contents FeBRUARY 10, 2014

VoLUMe 193 nUMBeR 2

66 | steinhardts second act

From hedgie legend to ETF wise man.

11 | FAcT & cOmmEnT

by steve Forbes

China is dependent on our fscal health.

LEADERBOARD
14 | ARE YOU A STARTUp?

Have a genius idea? Follow the path to your future.

16 | HOnG kOnGS RicHEST

Bets on Macau casinos pay of.

18 | HOT HOmES

The most expensive residences in your state.

Plus: A follow-up to our Isabel dos Santos
investigation.

20 | FRED SmiTH FLiES HiGH

The FedEx founder may be worth $2.3 billion,

but he wasnt an overnight success.

22 | HiGHEST-pAiD nBA ATHLETES

The elite earn most of their dollars
from endorsements.

24 | SpEED DEmOn

100 | not as advertised

Googles future is less selfdriving cars than Mad Men.
cover photograph by matt Furman For Forbes
2 | FORBES FEBRUARY 10, 2014

The Ferrari 458 Speciale will change your idea

of what a supercar should be.
Plus: Up-and-Comers.

26 | AcTivE cOnvERSATiOn

Snapchats Evan Spiegel tries to have

the fnal word.

contents FeBRUARY 10, 2014

34 | caliFornia king
Vivek Ranadiv thinks his
basketball team can save
Sacramento.

THOUGHT LEADERS
28 | cURREnT EvEnTS
by david malpass

Five big steps toward faster global growth.

30 | cApiTAL FLOwS
by rob arnott

Thank heavens for those patent trolls.

32 | innOvATiOn RULES
by rich karlgaard

A story of transformation: the conviction key.

STRATEGiES
34 | cAn A TEAm
REinvEnT A ciTY?

Weve seen time and again that it cant.

That isnt stopping the new owner of
the Sacramento Kings.
Plus: The latest NBA team valuations.
by tom van riper

TEcHnOLOGY

54 | obvious proFits,
less obvious prospects
Value investor Zachary
Wydra plays directly from
the Ben Graham handbook.

40 | cROwDSOURcinG cApiTALiSTS

Duolingo provides English lessons to millions

for free, as the nonproft Khan Academy does
with math. But its founders want to make real
money so the service lasts.
by parmy olson

44 | TRickinG THE HAckERS

Backed with $26 million, a startup is using

hackers own tricks against them.
by andy greenberg

46 | nOw STREAminG AT GATE 22B

Travelers are demanding free airport Wi-Fi.
But who is going to foot the bill?
by alex konrad

50 | beauty secrets
Makeup maven Jane Park knows
how to proft from girl talk.

EnTREpREnEURS
50 | GiRLFRiEnD pOwER

Why is Silicon Valley backing a small beauty

brand? Hint: Julep knows how to exploit
social media.
by carol tice

invESTinG
54 | SwinGinG AT STRikES

Most money managers live by the motto of go

big or go home. Beck, Mack & Oliver takes a
more civilized approach.
by steve schaeFer

58 | pORTFOLiO STRATEGY
by ken Fisher

All or nothing in 2014.

60 | invESTOR cHEckUp
by william baldwin

Bet against the government.

40 | proFiteering proFessors
Duolingo teaches its students English for
free, provided they also translate for free.
4 | FORBES FEBRUARY 10, 2014

contents FeBRUARY 10, 2014

92 | americas new
train set
Ultra-fuel-efcient
locomotives are
making a killing by
hauling ... fuel.

62 | ScREEn TEST
by marc gerstein

Quiet bargains.

AmERicAS mOST
pROmiSinG cOmpAniES
74 | TOTALLY jUicED

At Suja two young entrepreneurs teamed with

some adult supervision and created one of the
fastest-growing beverage companies ever.
by j.j. colao

82 | SEcRET LivES

AnchorFree lets you access the Web

anonymouslyanywhere, anytime. Its great
for privacy. But, oh, those relentless ads.
by karsten strauss

FEATURES
66 | THE OncE & FUTURE kinG

Michael Steinhardt forged the model for making

hedge fund billions before exiting the game.
With WisdomTree, hes back to upend Wall
Street againthis time, with the little-guy
investor at his side.
by michael noer

86 | BROOkLYnS
BiLLiOnAiRE

Cash crisies, political grudge matches, suicide.

None of it has stopped David Walentas from
forging a ten-digit fortune by creating an entire
neighborhood in New Yorks underdog borough.
And hes about to do it all again.
by caleb melby

92 | AmERicAS SEcOnD
RAiL BOOm

The relic of the 19th century will become

the most important logistics system of the
21st centuryand its making billions for
Warren Bufett and others. All aboard!

86 | dumbo dreamer
Billionaire David Walentas reimagined a
grimy stretch of Brooklyns waterfront into one
of New Yorks hippest areas.

by zack omalley greenburg,

joann muller and christopher helman

100 | GOOGLE wAnTS iT ALL

Forget wearable computers and self-driving

cars. The search giants dominance will
continue by sticking with its rootstaking
$20 billion out of the hides of some very
familiar companies.
by robert hoF

LiFE
106 | STALinS BEDTimE
niGHTmARE

A onetime Soviet showpiece, the Ukraina is now

Europes poshest business hotel.
by kenneth rapoza

74 | the right ingredients

Suja has carefully blended youthful passion
and seasoned management into one of
Americas Most Promising Companies.

6 | FORBES FEBRUARY 10, 2014

112 | THOUGHTS
On the Olympics.

Give your employees

the duck.
Anything else is just
chicken.
Almost 60 percent of employees
wish their employers offered
voluntary insurance1.
The question is, who will you choose?
You could opt for a voluntary option from your
medical carrier, or you could offer coverage from
the number one voluntary provider2: Aac.
Theres no direct cost to you for offering it, and
getting started is as simple as adding a payroll
deduction. Thats why business owners like you
have chosen Aac for nearly 60 years. Its also
why were so condent Aac is the right partner
for your business.
You can bet the farm on it.

Call your local agent and visit

aac.com/business

2013 Aac WorkForces Report, a study conducted by Research Now on behalf of Aac, January 7 24, 2013. 2 Eastbridge Consulting Group. U.S. Worksite/Voluntary Sales Report. Carrier Results
for 2012. Avon, CT: April 2013. Coverage is underwritten by American Family Life Assurance Company of Columbus. In New York, coverage is underwritten by American Family Life Assurance
Company of New York. Worldwide Headquarters | 1932 Wynnton Road | Columbus, GA 31999

Z131175

11/13

FORBES

EDITOR-In-CHIEF

Steve Forbes
CHIEF PRODUCT OFFICER
Lewis DVorkin
FORbEs MagazInE
EDITOR
Randall Lane
ExECUTIvE EDITOR
Michael Noer
aRT & DEsIgn DIRECTOR
Robert Mansfeld
FORbEs DIgITal
vP, InvEsTIng EDITOR
Matt Schifrin
ManagIng EDITORs
Dan Bigman Business, Tom Post Entrepreneurs, Bruce Upbin Technology
sEnIOR vP, PRODUCT DEvElOPMEnT anD vIDEO
Andrea Spiegel
ExECUTIvE DIRECTOR, DIgITal PROgRaMMIng sTRaTEgy
Coates Bateman
ExECUTIvE PRODUCER
Frederick E. Allen Leadership
Tim W. Ferguson FORbEs asIa
Kerry A. Dolan, Connie Guglielmo, Kashmir Hill sIlICOn vallEy
Janet Novack WasHIngTOn
Michael K. Ozanian sPORTsMOnEy
Mark Decker, John Dobosz, Luisa Kroll, Deborah Markson-Katz DEPaRTMEnT HEaDs
John Tamny OPInIOns
Kai Falkenberg EDITORIal COUnsEl
bUsInEss
Mark Howard CHIEF REvEnUE OFFICER
Tom Davis CHIEF MaRkETIng OFFICER
Charles Yardley PUblIsHER & ManagIng DIRECTOR FORbEs EUROPE
Nina La France sEnIOR vP, COnsUMER MaRkETIng & bUsInEss DEvElOPMEnT
Miguel Forbes PREsIDEnT, WORlDWIDE DEvElOPMEnT
Jack Laschever PREsIDEnT, FORbEs COnFEREnCEs
Michael Dugan CHIEF TECHnOlOgy OFFICER
Elaine Fry sEnIOR vP, M&D, COnTInUUM
FORbEs MEDIa
Michael S. Perlis PREsIDEnT & CEO
Michael Federle CHIEF OPERaTIng OFFICER
Tom Callahan CHIEF FInanCIal OFFICER
Will Adamopoulos CEO/asIa FORbEs MEDIa
PREsIDEnT & PUblIsHER FORbEs asIa
Rich Karlgaard PUblIsHER
Moira Forbes PREsIDEnT, FORbEsWOMan
MariaRosa Cartolano gEnERal COUnsEl
Margy Loftus sEnIOR vP, HUMan REsOURCEs
Mia Carbonell sEnIOR vP, CORPORaTE COMMUnICaTIOns
FOUnDED In 1917
B.C. Forbes, Editor-in-Chief (1917-54)
Malcolm S. Forbes, Editor-in-Chief (1954-90)
James W. Michaels, Editor (1961-99)
William Baldwin, Editor (1999-2010)

FEBRUARY 10, 2014 volUmE 193 NUmBER 2

FORbEs (ISSN 0015 6914) is published semi-monthly, except monthly in January, February, April, July, August and October, by Forbes
LLC, 60 Fifth Ave., New York, NY 10011. Periodicals postage paid at New York, NY and at additional mailing ofces. Canadian Agreement
No. 40036469. Return undeliverable Canadian addresses to APC Postal Logistics, LLC, 140 E. Union Ave., East Rutherford, NJ 07073.
Canada GST# 12576 9513 RT. POSTMASTER: Send address changes to Forbes Subscriber Service, P.O. Box 5471, Harlan, IA 51593-0971.
COnTaCT InFORMaTIOn
For subscriptions: visit www.forbesmagazine.com; write Forbes Subscriber Service, P.O. Box 5471, Harlan, IA 51593-0971;
or call 1-515-284-0693. Prices: U.S.A., one year $59.95. Canada, one year C$89.95 (includes GST). We may make a portion of
our mailing list available to reputable frms. If you prefer that we not include your name, please write Forbes Subscriber Service.
For back Issues: visit www.forbesmagazine.com; e-mail [email protected]; or call 1-212-367-4141.
For article Reprints or Permission to use Forbes content including text, photos, illustrations, logos, and video:
visit www.forbesreprints.com; call PARS International at 1-212-221-9595; e-mail http://www.forbes.com/reprints; or e-mail
[email protected]. Permission to copy or republish articles can also be obtained through the Copyright Clearance Center at
www.copyright.com. Use of Forbes content without the express permission of Forbes or the copyright owner is expressly prohibited.
Copyright 2014 Forbes LLC. All rights reserved.
Title is protected through a trademark registered with the U.S. Patent & Trademark Ofce. Printed in the U.S.A.

8 | FORBES FEBRUARY 10, 2014

IN BRIEF

Our Move
In Mobile
by lEWIs DvORkIn

Like a hangmans noose, mobile focuses the mind. I

often say the $2 to $3 CPMs publishers frequently get
for smartphone ads will crush all traditional newsrooms
built for the era of $50 print CPMsand most of them
still are, whether they admit it or not. The FORBES
contributor network was conceived, in part, as a new
content-creation model to ofset such upheavals in the
marketplace. Next in line for disruptionand tied pixelto-pixel with mobileis the article page. Spawned by a
print mentality, it must cope with both smaller device
sizes and a strong push by marketers for more compelling ad positions.
Thats where content streams come into play. They are
todays consumer experience of choice. You see them on
Facebook, Twitter and LinkedIn. Marketersand by extension their ad agencies and p.r. frmsare focused on them,
too. Forbes.com has experimented with streams for the last
three yearson the home page, the channel pages and a
real-time page for 300 to 400 daily posts. Now the time is
here to re-architect Forbes.com for the era of streams.
Our new mobile site, launched two weeks ago, features both vertical and horizontal navigation. Beneath
every post is a stream of headlines. The headlines in your
feed are diferent from those in mine or another persons.
All streams include related or editor-selected headlines,
special features and stories that match an individuals
consumption patterns. Tap the headline to reveal the entire post. Tap the bio to reveal the authors background.
Tap the sharing icon to push it to a social network. When
reading a post youll notice the ability to swipe horizontally. Swiping takes you to the next item in the stream,
with slightly more information than simply a headline.
We call it the Info Card. Tap the headline to expose the
entire post or continue swiping through Info Cards.
This new navigational construct, with natural breaks
between headlines and Info Cards, opens up new ways to
monetize a small screen. BrandVoice, our industry-leading native advertising program, fts as neatly within the
streams as current and new types of display advertising.
Every move we make addresses the media industrys
changing economics and technology. In doing so, weve
left nostalgia to others, preferring to create the systems,
processes and products that work for journalists, consumers and marketers in a new era. F

A HISTORIC $ 50 MILLION GIFT

ESTABLISHES THE USC MICHELSON CENTER
FOR CONVERGENT BIOSCIENCE

B U I LD I N G U PON U S C S U N I Q U E S T R E N GTH S AT T H E I N TE R S E C T I O N S
O F E N G I N E E R I N G, T H E B I O M E D I C A L S C I E N C E S A N D M E D I C I N E
The University of Southern California is rapidly accelerating journeys into greater understanding of living systems and
advances in lifesaving biomedical breakthroughs, thanks to a generous and visionary gift from Gary K. Michelson, M.D.
The new USC Michelson Center for Convergent Bioscience will provide a 190,000-square-foot, state-of-the-art research
facility for collaborative cross-disciplinary studies with far-reaching benefits to humanity worldwide. This $50 million gift
from Dr. Michelson reinforces USCs commitment to innovative thinking, opening new frontiers for world-class researchers,
scholars and students from around the world.

USC.EDU/MICHELSON

Dr. Gary Michelson is a visionary philanthropist and retired orthopaedic spinal surgeon,
whose groundbreaking ideas and inventions have generated more than 955 issued or
pending patents worldwide. His prolific innovation in medical products and procedures has
made him a pioneer in the field of spinal surgery and one of the most admired medical
inventors of his generation.

FORBES

FACT & COMMENT STEVE FORBES

With all thy getting, get understanding

chinA iS dEpEndEnt
On OUR FiScAl hEAlth
BY STEVE FORBES, EDITOR-IN-CHIEF

Chinas holdings in U.S. Treasurys, which reached record levels

in 2013, are setting of alarm bells.
They shouldnt. They underscore
that Beijing is becoming more dependent on the U.S. and the rest of
the world for its strength and prosperity. Chinas military leaders may
not recognize that truth any more
than Germanys military, its militaristic Prussian aristocracy (which
had outsize infuence prior to WWI)
and some of its intellectuals did in 1914.
Some points to keep in mind.
If we and Beijing ever engaged in a mortal confrontation, how much would Chinas
holdings in American government bonds be
worth if we said the paper was no longer valid?
Beijing is a hostage to our willingness to honor
these obligations.
China has not been a big buyer of our paper
for several years because of its concerns about
the dollars integrity.
Chinese companies get dollars by selling us
products that they either made or assembled
from corporate global supply chains. Unless
China wants to sit on paper money, it will continue to use those dollars to buy stuf from us,
in this case government bonds.
The fact that the Chinese government is
amassing so much in foreign currencies
$3.8 trillion at last countmeans that Chinas
capital markets are still primitive compared
with ours and Britains. That money is centrally controlled instead of being in the hands
of numerous partiesbanks, insurance companies, venture capital funds, mutual funds,
private companies that wish to invest overseas
and so onthat would put it to work creating

new products and services. Prior to

WWI Britain ran mammoth trade
surpluses, which were far greater
proportionately than are those of
China. But the money didnt sit in
the Bank of England collecting interest. It fnanced a mind-boggling
array of railroads, companies and
agricultural enterprises all over the
world. Private entrepreneurs, not
government ofcials, directed those
investments. British capital, for instance, fnanced much of the industrialization
of the U.S.
What would happen if China, to damage us,
decided to dump its trove of Treasurys? Prices
might wobble, but not for long. There are trillions of dollars worth of fnancial securities
scattered around the world, and smart asset
buyers would gobble up Treasurys if they
thought they were underpriced. Moreover, the
Fed, which already has a bloated balance sheet
of $4 trillion, could easily absorb what China
owns in Treasurys$1.3 trillion.
If China did sell Treasurys, it would be paid in
dollars. Then what? Would it dump the dollars for,
say, yen or euros? The European Central Bank and
the Bank of Japan, not to mention the Fed, could
take countermeasures if they so desired, to make
sure currency ratios didnt get out of line.
The idea that a government gains strength
by piling up dollars or other foreign currencies is a mercantilist holdover from the 16th to
18th centuries, when France, Spain and others
thought amassing gold and silver was how a
country became wealthy. Trade, not hoarding, makes for a powerful economyan insight
Adam Smith understood but one that too many
people today dont.

FEBRUARY 10, 2014 FORBES

| 11

FORBES

FACT & COMMENT STEVE FORBES

Keynes Quackery
Two recent comments underscore
the crisis in modern economies, a
critical situation that is at the heart
of the sluggish global economy and
that could, if not corrected, lead to
an ever uglier political environment.
The blame for the mess we are in lies
with John Maynard Keynes.
The head of the IMF, Christine
Lagarde, recently warned that falling
prices are threatening a fragile recovery: With infation running below
many central banks targets, we see
rising risks of defation, which could
prove disastrous for the recovery. Her
concern echoes that of the European
Central Bank head, Mario Draghi, who
spoke around the same time about
defation risks and declared that the
ECB will remain accommodative.
Classical economists going back
to Adam Smith have regarded the
production of products and services
as the real economy and money
and credit as the symbol economy.
In other words, money refects what
people are doing in the marketplace.
Money and credit are tools of commerce. Keynes turned that thinking
on its head, audaciously asserting that
money and credit are the real drivers
of the economy. Control money and
you control the production of products and services. To classical economists this is like stating that the sun
rises in the West and sets in the East.
But thanks to the Great Depression,
Keynes heresy became orthodoxy.
Monetarism is a Keynesian ofspring.
Keynes famously observed: Prac-

tical men, who believe themselves to

be quite exempt from any intellectual
infuences, are usually slaves of some
defunct economist. Unfortunately
too many government ofcials and
economists, while not pretending
to be exempt from ideas, are today
slaves of Keynes misguided monetary notions. Hence the current
orthodoxy: Pump out enough money,
and all will be well. The impact of
high tax rates, regulations that hamper enterprise and gum up the fexibility of labor markets, and bloated
public sectors, which absorb and
waste resources that could be productively put to work for everyones
beneft by businesspeople and investors, are downplayed or ignored.
What Keynes posited was the equivalent of saying that manipulating scales
is the way to attack obesity. Money
is a measure of value. Like a clock or
ruler, it has little or no intrinsic value.
Its function is to facilitate commerce.
Completely alien to todays fnance
ministers, central bankers and most
economists is the idea that money
works best when it has a stable value.
The defation that worries so
many of todays economic worthies
is actually a refection of a still sluggish economic environment, which,
in turn, is in no small part attributable to credit markets that have been
warped by the suppression of interest rates. When the price of borrowing money is distorted, the fnancing
of productive commerce is hindered.
Vibrant economies, not central
banks, create real money, and wealth
is abundantly created when tax rates

are low, money is stable and regulations are reasonable.

Blowing Smoke
New York City, Chicago and other
parts of the country are banning electronic cigarettes anywhere smoking
is prohibited. The nanny state ninnies pushing this are doing a severe
disservice to folks who are trying to
stop smoking or want the pleasure
of seeming to smoke without doing
it. These devices simulate smoking
by vaporizing a liquid that may or
may not contain nicotine, depending
on the smokers preference. They
arent traditional cigarettes, and the
vapor isnt smoke.
So why the moves to ban them? Because using e-cigarettes sort of looks
like smoking, although anyone who
isnt blind can easily see that these
arent the real deal. Prohibitionists
also cry that there needs to be more
scientifc study, even though there
isnt a scintilla of evidence that e-cigs
are as harmful as inhaling smoke.
Until there is defnitive proof of adverse consequences we should leave
e-cigs alone. After all, they are ideal for
smokers working to break the habit or
trying to avoid going back to it. Its a
tool in the fght against cigarettes.
This mindless attack against ecigarettes is reminiscent of the assaults
against smokeless tobacco. Masticating
tobacco is repulsive and harmful, but,
again, its small beer compared with
cigarettes. However, such distinctions are lost on the growing ranks of
behavioral dictators. F

Restaurants: Go, consider, Stop

Edible enlightenment from our eatery experts and colleagues Richard Nalley, Monie Begley, Randall Lane and Chef Jef Lamperti,
as well as brothers Bob, Kip and Tim.

l la Ripaille

l Villard Michel Richard

l B Bar & Grill

Its reassuring to know that this place has aged

gracefully and the fare remains frst rate. The
mushroom soup is delicious, the chicken paillarde is pounded to parchment-thin perfection,
and the lemon tart special leaves you smiling.

Once the service is brought up to snuf this restaurant will be deserving of Stars. Sublime: crab
cake, white bean soup, seared tuna served over
fnely chopped potato salad, crme brle and
the incredibly rich chocolate bar.

An indoor/outdoor garden and vintage decor

are appealing features of this popular and
happening Bowery staple. The burgers, the
fsh & chips and the Cobb salad all evoke raves.
Brunch is also wonderfuland quite the scene.

605 Hudson St., between Bethune and West

12th streets (Tel.: 212-255-4406)

12 | FORBES

FEBRUARY 10, 2014

455 Madison Ave., between 50th and 51st

streets (Tel.: 212-891-8100)

40 East 4th St., at Bowery

(Tel.: 212-475-2220)

LEADERBOARD

KEEPING SCORE ON WEALTH & POWER

FLOW CHART

ARE YOU A STARTUP?

Youve stumbled across your genius idea and are plugging
away to bring it to fruition. But are you really the sort of hot
new venture that gets serious investors salivating?
Follow the path below to fnd out.
YES
Has Marc
Andreessen
invested in your NO
company?
YES

IS YOUR
COMPANY
DESIGNED
TO GROW
VERY FAST?

NO

YES

Are you venture

backed?
NO

NO

Are you the next

Netfix or Uber?

NO

Are you
bootstrapping YES
starting without
any backing?

YES

NO

NO

YES

SORRY,
YOURE JUST
A PLAIN
OLD SMALL
BUSINESS

14 | FORBES FEBRUARY 10, 2014

Are you
contemplating an NO
IPO or have you
gone public?

YES

Have you been

acquired?

Do you
wear a suit
to work?

YES

YES
Do you
believe youre
disrupting?

NO

Do you have more NO

than one ofce?
YES

NO
Do you have
more than 80
employees?

YES

NICE WORK,
BUT YOURE
TOO BIG TO BE
A STARTUP

NO
Does music
blast over a
sound system
where
you work?

NO

YES

Is The Lean
Startup on your YES
nightstand?

NO Do you follow venture investor YES

Chris Sacca on Twitter?

NO
Is your ofce
a co-working
space?

NO

YES

Are you planning

NO or have executed
a pivot, rethinking
your basic
business?

Do you hold a
weekly team
lunch?
YES

YES

Do you take PingPong breaks to YES

brainstorm?
NO
NO

Do you have a
snack bar?

YES

Have you ever

quoted Paul YES
Graham?
NO
NO
Do you
fy
frst class?

Are there more

than 5 people on YES
your board?

YES

NO

NO

Have the founders

sold any shares?
YES

YES

Are you
proftable?

NO

CONGRATS!
YOURE A
STARTUP!

Is your company YES

more than 3
years old?
NO
NO

Are your
revenues above
$20 million?
YES

$2.1 BILLIoN

Revenue of Galaxy Entertainment Group,

run by Lui Che Woo, in the third quarter of
2013, up 16% year-over-year.

SCoRECARD

billionAiRES

WINNERS

HoNg koNgS
RIcHEST

Elon
Musk

David
Dufeld

Robert
Duggan

+$1 billion

+$750 million

+390 million

Net worth:
$7.9 billioN

Net worth:
$7.6 billioN

Net worth:
$1.9 billioN

electric automaker tesla

Motors shares surge 16%
after Musk announces
6,900 Model S deliveries in
the quarter, blowing past
expectations by 20%.

Cloud computing frm

workday, which he
cofounded in 2005, trades
at an alltime high after an
analyst upgrade. Shares are
up 93% since its 2012 iPo.

Pharmacyclics shares
have their best gain in fve
years after acing a clinical
trial for imbruvica, being
developed jointly with
Johnson & Johnson.

Macau, the WORLDS biggest gambling center, is boomingand pumping up

the wealth of its top operators. Lui che
Woo, chairman of Galaxy casinos, has had
his worth more than double for the second
straight year, making
him now the secondrichest man in Hong
Kong. But higher real
estate taxes have hurt
others.

1. lI ka-shIng
$32 bIllIon
The empire of Asias wealthiest person includes Cheung
Kong, Hutchison Whampoa and Husky Energy.

2. luI che Woo

$21 bIllIon
He had no experience in casinos when he bought a $1.1 billion Macau gaming license in 2002 and hit the jackpot.

3. lee shau kee

$20 bIllIon

LoSERS

Last years No. 2 slips one spot as tax increases hurt sales at
his real estate company, Henderson Land.

4. kWok faMIly
$17.5 bIllIon q
Kwong Siu-hing and her sons are worth nearly $2 billion less
after shares of Sun Hung Kai Properties sank.

5. cheng yu-tung
$15.5 bIllIon q
At 88 he is ailing and has turned over the chairmanship of his
New World Development to his son Henry, 67.

6. JosePh lau
$9.7 bIllIon
The stock price of his Chinese Estates has doubled, bucking
the trend in Hong Kong real estate.

Richard
Schulze

Leslie
Wexner

Edward
Lampert

$840 million

$310 million

$280 million

Net worth:
$2.2 billioN

Net worth:
$5.7 billioN

Net worth:
$3 billioN

After a triple-digit gain for

its stock in 2013, best buys
turnaround story hits a big
speed bump when awful
holiday sales trigger a 29%
price drop.

the Ceo of l brands,

which owns Victorias
Secret, has to cut its
quarterly forecasts after
margins turn out to be
lower than expected.

A year after he named

himself Sears Ceo, weak
holiday sales and negative
earnings push the retailers
shares down to their
lowest level since 2012.

figureS refleCt the ChANge iN VAlue of PubliCly trADeD holDiNgS froM DeC. 31, 2013 to JAN. 16, 2014.
SourceS: InteractIve Data vIa FactSet reSearch SyStemS; ForbeS.

16 | FORBES FEBRuaRy 10, 2014

7. MIchael kadoorIe
$8.6 bIllIon q
He helped make Hong Kong a world fnancial hub, but shares
in his hotel and power companies have languished.

8. Peter Woo
$7 bIllIon q
His fortune fell by $1 billion as Wharf, which runs shopping
malls, sufered in the weak real estate market.

9. Pansy ho
$6.8 bIllIon
The 51-year-old is the daughter and heir apparent of Macau
gambling kingpin Stanley Ho.

10. VIctor & WIllIaM fung

$4.7 bIllIon q
The brothers frm, Li & Fung, is the worlds largest supplier
of goods to retailers such as Wal-Mart and Target.
uP

uNChANgeD q DowN New

scorecard by scott decarlo; hong kong by russell flannery

toP: blooMberg; lui Che woo: iMAgiNeChiNA; MuSk: lArry buSACCA/getty iMAgeS; DuffielD: tiM PANNell; DuggAN: ChriStiAN PeACoCk; lAMPert: AMANDA gorDoN/blooMberg; hoNg koNg riCheSt Net worthS AS of DeC. 31, 2013.

LEADERBOARD

$2.6 MILLION

LEADERBOARD

Value of a de Grisogono necklace

stolen last May during the Cannes
International Film Festival.

real estate

hOt hOMes

Colorado

How much is the most expensive residence

in your state going for?

The most expensive home for

sale in each state:
>$100 mil
$81100 mil
$6180 mil
$4160 mil
$2140 mil
$120 mil

Price: $65,000,000
Four Peaks ranch, Snowmass
The 2007 home on an 876-acre spread
comes with stunning mountain views and
amenities that include a furnished tepee.

New York

Price: $130,000,000
435 e. 52nd Street
A fve-story private club built
in 1931 overlooking the East
River, ready for renovation
into a palatial home.

CaliForNia

Price: $115,000,000
1011 Beverly drive, los angeles
The 50,000-square-foot mansion
was once the home of publishing
magnate William Randolph Hearst
and actress Marion Davies.

CoNNeCTiCuT

Price: $140,000,000
Copper Beech Farm, Greenwich
Stats: A 12-bedroom neo-French
Renaissance with seven full baths and
a mile of Long Island Sound waterfront.
Original asking price: $190 million.

TexaS

Price: $135,000,000
Crespi-Hicks estate, dallas
Includes a fve-story main palazzo,
originally built for an Italian count,
a two-story guesthouse and a
three-story pool house.

Prices as of Jan. 6, 2014.

DIAMONDs FOR DADDYs GIRL

Back in august FORBES detailed
how the richest woman in Africa, by the
tender age of 40, had increased her net
worth from zero to $3 billion: You have
your father, the president of Angola,
direct those who want to do business in
the country to cut you in on their action.
FORBES has learned, however, that Isabel dos Santos has added a more legitimate jewel to her crown: de Grisogono,
a Swiss jeweler renowned among the
Hollywood A-list for its extravagant,
celebrity-studded parties in Cannes and
Miami Beach and fans like Heidi Klum
and Sharon Stone.
Newly uncovered documents show
that a shell company called Victoria Holding Ltd. acquired 75% of de
Grisogono in 2012 for more than $100
million through a subsidiary. The
documents show that ownership of
Victoria Holding Ltd. is evenly split
between the Angolan state-owned
18 | FORBES FEBRuaRy 10, 2014

diamond company, Sodiam, and a

Dutch-registered company, Melbourne Investments. Dos Santos husband, Congolese businessman Sindika
Dokolo, is listed as the sole benefcial
owner of Melbourne Investments.
It is not clear whether Dokolo made
any fnancial investment in Melbourne
Investments or whether Melbourne
contributed any cash to the purchase.
Sodiam, as a state-owned company (its
board, chair and CEO are all appointed
by President Jos Eduardo dos Santos),
is required to publicly disclose all its relevant ventures at home and abroad, but
until now its partnership with Dokolo
had remained a secret.
Sodiam, through its parent company,
did not return calls to provide its side of
the story. The chairman of de Grisogono said no public funds or resources,
namely from the Angolan State or Angolan State-owned companies, have been

Isabel dos Santos

involved, directly or indirectly. Dokolo

has told the Portuguese press, The
mentioned investment makes sense
from a strategic point of view. Any
dollar that enters Switzerland or Europe
is the object of an exhaustive verifcation process. Perhaps, but its hard to
fgure out what the presidents daughter
doesnt have a stake in in Angola; even
the publishing company that owns the
right to license FORBES in Portuguesespeaking Africa, it turns out, is owned
70% by Isabel dos Santos, according to a
press release from its co-owner, the Portuguese Zon Media. She had no comment for us. F

real eSTaTe BY eriN CarlYle; Follow-THrouGH BY raFael marqueS de moraiS aNd kerrY a. dolaN
bOTTOM: nEWScOM

follow-through

Can your doctor

know everything
known to medicine?
Medical data is growing at an unprecedented rate in fact, its doubling every
ve years. IBM Watson is a learning cognitive system that can understand
millions of pages of data to help doctors answer some of medicines biggest
questions. And now, IBMs new Watson Group is going beyond healthcare to
bring cognitive innovations to a wider range of data-intensive industries.
This is Watson on a Smarter Planet.

ibmwatson.com
IBM, ibm.com, Lets Build a Smarter Planet, Smarter Planet, WATSON and their logos are trademarks of IBM Corp., registered in many jurisdictions worldwide.
See current list at ibm.com/trademark. International Business Machines Corp. 2014.

$4.8 BILLION

LEADERBOARD

Amount FedEx spent on fuel

between June 2012 and June 2013
a 14% increase over two years prior.

path to success

FRED SMITH FLIES HIGH

$140

His overnight delivery service was anything but an overnight

success. But now hes worth $2.3 billion, FedEx ships 10.2 mil
lion packages daily in 220 countries, and, while UPS left gift
givers stranded this Christmas, Smiths company soared.

130
120

110

stock price

100

80

THE bIG IDEA

born in 1944, smith is crippled by a bone disease as a

small boy and watches sports
from the sidelines. regains
his health by age 10, becomes
an excellent football player
and learns to fy at 15.

enrolls at yale in 1962. a disagreement with a professor

leads to his developing the
business model for an express
delivery service. Decides it will
need to carry small, highpriority packages at night, when
airports arent congested.

THE CrASH

the Great recession batters

fedex. the company barely
ekes out a $98 million proft
in 2009, down from
$2 billion two years earlier.

70

DIVErSIFyInG

60

buys Kinkos for $2.4 billion in

2004 to compete with ups
recently purchased mail boxes etc.
Kinkos is later reorganized into
fedex ofce.

50

G.I. FrED

Joins the marines in 1966 and

does two tours in vietnam.
narrowly survives a vietcong
ambush after losing his helmet,
grenade and gun. brings his
attacker down by aiming at his
head but then hitting him in
the knee.

40
1/30/09

1/31/12

1/16/14

Source: InteractIve Data vIa

FactSet reSearch SyStemS.

A bIG GAmbLE

in his frst 26 months in

business he racks up
$29 million in losses. Desperate to pay bills, he fies
to las vegas, wins $27,000
at blackjack and wires it
back to fedex. yet by 1976
fedex is fying smoothly
and bringing in $75 million in revenue, though it
remains heavily indebted.
it goes public in 1978.

TAKEoFF

returns to the idea he

developed at yale and
founds federal express
in 1971 after raising a then
astonishing $91 million in
venture capital. operations start in 1973.

20 | FORBES FEBRuaRy 10, 2014

PACIFIC oVErTUrES

in 1998 introduces the only

next-business-day express
cargo service from asia to the
u.s. it pays of. an international
priority delivery brings in more
than three times as much revenue as a domestic one.

TUrbULEnCE

looks east to asia in 1989 with

the $880 million purchase of
the flying tiger cargo line.
integrating the two is difcult,
and fedexs net income drops
from $185 million in 1989 to
just $6 million in 1991.

by AbrAm brown
top: Justin sullivan/Getty imaGes; smith: nancy Kaszerman/zumapress/newscom; plane (left) chris mattison/alamy; plane (riGht) miGuel meDina/afp/Getty imaGes;
helmet: Gary ombler/Getty imaGes; employee: ap; carDs: Duncan nicholls anD simon webb/Getty imaGes; asia: ap; box: alamy

90

CHILDHooD CHALLEnGE

ALoFT AGAIn

belt-tightening, international
growth and e-commerce help
the company surmount the
fnancial doldrums. posts a
$1.6 billion proft on recordhigh sales in 2013.

LEADERBOARD

$90 MILLION

Value of the seven-year endorsement deal

LeBron James signed with Nike in 2003
when he was still in high school.

SPORTSMONEY

hIghest-paId Nba pLayers

BasketBall is the only one of the four big U.S.
team sports that puts a cap on individual player salaries,
but the average pro still makes nearly $5 million a year. The
leagues elite earn several times that, plus millions more
from endorsements. The very best can make more than

$10 million a year with the likes of Nike and Adidas promoting their products worldwide. The ten highest-paid
will altogether bank $358 million this year, including
$149 million from sponsors. For more visit www.forbes.
com/nba. See page 38 for the NBA teams values.

1. Kobe Bryant

Los angeLes Lakers

earnings: $64.5 mil salary: $30.5 mil endorsements: $34 mil
Bryant signed a two-year, $48.5 million contract extension in November
that will keep his on-court salary tops in the NBA.

2. LeBron James

MiaMi heat
earnings: $61.1 mil salary: $19.1 mil endorsements: $42 mil
the NBAs top pitchman counts Nike, mcDonalds, coca-cola, Samsung
and Dunkin Donuts among his partners.

3. Derrick Rose

ChiCago buLLs
earnings: $38.6 mil salary: $17.6 mil endorsements: $21 mil
Injuries have derailed rose the past three seasons, but he receives his full
Bulls salary and income from a $185 million, 13-year Adidas deal.

4. Kevin Durant

okLahoMa City thunder

earnings: $31.8 mil salary: $17.8 mil endorsements: $14 mil
the three-time scoring champ joined Jay Zs roc Nation Sports in June as
the agencys frst NBA client.

5. Dwyane Wade

MiaMi heat
earnings: $30.7 mil salary: $18.7 mil endorsements: $12 mil
Wade sells his own neckties and socks in addition to having endorsement
deals with Li-Ning, Gatorade, Hublot, pepperidge Farm and Dove.

6. Carmelo anthony new york kniCks

earnings: $30.4 mil salary: $21.4 mil endorsements: $9 mil

this summer melo is expected to opt out of the fnal year of his $23.3 million knicks contract, in return for a richer, long-term deal.

7. amare Stoudemire

new york kniCks

earnings: $28.2 mil salary: $21.7 mil endorsements: $6.5 mil
the six-time All-Star has one year left on the $99.7 million contract he
signed with the knicks in July 2010.

8. Dwight Howard

houston roCkets
earnings: $26.5 mil salary: $20.5 mil endorsements: $6 mil
Howard agreed to a four-year, $88 million free-agent contract with
Houston in July and still has a rich Adidas deal.

10. Chris Paul

Los angeLes CLippers

earnings: $22.7 mil salary: $18.7 mil endorsements: $4 mil
paul inked a fve-year, $107.3 million deal with the clippers in July and
was elected president of the National Basketball players Association a
month later.

22 | FORBES FEBRuaRy 10, 2014

by kurt badenhausen
top: Ap; Streeter LeckA/Getty ImAGeS

9. Dirk Nowitzki

daLLas MaveriCks
earnings: $23.2 mil salary: $22.7 mil endorsements:
$500,000
Nowitzkis only endorsement agreement is with Nike. Why? the former
mVp has never employed a sports agent.

20

LEADERBOARD

Surprisingly high number of miles per

gallon the Ferrari 458 Speciale lists as
its highway fuel economy.

ASK 50 BILLIONAIRES

buying time
How many weeks of vacation
do you take in a typical year?
4.4%

4.4%

mORE THAN
8 WEEKS

NONE

11.1%

13.3%

AROUND
8 WEEKS

LESS THAN
2 WEEKS

17.8%

AROUND
2 WEEKS

48.9%

AROUND
4 WEEKS

RESPONSES TO AN ANONYMOUS POLL OF

50 MEMBERS OF THE FORBES WORLDS BILLIONAIRES LIST.

TOYS

speed demon

Driving the Ferrari 458 Speciale, the most exciting new car of 2014, means immediately changing your
notion of what a supercar should be. It shifts quicker,
turns sharper and stops shorter than the competition.
With a 597hp engine and a body 200 pounds lighter than
the earlier 458 Italia, it hits 60mph in under three seconds and tops out at 202mph. Its selling out as fast as it
drives: The frst years worth, at around $298,000 apiece,
are already spoken for. If you cant get one, settle for the
Lamborghini Aventador or Aston Martin Vantage.

UP-AND-COMERS

travel guides
These entrepreneurs want to help you escape the winter blues and never lose track of your miles.
Andres Fabris and Andy Chen TRAXO

Johannes Reck and Tao Tao GETYOURGUIDE

The two 29-year-olds founded GetYourGuide in 2008 as a one-stop Web destination for travelers looking
for the best diversions in any major city around the globe. The Zurich- and Berlin-based operation expanded
to the U.S. last year and is today the largest Internet resource for attractions and activities, with more than
25,000 listings and best-price guarantees. Investors have pledged $16 million, and GetYourGuide claims
more than a million visitors each month.

Sam Shank and Jared Simon HOTELTONIGHT

With three taps and a swipe, users of the app HotelTonight arrange same-day bookings at 5,000 hotels in more
than 250 cities around the world. Shank, 40, and Simon, 39, launched it in 2011; its available for free in fve languages and has been downloaded nearly 9 million times. Users can book up to a fve-night stay anytime between
9 a.m. and 2 a.m., local time. A $45 million funding infusion in September brought the total amount invested in
the company to $80 million.

24 | FORBES FEBRuaRy 10, 2014

up-and-comers BY KaTHrYn dILL; new car BY HannaH eLLIoTT

Fabris, 40, frst conceived of Dallas-based Traxo in 2009 as a networking tool to keep up with his grad school
classmates; later, together with cofounder Chen, also 40, he evolved it into the ultimate digital travel wallet.
Its app consolidates users travel info from more than 100 sites, supplies recommendations and discounts, and
shares itineraries as desired. It also keeps track of travel-related loyalty points and records an archive of user
travel. The company has raised $5.7 million in funding, most of it in a round completed in October.

LEADERBOARD

10

Age of the youngest member of the

FORBES 30 Under 30: Quvenzhan Wallis, who was
nominated for a Best Actress Oscar in 2013.

active conversation
ShEldON AdElSON tRIES
tO qUASh ONlINE GAMBlING
@OFFICIAlSPEAKME

No good reason to keep

online gaming ofine other
than greed. Thats not a good
enough reason to do anything.
@StACKIII

Its really disappointing that

there arent more conservative donors willing to cross
Sheldon Adelson on this.

sNAP DANce

7,531,661 VIEWS ON FORBES.COM

325,702 VIEWS ON FORBES.COM

Our annual 30 Under 30 issue, celebrating 450 young

talents in 15 diferent feldsfrom Pete Cashmore to
Maria Sharapova to Malala Yousafzai, plus scores of
lesser-knownsmade some people feel very insecure.
Alex Dalenberg at Upstart Business Journal wrote, Fire
up your millennial angst 20-somethings. I thought
I had a pretty productive morningfresh of a New
Years Resolution bingebut then I opened up the
FORBES list and learned that Mashable founder Pete
Cashmore and I are the same age. He grew a one-person blog into a global news operation with 20 million
uniques. I managed to get up early and make breakfast.
So there you go. Look upon their works, ye millennials, and despair. Danielle Wiener-Bronner at The Wire
described the select as the most impressive, young,
photogenic people who are doing cool things you either
are too old or too lazy to be doing yourself. ... Unless
you are one of those 450 who made it, in which case,
congrats! You can stop reading now. Or, as Chris OShea
at Mediabistro put it, Its flled with people who you
will publicly praise and then curse under your breath.
The New Yorker decided the only answer was to one-up
FORBES with a 3 Under 3 list: Meet the innovators
and disruptors of 2014, all under the age of three years
old, all impatient to change the world. They represent the entrepreneurial, creative, and intellectual
pinnacle of their generation. The intimidatingly successful on that list included an energy conservationist,
2.5, who turned on the lights of her apartment all by
herself, and a fashion designer, 1.5, whose T-shirts
covered in alphabet soup have infuenced countless
imitators.

J.J. Colaos Snapchat cover

described how cofounder
Evan Spiegel, 23, made
Mark Zuckerberg come to
L.A. when the Facebook
CEO wanted to meet. After
a Business Insider reporter
called him arrogant,
Spiegel tweeted, Thats
not what happened, sending out a truncated e-mail
exchange with Zuck as
proof. But when FORBES
produced interview transcripts proving wed quoted
him accurately, and the full
e-mail chain emerged, Sam
Biddle at Valleywag noted
that Spiegel tried to look
cocky-confdent, but with
the truth out, he just looks
like a c**k. Added Mashables Kurt Wagner, When
it comes to likeability
Spiegel is certainly making it tough on himself.
Zucks take on all this?
Hes got a big business
to run and doesnt really
waste a lot of time looking
back, suggested Techonomys David Kirkpatrick.

FORBES, JANUARY 20, 2014

26 | FORBES FEBRuaRy 10, 2014

FORBES, JANUARY 20, 2014

JOhN BUCKINGhAM SAYS

APPlE WAY UNdERVAlUEd
@GREGMAZARES

Apple is like the NE Patriots.

They are the best year after
year & over time but are not
respected and in fact loathed
by many.
ChINA CRACKS dOWN ON
BItCOIN
JAZCJCA00

Dont feel too bad for

us bitcoiners.... Im not
complaining about my
measly 200% proft in three
months.
AStRONAUGht

Why do bitcoin advocates

always have to tell us how
their speculative investment ...
is doing? Its very reminiscent
of the craze before the Internet
bubble.

fAvorite
tweet

@KellyOsbourne
(Ozzys daughter):
F**k yeah I made the
@Forbes 30 Under 30 list
this year! Dadda I told you
I would make you proud!
@OfcialOzzy!!!!
#HardWorkPaysOff

top: Rachel MuRRay / Getty IMaGes

future shock

thought leaders
david malpass current events

five big steps

toward faster global growth
Interest rates have been held
near zero for so long they have begun
to seem normal. But thats a delusion.
Its no more possible to run a market
economy on free credit than it would
be to run one on free gasoline or free
labor. It works for the government and
the well-connected but not for the rest,
especially small businesses and new
workers. The result is a heavily distorted global economy, a devastating new
normal for growth rates and a multiyear collapse in real median income,
which worsens income inequality.
Let interest rates rise. The most
important growth policy in 2014
would be for the Federal Reserve to
lay the groundwork for raising interest rates, as it did for reducing bond
purchases in 2013. Its high time the
Fed moved past zero rateseven a
0.5% interest rate would allow credit
markets to work better.
new debt limit. Washington also
needs to rewrite the debt limit so it
restrains spending growth and puts a
stop to the most inefective spending.
The current debt limit is a harmful
masqueradewritten by government
for the purpose of expanding spending and debt. A starting point when
debt exceeds the ceiling would be to
prohibit new entitlements and limit
the escalation of existing ones. Congress should reduce the future pay and
health insurance subsidies of senior
congressional and executive branch offcials when debt goes over the limit.
Yen ceiling. Japan should put a
ceiling on the yen the way Switzerland did on its franc. As long
as theres the risk of another big
upswing in the yen, growth and in-

vestment in the worlds third-largest

economy will underperform. Over
the last year Japan has softened the
yen, but its tools lack credibility. Wall
Street traders will complain as loudly
about a yen ceiling as they did about
the Feds reduction in bond purchases,
as they prefer currency instability. But
businesses and jobs do best when
countries adopt strong and stable
currencies. Japan has mechanisms
already in place to implement a
Swiss-style ceiling that could jump
its growth rate to 4% overnight.
Downsize governments. European countries need to refocus their
austerity programs on downsizing
government instead of targeting their
private sectors. European programs
have concentrated on higher taxes,
sweetheart deals for state-owned
companies and government control
of the labor markets and health care.
This has left the euro zones average
unemployment rate at 12.1%, with
some countries rates as high as 25%.
Economists call these programs
internal devaluations, which translates to lower wages and pensions for
the private sector. They are designed

by government bureaucracies to
keep government big. May elections
for the European parliament will be
contentious. Europes outlook would
improve if new growth plans focused
on downsizing government rather
than perpetuating it.
Liberalize trade. This is critical
to global growth, but progress has
stalled. A core reason for this is that
governments evaluate one another
based on their average tarifs, ignoring many of the most harmful trade
barriers. Over time government
institutions have turned trade liberalization into endless negotiations
among government lawyers, generating thousands of pages of complex
regulations. This ends up hurting
workers and growth. Its like evaluating teachers based on the average
among them, downplaying the damage caused by the weakest few. The
world would beneft from identifying
and fxing the most restrictive trade
quotas and tarifs. Currently big
teams of government negotiators and
lobbyists work toward mega-agreements that seek only marginal
improvements in average tarifs,
which would do little to liberalize
trade or increase global growth.
Most governments plan to stay
the course in 2014, hoping growth in
other countries picks up enough to
keep them in power. Thats possible,
but each decision to maintain the status quo means slower job growth than
that needed to meet the coming increase in the elderly population. Any of
these fve steps could be accomplished
in 2014, which would materially improve the global growth outlook. f

DaviD Malpass, glOBAl EcOnOmiSt, pRESidEnt OF EncimA glOBAl llc; paul Johnson, EminEnt BRitiSh hiStORiAn And AUthOR;
aMity shlaes, diREctOR, thE 4% gROwth pROjEct, gEORgE w. BUSh inStitUtE; And lee Kuan yew, FORmER pRimE miniStER OF SingApORE,
ROtAtE in wRiting thiS cOlUmn. tO SEE pASt cURREnt EvEntS cOlUmnS, viSit OUR wEBSitE At www.forbes.coM/currentevents.

28 | FORBES FEBRUARY 10, 2014

BUT IT CAN BE INSPIRED.

Game changing ideas often

come from the most unlikely
of places like 41,000 feet
above the sea. Thats what
being able to think in the
quietest cabin in private
aviation can do for you.

NETJETS INC. IS A BERKSHIRE HATHAWAY COMPANY. ALL AIRCRAFT OFFERED BY NETJETS IN THE UNITED STATES FOR FRACTIONAL SALE, LEASE, OR USE UNDER THE MARQUIS JET CARD AND PRIVATE JET TRAVEL CARD PROGRAMS ARE MANAGED AND
OPERATED BY NETJETS AVIATION, INC., A WHOLLY OWNED SUBSIDIARY OF NETJETS INC. NETJETS, EXECUTIVEJET AND THE MARQUIS JET CARD ARE REGISTERED SERVICE MARKS. 2013 NETJETS IP, LLC. ALL RIGHTS RESERVED.

Yo u c a n n o t b u y s u c c e s s ,

f o r b u s i n e s s , f o r f a m i l y, f o r l i f e

N E TJ E T S.CO M

877 JET 2806

FIND OUT HOW WELL WE KEEP OUR WORD, TOO

thought leaders
rob arnott CaPItal FloWs

Thank heavens For Those

Patent trolls
Its the new year, a wonderful time to refect on all of the things
we can be grateful for. Contrary to
popular opinion, its time to spare a
kind word and thought for the blessings that patent trolls bring to our
nation and to our prosperity. No, this
is not Jonathan Swifts A Modest
Proposal.
As a libertarian I weep for the patent trolls as the lynch mobs gather.
Full disclosure: I dont have a dog
in this hunt, nor have I ever worked
with or against a patent troll. But
they serve a genuine need in the
marketplace. Patent trolls are often
the buyer of last resort for an inventor who cannot aford to develop his
or her invention into a product.
It bears asking: Who invented
the name? Was it perchance patent
thieves who conveniently coined
the name patent trolls to defect
attention from their own nefarious
activities?
Suppose Im an inventor, not
part of a multinational behemoth. I
develop a wonderful innovation that
will revolutionize software, banking,
telecommunications and the Internet
in one deft stroke. Unfortunately, I
cant bring this idea to market alone;
its best done by one of the jumbo
players in one or more of these felds.
I take my idea to Google, to Microsoft, to Goldman Sachs or perhaps to
AT&T. They dismiss me and my idea.
Fair enough. So I turn to their competitors, and face the same reaction.
But then products begin to appear
that could exist only if my idea is
being used.
But suppose Im a little guy. I

dont have the resources to take on a

multinational behemoth. Patent aggregatorser, trollsto the rescue!
They have deep enough pockets to
do battle with the exploiters of my
invention. They pay me good money
for my intellectual property. Maybe
they even let me tag along with the

Patent trolls are oFten the buyer

oF last resort For an inventor
promise of some residual participation in their winnings.
Now get this: The trolls start
winning!
Hypothetical patent thief Research
In Motion settles for $612 million.
But not before a judge imposes an
injunction, which shuts down all of
the BlackBerrys on which Wall Street
and the U.S. government seem utterly
reliant. The outrage during the appeal
process is palpable. The departments
of Justice and Defense weigh in, but
the Supreme Court dismisses their
concerns. The Wall Street Journal
and many others on the right and the
left excoriate the patent owner, not

Rob ARnott iS thE FOUndER And chAiRmAn OF RESEARch AFFiliAtES llc.

30 | FORBES

FEBRUARY 10, 2014

the infringer. After the case is settled

Congress quickly singles out patent
law as one of the only parts of tort law
in which courts cannot ofer victims
of patent theft injunctive relief.
But waittheres more.
Not satisfed with ending injunctive relief, Congress passes a law that
singles out patent plaintifs for loser
pays treatment. This sounds great,
unless the battle is between a small
inventor and a multinational behemoth, and the battlefeld is tilted
sharply against the patent owner.
The inventor is now constrained to
a very expensive discovery process,
in which the plaintif has to know
exactly what evidence will show infringement in order to have the right
to ask for that evidence. Unique to
patent law, a provision of joinder

allows the winner to seek restitution of costs from anyone with a legal
or fnancial interest in the patent or
from the patent owner, which will
have a chilling efect on investment
in patents and innovation.
In an efort to rein in perceived
abuses from so-called patent trolls
whose primary afront would seem to
be their victories over patent thieves
our nation seems ready to turn its
back on two centuries of leading the
world in invention and innovation.
So lets take a moment to thank
the trolls for their role over these
200 years as buyers of last resort
whenever patent thieves had deeper pockets and more determination
than the inventors. F

thought leaders
rICh Karlgaard INNoVatIoN rules

a Story of tranSformation
the conviction key
Marginal gains add up. Thats
why we spend a lot of time looking
for them in our businesses. If we can
reduce costs by 2% here and cut development time by a month there, it adds
up. Good companies relentlessly seek
these kind of improvements. But great
companies do more than that: They dig
deeper to fnd transformative gains.
Let me illustrate by way of an amazing
story of one persons transformation.
In October 2001 Roberto Espinosa,
a 31-year-old resident of San Antonio,
Tex., stepped onto the platform of the
service elevator at Manduca, his restaurant in the citys fashionable River
Walk district. It was like stepping
onto air: The platform suddenly gave
way, plunging 30 feet to the basement
and slamming into the concrete.
Dazed, Espinosa crawled out of
the elevator shaft. He slipped in and
out of consciousness and barely remembers the arrival of frst responders. They carefully immobilized
Espinosas neck, strapped him onto
a gurney and drove him the 5 miles
to Brooke Army Medical Center. Six
hours of intensive care followed.
Espinosa survived, but his road to
recovery proved long and painful.
Espinosa had a natural predisposition for business. His family owned
and ran a furniture shop called De
Firma in Mexico, which soon expanded into San Antonio under the name
Home Emphasis. Espinosa had always assumed hed go into the family
business, but as time passed he had an
urge to take on new risks and prove
himself outside the family cocoon.
So he started Manduca. This declaration of independence was either
brave or dumb. Restaurants, with a
three-year failure rate of 60%, are as
32 | FORBES FEBRUARY 10, 2014

Mutual. Espinosa accepted.

fivefold productivity

risky as most businesses. Espinosas

wife, Lourdes, insisted they mitigate their risk by purchasing life and
disability insurance for Roberto. I
didnt know much about insurance,
he recounts, so I called somebody
I knew, Fernando Suarez. I trusted
Fernando.
The trust paid of. Following
Espinosas accident and near death,
Suarez was a frequent visitor to the
hospital, visiting almost as often as
the family. He was always there,
says Espinosa, and as a friend, not a
salesman.
Trying to sell him insurance would
have been futile, anyway, as Espinosa
had no money to buy more policies.
The 9/11 terrorist attacks had turned
a mild 2001 recession into something
worse, hitting the travel and hospitality businesses particularly hard. In
2002 the physically fragile Espinosa
was forced to close Manduca. He had
never experienced failure like that.
Suarez noticed the drain on Espinosas wallet, as well as the decline in
his confdence. He invited Espinosa
to try out as a representative at his
insurance company, Northwestern

But what does it mean, really, to accept a job selling insurance, which
pays only on commission? Was this
a real career? Or was this a foolish
gamble at a vulnerable point in ones
life? The frst three years were very
difcult, admits Espinosa. I had
trouble making the sales phone calls,
and my prospects sensed my lack of
conviction. I was so discouraged that
I cleaned out my desk three times.
Coaching and mentorship got Espinosa through his rough beginning,
and income started to trickle in. Still, it
was tough to survive, pay the bills and
keep going. Then came a turning point,
something that changed Espinosas
career forever. I was at a funeral for a
client, he said. The deceased mans
8-year-old daughter got up and said
she missed her daddy. Then she said
she knew her family would be okay. I
got tears hearing that from an 8-yearold. I suddenly knew that what I was
doing was very important work.
That day Espinosa found his
conviction. In a few short years he
became one of Northwestern Mutuals top recruiters of new reps in
San Antonio. Espinosa estimates his
productivity increased fvefold once
his conviction switch was turned on.
Thats not a marginal gain; its something far bigger. For Espinosa and the
company he represents, the gains are
still adding up, still compounding.
Most companies hope for transformative events like these. Great
companies, Ive observed, know
where to plant the seeds. F

Rich KaRlgaaRd iS thE pUBliShER At FORBES. hiS nExt BOOk, the soft edge: where great companies find lasting
success, will BE OUt in ApRil. FOR hiS pASt cOlUmnS And BlOgS viSit OUR wEBSitE At www.foRbes.com/KaRlgaaRd.

centurylink.com/link

strAteGIes
sportsmoney

Can a Team
Reinvent a City?
Weve seen time and again that it
cant. But that isnt stopping Big
Data pioneer Vivek Ranadiv from
using the NBA to bet $1 billion on
Sacramento.
By Tom Van RipeR

34 | FORBES FEBRuaRy 10, 2014

Eric MillEttE For ForbEs

ivek Ranadiv is set to sit down

in his modest ofce at the Sacramento Kings practice facility, just before his team takes on
the Dallas Mavericks. Then he
has a better idea. Lets go over to the court.
My son is in there shooting.
Settled into a courtside plastic chair in a
practice gym across from Sleep Train Arena,
watching his 26-year-old son, Andre, fre of
jumpers, the Kings new owner relaxes, smiles
and compels his naturally soft voice above the
din of bouncing basketballs. Then he drops
this: The billion dollars he and his partners
are sinking into Sacramento, he says, will be
one of the best investments in a decade.
By yourself and your partners, you mean?
No, by anyone.
Welcome to the through-the-looking-glass
world of Vivek Ranadiv. Educated at MIT
and Harvard Business School, Ranadiv, 56,
made his fortune down the road in Silicon
Valley, pioneering real-time information processing for Wall Street (his stake in Tibco, the
fnancial data company he founded, is worth
more than $150 million). Later, Ranadivs reimagining of how to play the game of basketball almost turned his 12-year-old daughters
diminutive team into national champions with
a nonstop press that exhausted bigger, better
rivals (the David versus Goliath tale was made
famous by a 2009 story in the New Yorker). In
his frst foray into the NBA, the value of his
small stake (under 10%) in the Golden State
Warriors almost doubled in three years as
smart arena development exploded the teams

man with many plans:

new Sacramento Kings
owner Vivek Ranadiv
thinks outside the
rules.

For people with a higher risk of stroke due to

Atrial Fibrillation (AFib) not caused by
a heart valve problem

I was taking warfarin. But I wondered,

could I shoot for something better?
NOW I TAKE ELIQUIS (apixaban) FOR 3 GOOD REASONS:

1
2
3

ELIQUIS reduced the risk of stroke better than warfarin.

ELIQUIS had less major bleeding than warfarin.
Unlike warfarin, theres no routine blood testing.

ELIQUIS and other blood thinners increase the risk of bleeding which can be serious,
and rarely may lead to death.

Ask your doctor if ELIQUIS is right for you.

ELIQUIS is a prescription medicine used to reduce the risk of stroke and blood clots in people who have atrial
brillation, a type of irregular heartbeat, not caused by a heart valve problem.

IMPORTANT SAFETY INFORMATION:

Do not stop taking ELIQUIS without talking to the doctor
who prescribed it for you. Stopping ELIQUIS increases your
risk of having a stroke. ELIQUIS may need to be stopped,
prior to surgery or a medical or dental procedure. Your
doctor will tell you when you should stop taking ELIQUIS
and when you may start taking it again. If you have to
stop taking ELIQUIS, your doctor may prescribe another
medicine to help prevent a blood clot from forming.
ELIQUIS can cause bleeding which can be serious, and
rarely may lead to death.
You may have a higher risk of bleeding if you take ELIQUIS
and take other medicines that increase your risk of bleeding,
such as aspirin, NSAIDs, warfarin (COUMADIN), heparin,
SSRIs or SNRIs, and other blood thinners. Tell your doctor
about all medicines, vitamins and supplements you take.
While taking ELIQUIS, you may bruise more easily and it
may take longer than usual for any bleeding to stop.
Get medical help right away if you have any of these signs or
symptoms of bleeding:
- unexpected bleeding, or bleeding that lasts a long
time, such as unusual bleeding from the gums;
nosebleeds that happen often, or menstrual or
vaginal bleeding that is heavier than normal
- bleeding that is severe or you cannot control

Tell your doctor if you are pregnant or breastfeeding, or

plan to become pregnant or breastfeed.
Do not take ELIQUIS if you currently have certain types
of abnormal bleeding or have had a serious allergic
reaction to ELIQUIS. A reaction to ELIQUIS can cause hives,
rash, itching, and possibly trouble breathing. Get medical
help right away if you have sudden chest pain or chest
tightness, have sudden swelling of your face or tongue,
have trouble breathing, wheezing, or feeling dizzy or faint.
You are encouraged to report negative side effects of
prescription drugs to the FDA. Visit www.fda.gov/medwatch,
or call 1-800-FDA-1088.
Please see additional Important Product Information on the
adjacent page.
Individual results may vary.

Visit ELIQUIS.COM
or call 1-855-ELIQUIS

- red, pink, or brown urine; red or black stools (looks like tar)

- coughing up or vomiting blood or vomit that looks like

coffee grounds
- unexpected pain, swelling, or joint pain; headaches,
feeling dizzy or weak
ELIQUIS is not for patients with articial heart valves.
Before you take ELIQUIS, tell your doctor if you have:
kidney or liver problems, any other medical
condition, or ever had bleeding
problems.

2013 Bristol-Myers Squibb Company

432US13BR01723-02-01 09/13

IMPORTANT

FACTS

The information below does not take the place of talking with your healthcare professional. Only your healthcare professional knows
the specics of your condition and how ELIQUIS may t into your overall therapy. Talk to your healthcare professional if you have any
questions about ELIQUIS (pronounced ELL eh kwiss).

What is the most important information vomit blood or your vomit looks like coffee How should I take ELIQUIS (apixaban)?
grounds
I should know about ELIQUIS (apixaban)?
Take ELIQUIS exactly as prescribed by your

Do not stop taking ELIQUIS without talking

to the doctor who prescribed it for you.
Stopping ELIQUIS increases your risk of having
a stroke. ELIQUIS may need to be stopped, prior
to surgery or a medical or dental procedure.
Your doctor will tell you when you should stop
taking ELIQUIS and when you may start taking
it again. If you have to stop taking ELIQUIS, your
doctor may prescribe another medicine to help
prevent a blood clot from forming.
ELIQUIS can cause bleeding which can be
serious, and rarely may lead to death. This is
because ELIQUIS is a blood thinner medicine
that reduces blood clotting.
You may have a higher risk of bleeding if you
take ELIQUIS and take other medicines that
increase your risk of bleeding, such as aspirin,
nonsteroidal anti-inammatory drugs (called
NSAIDs), warfarin (COUMADIN), heparin,
selective serotonin reuptake inhibitors (SSRIs) or
serotonin norepinephrine reuptake inhibitors
(SNRIs), and other medicines to help prevent
or treat blood clots.
Tell your doctor if you take any of these
medicines. Ask your doctor or pharmacist if you
are not sure if your medicine is one listed above.
While taking ELIQUIS:
you may bruise more easily
it may take longer than usual for any bleeding
to stop
Call your doctor or get medical help right
away if you have any of these signs or
symptoms of bleeding when taking ELIQUIS:
unexpected bleeding, or bleeding that lasts
a long time, such as:
unusual bleeding from the gums
nosebleeds that happen often
menstrual bleeding or vaginal bleeding
that is heavier than normal
bleeding that is severe or you cannot control
red, pink, or brown urine
red or black stools (looks like tar)
cough up blood or blood clots

doctor. Take ELIQUIS twice every day with or

without food, and do not change your dose or
stop taking it unless your doctor tells you to.
If you miss a dose of ELIQUIS, take it as soon
as you remember, and do not take more than
one dose at the same time. Do not run out of
What is ELIQUIS?
ELIQUIS. Rell your prescription before you
ELIQUIS is a prescription medicine used to reduce run out. Stopping ELIQUIS may increase your
the risk of stroke and blood clots in people who risk of having a stroke.
have atrial brillation.
What are the possible side effects of
It is not known if ELIQUIS is safe and effective ELIQUIS?
in children.
See What is the most important information I should know about ELIQUIS?
Who should not take ELIQUIS?
ELIQUIS can cause a skin rash or severe
Do not take ELIQUIS if you:
allergic reaction. Call your doctor or get
currently have certain types of abnormal
medical help right away if you have any of
bleeding
the following symptoms:
have had a serious allergic reaction to ELIQUIS.
chest pain or tightness
Ask your doctor if you are not sure
swelling of your face or tongue
trouble breathing or wheezing
What should I tell my doctor before taking
feeling dizzy or faint
ELIQUIS?
Tell your doctor if you have any side effect that
Before you take ELIQUIS, tell your doctor if bothers you or that does not go away.
you:
These are not all of the possible side effects of
have kidney or liver problems
ELIQUIS. For more information, ask your doctor
or pharmacist.
have any other medical condition
Call your doctor for medical advice about side
have ever had bleeding problems
effects. You may report side effects to FDA at
are pregnant or plan to become pregnant. It 1-800-FDA-1088.
is not known if ELIQUIS will harm your
This is a brief summary of the most important
unborn baby
information about ELIQUIS. For more infor are breastfeeding or plan to breastfeed. It is mation, talk with your doctor or pharmacist,
not known if ELIQUIS passes into your breast call 1-855-ELIQUIS (1-855-354-7847), or go to
milk. You and your doctor should decide if www.ELIQUIS.com.
you will take ELIQUIS or breastfeed. You Manufactured by:
should not do both
Bristol-Myers Squibb Company
Tell all of your doctors and dentists that you are Princeton, New Jersey 08543 USA
Marketed by:
taking ELIQUIS. They should talk to the doctor Bristol-Myers Squibb Company
who prescribed ELIQUIS for you, before you have Princeton, New Jersey 08543 USA
any surgery, medical or dental procedure.
and
Tell your doctor about all the medicines you Pzer Inc
New York, New York 10017 USA
take, including prescription and over-theCOUMADIN is a trademark of Bristol-Myers Squibb
counter medicines, vitamins, and herbal Pharma Company.
supplements. Some of your other medicines
may affect the way ELIQUIS works. Certain
medicines may increase your risk of bleeding
or stroke when taken with ELIQUIS.
unexpected pain, swelling, or joint pain
headaches, feeling dizzy or weak
ELIQUIS (apixaban) is not for patients with
articial heart valves.

This independent, non-prot organization provides assistance to qualifying patients with nancial hardship who
generally have no prescription insurance. Contact 1-800-736-0003 or visit www.bmspaf.org for more information.

2013 Bristol-Myers Squibb Company

ELIQUIS and the ELIQUIS logo are trademarks of Bristol-Myers Squibb Company.
Based on 1289808 / 1298500 / 1289807 / 1295958
December 2012
432US13CBS03602

strAteGIes sportsmoney
worth from $450 million to $800 million.
Ranadiv sold when he bought the Kings.
Its not that he likes to think outside
the boxhe thinks outside the rules, says
Kevin Maney, who coauthored the management tome The Two-Second Advantage with
Ranadiv. To forget everything about the
way things have always been done and think
about how youd do it if no rules existed.
Yet nothing Ranadiv, who kept the Kings
from leaving town when he took control last
June, has ever done is on the scale of what
hes up to now. We are building the 21stcentury city, he explains, zero doubt or irony
in his voice. It goes back to Rome. Cities are
built around their coliseums. To remake Sacramento, the city will own the new arena, and
the Kings group will develop the area around
it, igniting a downtown renaissance.
Ranadivs gamble hinges on the often
tried, often failed if-we-build-it-they-willcome model of economic development, this
time stealing from San Francisco. Rising Bay
Area prices will spur a 90-mile eastward
migration creating demand in Sacramento, he
says. The food industry and the health care
industry are here, and San Francisco is getting expensive, he says, his voice trailing of
as he sidesteps the notion that Sacramento is
not San Francisco (as anyone in San Francisco will quickly point out). As for the new
arena, city fnancing has yet to be approved.
He doesnt care. There is no point in going
to a place thats already big, he says. The
point is to build something here.
Of course, as any sports economist will
tell you, hell have to be the second coming
of Robert Moses for that to happen. Sacramento, the state capital, is a particularly long
long shot. For starters, it isnt a corporate
townyou wont fnd a lot of Silicon Valley
money sloshing around here. Unemployment
is at 8%, and more people are employed in
the public sector than any private industry.
Beyond that, ofce vacancy rates sit at 20%.
Its hard to see who will fll Ranadivs city of
the future.
Still, he has believersand theyve opened
their wallets. He and his partners, Qualcomm
Chief Executive Paul Jacobs, former Facebook executive Chris Kelly, 24-Hour Fitness
founder Mark Mastrov and former NBA great
Shaquille ONeal, nabbed a 65% stake in the
Kings from previous owners Joe and Gavin

Maloof for $348 million, a deal that valued

the club at a record sale price of $534 million
(sources close to the deal say they borrowed
43%, mostly from an NBA credit facility, to
buy the team). A subsequent purchase from
Bob Cook, a local real estate developer who
had declared personal bankruptcy, upped
their stake to 72%.
Theyre also contributing $190 million toward a $448 million downtown arena to open
in 2016. And then the kicker: a $500 million
investment in a surrounding project that will
include a still-undetermined mix of ofce
space, retail stores, condos and restaurants.
The partners $1 billion commitment sold
the NBA Board of Governors, who were
loath to move another team and turned
down a higher bid from Microsoft CEO Steve
Ballmer and hedge fund magnate Chris Hansen, who wanted to take the Kings to Seattle.
Also helpful: Ranadivs willingness to
forgo revenue-sharing money from the
league and the backing of Sacramento Mayor
Kevin Johnson, a onetime NBA star with the
Phoenix Suns wholike most politicians
dreaded being The Guy Who Lost Our Team.
Johnson personally recruited the Ranadiv
group and helped broker the arena deal. It
was always an uphill battle. We werent supposed to be here, Johnson says.
Where they are looks a lot like square
one, and the fnancially ailing Kings, who
havent seen the postseason since 2006, seem
an unlikely urban renewal catalyst. Born in
Rochester, N.Y. in 1948, the team trudged
through Cincinnati, Kansas City and Omaha
before settling in Sacramento in 1985. Following a successful run during the early to
mid-2000s, when they regularly won and
packed the house with the talented core of
Chris Webber, Mike Bibby and Peja Stojakovic, things took a big turn for the worse.
The Maloofs, plagued by fnancial trouble
from their outside business interests, cut
back on player payroll, weakening the team
and turning of fans. In 201213 attendance
was last in the league at 13,700 a game. Rumors had the Kings relocating to Virginia
Beach or Anaheim. Until Ranadiv showed
up as the white knight, a move to Seattle
seemed all but done.
Since taking control, Ranadiv has
plunged into his project with his characteristic faith that he can fnd unthought-of solu-

trenDInG
what the 54 million
Forbes.com users are talking
about. For a deeper dive go
to FoRBeS.Com/BuSineSS
cOMPAnY

BeST Buy (again)

that 2013 rally we brought
up last issue? Forget it.
shares sell o on news of
pathetic holiday sales.
PerSOn

SCoTT SChieFFeR
texas cPA tweets ForbEs
that his southwest Airlines
ight has mistakenly landed
at the wrong Missouri aireld. Global headlines ensue.
PLAce

pueRTo RiCo
though muni market on
tenterhooks over potential
debt restructuring, Uncle
sam unlikely to step in.

FEBRuaRy 10, 2014 FORBES | 37

strAteGIes sportsmoney

the Stern effect

Just how well did David stern, who will retire as NbA commissioner in February, deliver for the leagues owners? consider this: in 1983, the year
before he took the job, sacramento sold for $10.5 million. in 2013 it sold for $534 million, a 14% compound annual increase over 30 years.

tions for the kind of problems that vex others. On the court, new cameras, computers
and data promise to reinvent NBA coaching
as they have pro baseball and football. Of
the court, his team proudly became the
frst in the league to start accepting trendy
cyber-currency Bitcoin for transactions. Applications developed with Qualcomm could
give him unprecedented detail about his
customerswhere they live, what they eat
and how much they typically spend. Its like
a casino knowing that a blackjack player has
just lost three hands in a row and immediately sends a waitress over with a drink, says
Kings President Chris Granger. Were very
microfocused.
As they wait for the new arena deal to
38 | FORBES FEBRuaRy 10, 2014

be approved, the Kings are making do with

smaller initiatives. Theyre integrating sponsors with fans, who can now sign up through
the team for health care from Kaiser Permanente, the Kings ofcial medical provider.
Every new season ticket sold this year came
with a 10% donation to a local charity. And
despite another awful startthe Kings were
1423 through Jan. 16fans seem buoyed by
the new ownership. The team sold nearly
5,000 new season tickets this season, the
most in the league. Overall attendance is up
17%, to 16,000 a game.
But by any analysis, Ranadiv has a long
way to go before hes fxed his basketball
team. The city of the future? We wish him
luck with that. He will most certainly need it. F

TECHNOLOGY
sOfTwarE

Crowdsourcing Capitalists
Duolingo teaches English to millions for free, as the nonprofit Khan Academy does with
math. But its founders want to make real money so the service lasts.

luis von ahn and

severin Hacker are after
the 99.99999% of daily
content that remains
untranslated.

s stars fll the night sky in Veracruz, Mexico, 23-year-old Uziel

Alejandro Lpez kicks back
at home to play on his Android smartphone. His thumbs
breeze over the brightly colored screen, but
this is no casual game. Hes learning English
on Duolingo, a free mobile app created 1,700
miles away by a technology startup in Pittsburgh, Pa. Lpez has passed multiple lessons
in one month, faster than his attempts on
more than ten other language-learning apps.
The brain behind Duolingo is Luis von
Ahn, 34, a boyish-faced computer science
professor at Carnegie Mellon University.
Sometimes called the father of crowdsourcing, hes best known for inventing the CAPT-

40 | FORBES FEBRuaRy 10, 2014

CHA, the squiggly word

or words you have to type
in on password-protected
forms. Google bought his
company, reCAPTCHA,
and uses your free labor
to verify hundreds of
millions of words from
books that its scanners
cant parse.
A similar kind of
crowdsourcing keeps
Duolingo in business, in
a more sustainable way
than an educational nonproft like Khan Academy
ever could. Once young
Lpez takes a few language lessons on the app,
he and perhaps 30 other
Duolingo users hone
their skills by translating
some text on a Wikipedia-style editing page.
If they fnd themselves deciphering a list of
The 35 Gayest Moments From Duck Dynasty, theyve stumbled upon an article from
news site BuzzFeed.
In the fall of 2013 BuzzFeed and CNN
started paying Duolingo to translate several
dozen articles a day into Spanish and other
languages. Von Ahn and his 29-year-old
cofounder, Severin Hacker (his real name; its
Bavarian), say partnerships with more publications are imminent. Users such as Lpez are
translating around 600 articles a day, but only
10% are revenue-generating for Duolingo, so
theres plenty of room for revenue growth.
Some contend the model is unethical.
The students are working for an abstract
value, which is knowledge, says Michael

Michael NeMeth for forbes

By Parmy olson

TECHNOLOGY sOfTwarE
sTraTEGIEs
Thomsen, a multilingual tech writer who got
into a heated e-mail exchange with Duolingo
after blogging about how its system was
exploitative. There are a lot of services like
this from Silicon Valley that come on this
plume of idealistic rhetoric, sitting on top of
what is basically a proft-and-loss scheme.
Duolingo, like its client BuzzFeed and
other Internet businesses like Facebook, is in
the business of scale. It needs tens of millions
of users to make the same amount of money
that an older, traditional competitor might
with much smaller numbers. Its a cheap
and ineective version of language learning,
says Thomsen.
Hacker can barely contain himself at
this suggestion. Free education will really
change the world, he says. If we achieve
that, then all the other issues are ... I dont
know, seem not to matter to me.
Still, the founders thought signifcantly
about making Duolingo a nonproft like Khan
Academy in the early days, before Von Ahn
realized that wouldnt be sustainable. You
have to somehow continue convincing billionaires to fund you forever, he says at a hotel
in Mountain View, Calif. (Khan Academy has
raised more than $15 million from the likes of
the Gateses foundation and Google.)
Duolingo expects not only to cover its
$500,000 in monthly costs but also to book
its frst proft this year. With around 8 million monthly active users and growing, its
now the most popular language app, with
six languages on oer and Russian, Japanese
and Chinese on the way. The startup cites an
independent study showing that its users can
learn the equivalent
of the frst college
There are a
semester of Spanish
lot of services
in 34 hours comfrom Silicon
pared with 55 hours
Valley that
with Rosetta Stone.
In December Apple
come on a
named it App of the
plume of
Year 2013.
idealistic
The company was
rhetoric
born after Von Ahn
sold reCAPTCHA to
atop what is
Google in 2009 for
basically a
more than $25 million
prot-andand started thinking
about bigger problems loss scheme.
to solve. Hacker was
42 | FORBES FEBRuaRy 10, 2014

Von Ahns Ph.D. student, and it was in their

weekly half-hour meetings in Von Ahns oce
between 2009 and 2011 that the two discussed
the creation of a project around language. Von
Ahn was born and raised in Guatemala and saw
frsthand how expensive it was to learn English,
while Hackers Swiss childhood featured food
labels and road signs in four languages. They
went on to raise $18.3 million from venture
capitalists like Union Square Ventures and Hollywood actor Ashton Kutcher.
There are 1.2 billion people learning a
foreign language in the world, says Von Ahn.
Some 800 million want to learn English so
they can get a better job, and it annoys him
that many have to shell out $125 each
for those yellow boxes of Rosetta
Stone software. Free Web-based
alternatives like Duolingo, Anki and
Memrise have already been putting the
22-year-old Rosetta Stone under pressure.
Rosetta Stone is now forecasting a third
consecutive annual loss, and its shares
have halved since its 2009 IPO.
BuzzFeed executive Dao Nguyen says
Duolingos crowdsourced translations are
good but could be better, something the two
are working on by passing corrections back
to train Duolingos algorithm. At least the
translations cost much less than average
rates: 5 cents a word for inferior ones to 20
cents a word for the best.
Duolingo is now talking with wireless
carriers in Latin America about preinstalling the app on new smartphones, and one of
the largest translation frms is interested in a
partnership deal. Im impressed, says Mark
Lancaster, founder of SDL, which grosses
$330 million from selling translation software
and human services. The problem isnt that
theres not enough work to go around, he
says. One study claims that language service
providers work on only .000000687% of the
content created every day. Its how eciently
the work can be done.
Von Ahn has already received buyout offers from big players and said no. Having
bought his last two companies, Google seems
a likely contender. An acquirer might load
the app with ads or translation requests from
Nike or Pepsi. Von Ahn is okay with that, as
long as the app remains free. If that makes
him a capitalist, hes okay with that, too. Im
not against capitalism. F

GaDGETs
wE LOVE
soNY 4K
caMcorDer

You want to live the ultraHD life, so you bought

a $5,000 4K television.
But true 4K content is a
ways of. Ultra-HD Blu-ray
discs are scant. Netix
is stepping up with 4K
streaming, starting this
spring. Take matters into
your own hands with
Sonys afordable 4K
camcorder ($2,000).
Its got a one-inch,
14.2-megapixel sensor that
can shoot in full-resolution
4K at 24 or 30 frames
per second with XAVC
encoding, a Zeiss lens
with 12x optical zoom,
and noise cancelation that
cuts down the chatter
from behind the camera.
Cant get Avatar at your
preferred quality just yet?
Make your own sequel.
Bruce Upbin

sECuriTY

Tricking the Hackers

Backed with $26 million, a startup is
using hackers own tricks against them.
By andy greenBerg

F
Shape Securitys derek
Smith and Shuman
ghosemajumder, a
former click-fraud
fghter at google.

or decades the information security industrys default analogy has

been virus versus antivirus, a futile
race to detect hackers weapons
as they constantly mutate. Now a
few security veterans are fipping the game:
Deciphering a shape-shifting chunk of code is
about to become the attackers problem.
In late January a team of entrepreneurs
out of Google and the defense world unveiled a startup called Shape Security. The
58-person Mountain View, Calif. company sells a pizza-box-size appliance called a
ShapeShifter that plugs into a companys network and obfuscates the code behind the
customers website. It replaces variables with
random strings of characters that change
every time a page is loaded, all without altering the way the site appears to human visitors. This trick, known as polymorphism,
makes it vastly more difcult for cybercriminals to use automated tools to crack passwords, scrape content from thousands of
sites or use malware-infected PCs to spy on
victims online banking.
We realized that so much frontline hacking is occurring in this automated, script-

44 | FORBES FEBRuaRy 10, 2014

ed fashion, says Shapes CEO, Derek Smith.

That germinated into the idea of turning
polymorphism against the hackers.
Shape was born in 2010 at the Department
of Defense, where cofounders Smith and former Google mobile boss Sumit Agarwal met
after Smith sold his last security frm, Oakley
Networks, to Raytheon. But the core codeshifting idea came from another Oakley alum,
Justin Call, who soon became Shapes CTO.
Agarwal found a vice president of strategy in Shuman Ghosemajumder, another former Googler who had spent years leading the
search giants high-stakes battle against click
fraudjust the sort of bot-based attack that
Shape hopes to cripple.
Since then its raised a total of $26 million
from investors, including Kleiner Perkins
Caufeld & Byers, Venrock and Google Ventures. Though its just launching, it already
has more than 20 customers testing the technology and expects to book low eight fgures in revenue for 2014. When its product
comes out of testing, it plans to charge more
than a million dollars a year per customer.
Shapes challenges include persuading
chief security ofcers to add yet another security appliance to their crowded data centers
and ensuring that its code-scrambling trick
doesnt slow down a customers busy website or jumble the way it looks, says Jeremiah
Grossman, chief technology ofcer of WhiteHat Security and well-known Web-hacking
researcher. But if anyone can make this work,
its this team, he says.
If ShapeShifters do fnd their way into data
centers around the Internet, expect cybercriminals to fnd new ways around them. If
criminals cant read the HTML to fgure out
what part of the site to attack, they might use
image recognition to study how the website
looks or even hire humans to fll in for bots.
Shape says its already fling patents for the
next phases of that game, though its keeping
mum on those tricks to avoid tipping of the
bad guys.
But for now Ghosemajumder points out
that rather than pay for expensive new bot
upgrades, the more rational approach for
the attackers is to target the hundreds of
websites where their automated attack still
works. To paraphrase the old saying about
outrunning a bear: You dont have to be more
clever than the hackers. You just have to be
more clever than their other targets. F

martin klimek for forbes

TECHNOLOGY

TECHNOLOGY
wirELEss

Now Streaming
At Gate 22B

Travelers are demanding free airport Wi-Fi.

But who is going to foot the bill?
By alex konrad

ith banks of blinking slot

machines situated just
past the security check,
McCarran International
Airport in Las Vegas will
never be a normal airport. But the tourism and convention money that comes from
serving as the gateway to the Strip means
that McCarran can also aford to be an early
adopter of traveler-friendly technology.
Ten years ago McCarran was one of the
frst big U.S. airports to give away Wi-Fi.

46 | FORBES FEBRuaRy 10, 2014

Today the airport is in the process of deploying one of the frst systems to beam Wi-Fi
outside the terminal to fiers stuck on board
arriving and departing aircraft. The experience where a customer feels forced to pay
at a location is not a happy experience, says
Samuel Ingalls, McCarrans longtime IT
chief. I cant overstate what kind of positive
reaction weve gotten over the years.
The rest of the country is fnally catching
up, with more than 90% of the biggest 150
U.S. airports ofering a free or freemium
Internet connection last year, according to
research by wireless software company
Devicescape. Last year three of the biggest
holdoutsthe New York-area airports John
F. Kennedy, LaGuardia and Newarkofered
free Wi-Fi almost half of the time.
Airports arent ofering Wi-Fi because its
suddenly cheapits expensive and often a
headache to deploy. Weve got almost 3 million square feet to cover. Its not like running
to Best Buy, says Scott Wintner of Detroit
Metro Airport.
But customers want free Wi-Fi, and at
some point in the last year or so the failure
to ofer a free, consistent connection has
become a competitive disadvantage. The

TECHNOLOGY wirELEss

TrENDiNG
what the 54 million
forbes.com users
are talking about.
for a deeper dive go to
forBes.com/tecHnoloGy
COMPANY

nest
You might not want to pay
$129 for a smoke alarm, but
google just paid $3.2 billion
for the smart-home-device
maker packed with lots of exApple folks.
IDEA

48 | FORBES FEBRuaRy 10, 2014

LAX and Miami, in October. That brought

back airports such as Minneapolis-St. Paul,
which AWG snatched from Boingo in an adsupported deal that made the airport twice as
much money ($400,000 last year).
But even with acquisitions Boingos revenue grew just 3% last year, and its shares are
of 50% from their highs in 2012. Analysts
are more bullish about its move into military
bases through its February 2013 acquisition
of a frm called Endeka. There is always
competition to keep us on our feet, says
Boingo President Nick Hulse. I think we are
caught up to this new market trend.
As long as advertisers are footing the bill,
airports no longer care which infrastructure
vendor gets the deal. Throwing open a contract to new players brings the extra beneft of
higher-speed networking gear. By switching to
AT&T, Dallas/Fort Worth is getting one of the
best high-speed free Wi-Fi systems in the U.S.
(see table, p. 46). Houstons two airports will
forgo the $300,000 they make per year in a 35%
revenue share with Boingo and choose a new ad
partner to help cover the cost of new gear. Its
unlikely we will continue with Boingo, says
chief commercial ocer Ian Wadsworth.
Boingo still has tricks up its sleeve. At Chicagos bustling OHare International Boingo
is testing a new Hotspot 2.0 that lets authenticated smartphone users hop onto Wi-Fi
securely at no cost. Who would likely foot
the bill? AT&T and Verizon. F

PERSON

marissa mayer
the Yahoo Ceo res her top
deputy 15 months after luring
him from googlethis amid
a continued decline in ad
revenue despite a big trac
jump and shiny new apps. the
buck has to stop somewhere.

dAvid PAul morris / BloomBerg

number of major hubs that charge for Wi-Fi

is now ten. The nations busiest airport, Atlantas Hartsfeld-Jackson, is the one most
often singled out. It lowered its fees to $4.95
in 2012 and delayed a planned switch to free
in the fall. Minneapolis-St. Paul International
shifted to freemium, charging only for intensive use such as video streaming or connections that last for more than 45 minutes.
The shift to free has led to changes in who
pays for airport Wi-Fi. Four years ago Google
popularized the concept of underwriting an
entire airports Wi-Fi during a holiday promotion. Startups such as JiWire and Cloud
Nine Media began ofering ad deals directly
to airports to defray some costs with 30-second video spots, rich media and banner ads.
Even as ad-supported Wi-Fi took of, the
biggest partner to airports has remained
Boingo Wireless, which has traditionally paid
for the equipment and installation and split
its monthly and daily access fee revenue with
the airports in multiyear contracts. Buying up
its rivals, Boingo at the time of its 2011 IPO
claimed to reach 42% of all North American
passengers in 271 airports (plus contracts in
restaurants, malls and hotels).
But the emerging appetite for free Wi-Fi
has forced Boingo to look for more varied revenue sources. It bought into the ad-supported
trend by acquiring Cloud Nine in August 2012
and a fast-growing competitor, Advanced
Wireless Group, which had contracts with

net neutrality
verizon gets a court win
knocking down the FCCs
blessing of an open web.
Broadband providers can now
discriminate against heavy
trac users such as netix and
Youtube. expect a ght.

eNTrePreNeUrS

Girlfriend Power
Why is Silicon Valley backing a small beauty brand?
Hint: Julep knows how to exploit social media.
BY CAROL TICE

Using customers to
create, test and sell
goodsand jolting the
industry: Juleps CEO
and founder, Jane Park.

ndreessen Horowitz raised a few

plucked eyebrows last February
when it led a $10.3 million Series
B round for a company that sells
nail polish, skin care products
and makeup. Julep Beautys founder and CEO,
Jane Park, was pedigreed, alright, having done
time at Boston Consulting Group and at Starbucks. But, cmon, that kind of money for prod-

50 | FORBES FEBRuaRy 10, 2014

ucts sold on QVC, as well as in its own salons,

Sephora and Nordstrom?
Well, yes. Julep is also exploiting e-commerce
and social media to quickly create, test and sell
new products, giving the staid beauty business a
vigorous jolt. Using feedback from loyal customersonline and in person at its salonsthe
seven-year-old company introduced more than
300 new products on its website in 2013, a staggering number for a small company. Were not
telling customers what they want, says Park, 42.
Were responding to what they want.
Park says that online business tripled from
2012 to 2013. Last year, FORBES estimates,
Julep racked up roughly $20 million in total revenue, with sales more than doubling in each of
the last couple of years. Investors have noticed.
Besides Andreessen, the Seattle frm has attracted money from Maveron (Howard Schultz
and Dan Levitans venture arm), Version One
Ventures and Precedent Investments (whose
funders include Will and Jada Pinkett Smith,
and Jay Zs Roc Nation)for a total of $26.9 million over the last two years.
Andreessen Horowitz sees Julep as a beautyfocused software company, says partner Margit
Wennmachersone thats fgured out how to
analyze and cater to consumer demands in the
$160-billion-a-year beauty sector. We think
that software eats the world, she says. This is
a classic case of a software company attacking a
very large, traditional market.
Retailers agree. Theyre a very nimble,
creative, collaborative company and can move
colors in and out quickly, says Debbi HartleyTriesch, Nordstroms national cosmetics merchandise manager. Nordstrom is selling 25 different Julep products at four Seattle stores and
on Nordstrom.com this year.
Park got her frst taste of entrepreneurship
typing mailing labels into a Commodore 64
computer while helping her Korean-immigrant
father during promotions for his picture-framing store. That was when I caught the bug, she
says. It was exciting when sales came in and I
could see I had an impact.
But she seemed headed along a diferent
career trajectory. After graduating with a degree

rick dahms for forbes

e-commerce

eNTrePreNeUrS e-commerce

52 | FORBES FEBRuaRy 10, 2014

tant insights into where products and processes

need to be improved.
The companys frst-line beta testers are the
Mavens. These subscribers pay $19.99 a month
to receive a custom-selected box of nail colors
and other makeup at a discount of retail price
(ordinarily, the sleek little nail polish bottles
go for $14 apiece). Then the social media chat
begins, as recipients comment on and submit
photos of their manicures, allowing Julep executives to see how their products are used.
Some Mavens are also video bloggers who
post unboxing videos on YouTube, revealing
contents of monthly Julep deliveries. This is
Reeseits a gorgeous, bubblegum-pink color!
chirps fashion vlogger Nicole Guerriero in a
video with over 57,000 views. While some post
for the love of it, many vloggers earn commissions via a sales link on their YouTube page.
Some of Parks girlfriends helped her land Juleps biggest clients. One, who manages a Nordstrom Rack, gave her entre into that chain. A
fashion editor friend introduced Park to a businesswoman who in turn paired her with QVCs
buyer, who was looking for a beauty brand that
could deliver a 4th-of-July-themed nail shade in
under 60 days, for a planned holiday show.
Today Julep has a radically diferent complexion from Parks original idea: a chain of nail
salons selling unique, limited-edition products.
She tapped her former bosses at BCG in 2007
for seed money to open the frst salon, near
north Seattles tony University Village mall. She
pitched Maveronand got a at-out no, recalls
partner Jason Stofer.
When the Great Recession hit, salon customers vanished, and Park began rethinking her
model. Shed get a lot more reach by refocusing
on online sales and social media marketing, even
if she kept salons for market research. In 2011
Maveron got a call from Darrell Cavens, CEO of
hit Seattle daily-deals site Zulily: Check out Park
and Julep. This time Maveron pounced. Beauty
is a business where women talk to each other
about what products theyre trying, Stofer says.
Its one of the most social businesses there is.
In Juleps petite, photogenic founder, Stoffer sees someone who intuitively understands
multichannel marketingand is accessible,
stylish and the antithesis of snobbish. Even
back to Este Lauder beauty companies have
been driven by charismatic female founders
with a unique take, he says. Jane is that kind
of star. F

TreNDING
What the 54 million
Forbes.com users
are talking about.
For a deeper dive go to
FORBES.COM/ENTREPRENEURS
IDEA

WILL YOU GO VIRAL?

by studying the roadblock
eect and the stagger eect,
you can sometimes predict
whether a post or tweet will go
crazyor quickly die.
COMPANY

SYNCHRONOSS
its Workspace gives you the
cloud capabilities of box and
dropbox on desktop, tablet
and smartphone but is ideally
suited to small businesses.
PERSON

JESSE ITZLER
The rapper-turnedentrepreneurnow an angel
investoroers his advice on
the most successful ways to
pitch potential investors.

daNieL ZUchNik / GeTTY imaGes

in public policy at Princeton and getting a law

degree from Yale, Park consulted for a while at
BCG, then jumped over to Starbucks as director
of new ventures. But she was drawn to the beauty niche by fond memories of putting on makeup
with her two sisters and her girlfriends. At the
time, the industry was cranking out mostly red
and pink nail polish full of toxic chemicals.
There wasnt really a healthy formulation
for nail polish or many colors, Park recalls.
She set out to bring the fast-fashion concept so
popular in apparel to makeup. In 2011 Park introduced the monthly Julep Maven subscription
service, which encourages customers to try new
shades and then move on to the next crop.
Over time Julep has broadened its line from
its signature nail polisheseach is given a
womans nameinto a wide variety of makeup
and skin care items, with a focus on product
innovation. On a recent visit to Juleps bustling,
white-and-pink oces near the downtown Seattle waterfront, excitement centered on a new
nail polish wand due out in May.
Designed by IDEO, the frm behind the Apple
mouse, the Pli wand turns the short, chunky top
of any Julep nail polish bottle into a more easily
controlled pen-shaped applicator that swivels to
any angle needed. To fnance Plis production,
Julep will turn to crowdfunding through its ecommerce site, creating an initial manufacturing
run just big enough to cover prepaid orders.
For new-product ideas Julep watches customers comments on Facebook, Pinterest and
Twitter, reads beauty blogger reviews and listens
to customers at its handful of Seattle-area nail
salons. If one of this months nail colors ies of
salon shelves, it may become part of Juleps permanent assortment and appear in shops. Photos
are actively solicited with giveaway contests, like
a recent one ofering a $100 gift certifcate for
submitting the manicure shot that got the most
Facebook likes. Says Park: The way we connect with customers
in our parlors, it was
Beauty is
natural to bring that
a business
conversation online.
where women
It isnt all happy
talk to each
talk, either. The company doesnt hide or
other about
delete negative comwhat products
mentscomplaints
theyre
stay on the Facebook
trying.
page and get responses, giving execs impor-

InvestIng

Swinging At
Strikes
Most money
management
frms live by
the lucrative
motto of go big
or go home.
Beck, Mack &
Oliver takes a
more civilized
approach.
By Steve Schaefer

M
Beck, Mack & Olivers
Zachary Wydra left
hedge funds for the
slower pace of a value
stock mutual fund.
54 | FORBES FEBRuaRy 10, 2014

oney manager Zachary

Wydra is a lifelong New York
Yankees fan. But on his ofce
wall hangs a photograph of
Boston Red Sox slugger Ted
Williams. While this might be considered an
abomination to some fans of the Bronx Bombers, it reminds Wydra of one of the core tenets of
his investment philosophy.
Williams was one of the greatest sluggers in
baseball. His secret was dividing the strike zone
into 77 equal areas and swinging only at pitches
in areas in which he had a history of success.

Wydra is the manager of Beck,

Mack & Oliver Partners Fund, a
$160 million (assets) go-anywhere
value fund holding stocks ranging from $530 million (market cap)
PICO Holdings to $200 billion behemoth IBM. But like Williams, Wydra
swings at a select few stocks29
currentlythat are in his sweet spot.
In other words, his team has done
deep-dive fundamental research
and believes the odds of hitting a
home run far outweigh the risks.
Since its conversion to no-load
mutual fund status in 2009, Wydras
fund has logged an average annual
return of 16%, besting the S&P 500
each year except 2013, when it held
17% in cash and returned only 21%.
If we arent fnding attractive values, says Wydra, deviating from
the benchmark is fne.
Wydras approach is right out of
the Benjamin Graham deep value
handbook. Allowed to allocate up to
50% of assets in his top ten holdings,
he seeks frms with predictable cash
fows and durable businesses that
can withstand competitive threats.
He also targets asset bargains. Its all
about generating big returns from
mispricings in the market.
About 40% of Wydras fund is in
small caps, but his largest holding is
IBM. He says IBM could buy back
as much as 50% of its shares over
the next ten years, doubling earnings per share. But his case for Big Blue goes beyond fnancial engineering. He says Wall Street
is missing IBMs potential in cloud computing.
A bunch of cloud names are trading at huge
multiples, and IPOs are fying, says Wydra, 42.
Indeed, stocks like Rally Software and Beneftfocus surged in 2013, despite being unproftable. Meanwhile, IBM sells for just 11 times 2014
earnings expectations.
As businesses switch to the cloud, dont you
think IBM will be involved? says Wydra, sitting in the frms conference room next to a large
overstufed bookshelf of fnance books ranging

Matt FurMan For Forbes

mutual funds

InvestIng mutual funds

from Den of Thieves to The Intelligent Investor.
Though Wydras fagship fund is puny by industry standards, he and the other partners of
the frm manage a total of $5 billion. Beck, Mack
& Oliver is an old school Wall Street frm founded in 1931. However, unlike most boutiques it is
under little pressure to grow. In an efort to stay
nimble his fund will close when it reaches
$1.5 billion in assets. As recent shareholders of
Berkshire Hathaway can attest, size matters when
it comes to performance, especially if your mission
is fnding cheap stocks. (Berkshire has a fve-year
total return of 85%, versus 141% for the S&P 500.)
Because of its unique culture and structure
BM&O has been able to resist the urge to get
bigger. The frm has only seven partners, all of
whom are stock pickers. Each earns a percentage of profts, and all profts are paid out each
year. In fact one reason Wydras tiny mutual
fund has a relatively low 1% expense ratio is that
the frm spends virtually nothing on marketing.
The catch for partners is that at age 65 they
must give away their equity in the frm to younger partners over the course of fve years. Once
a partners stake drops to zero he no longer receives any income from
In nance
the frm. This keeps the
frms ownership in the
everyone
hands of stock pickers
usually
younger than 70, with
claws for the
each partners stake
last dollar,
based on client load and
revenue generation.
says Wydra,
By contrast, at other
who detests
Wall Street frms younger partners often borrow the sight of
to buy out older partners blood.
stakes. This puts pressure on frms to get bigger, thereby increasing
asset fee revenue, profts and the payback.
In fnance everyone usually claws for the
last dollar, says Wydra, who currently owns
more than 10% of the frm. Instead of spending endless hours chasing new business, partners spend most of their time either researching
stocks or together in meetings debating the merits of an investment. Says Wydra, Every time
you recommend a name youre defending it to
your partners before you ever have to defend it
to clients.
Wydras path to deep value investing at
BM&O is not typical. He was premed at Brown
University, graduating in 1994. However, during medical school the sight of blood made
56 | FORBES FEBRuaRy 10, 2014

Wydra weak in the knees.

A guy had come in [to the emergency room]
whod been in a fght, Wydra recalls. My med
school friend rushed over, but I was thinking, I
dont want to get any of that blood on me.
So Wydra ditched doctoring and followed a
friend into banking. He was making $80,000 a
year, Wydra says. I didnt know what a balance
sheet was, but that sounded pretty cool.
Eventually Wydra got an M.B.A. from Wharton and then landed an analyst job at Jacksonville,
Fla. hedge fund Water Street Capital, founded by
Gilchrist Berg, one of Julian Robertsons original
Tiger Cubs. At Water Street Wydra was one of the
analysts behind the funds killing in Apple, which
it bought in 2004. Wydra saw the iPod music
player as a Trojan horse that would lure shoppers to Apple for bigger-ticket items like laptops.
Wydra was a quick study in the rigorous discipline of buy side research, digging deep into company flings, meeting with management, customers and competitors, and dredging up every scrap
of available information to check for risks.
BM&O takes a similar approach, so joining
in 2005 was an easy transition. The frst stock
Wydra recommended at the frm was water
technologies company Nalco Holding. When
the fnancial crisis hit, the debt-laden company
plunged 75% to $7.80.
Wydra knew Nalcos customers, like oil refneries, could not operate without its products and
support, so he fgured its cash fow was durable
enough to make necessary interest payments; in
the swirl of a fnancial crisis it was a case of the
baby being thrown out with the bathwater.
BM&O added to its Nalco position slightly
above the lows. That conviction was richly rewarded when EcoLab bought the company for
$38.80 per share in 2011.
Wydra has had some strikeouts. In 2008 he
made an ill-fated bet on AIG, which contributed
to his 42% decline that year.
These days Wydra insists that his strike zone
for stocks is all about understanding the fundamentals rather than any size or sector. Thats
why hes willing to swing high for megacaps and
lower for undervalued small stocks like La Jolla,
Calif.s PICO Holdings, a frm that invests in
water storage and water resource management,
real estate and agribusinesses. Says Wydra,
PICO management is great at aggregating misunderstood assets at low valuations and selling them at higher ones. Proving, of course, he
practices what he preaches. F

tRendIng
What the 54 million
forbes.com users
are talking about.
for a deeper dive go to
fOrBeS.cOM/INveStING

COMPANY

BeaM
american spiritsmaker
accepts $16 billion cash
buyout from Japans
suntory. bottoms up!
PERSON

ty WarNer
beanie babies billionaire,
facing a possible
60 months, avoids jail
time in tax-evasion case.
IDEA

chaSING caBLe
Charter Communications
wants to buy the much
bigger time Warner
Cable, but other suitors
may yet emerge.

$&($!&''$($#$'(#)'"&#'
" %! !

$#$&')('(##&'
# "!# !" $"!
#!
$! !! "! !#"# "#
"! !! ! ! #

$&($!&+&%#('

"#! "

& !$

Owner and Chairman

APi Group, Inc.

Chairman and CEO

Honeywell

International Recipient - Canada

%""('"# !"$($!"
Chairman
Canadian Natural
Resources Limited

Founder & Chairman

Blyth, Inc.

$""!

%"

Vice President and Secretary

Herbold Foundation
Former United States
Ambassador
Republic of Singapore

Chairman, Managing
Director
BIGHORN Golf Club

$&($ !& "&' #$)& ')# #&($#' ($ %)&') (& $+#

*&'$#' $ ( "&# &" (&$) & )($# # ( '(&( $ ('
)($#!%&$&"'#(''$($#'+&"$&(#"!!$##
%&*(!,)##''$!&'%'($(&' ,$)($&($!&''$($#
'%&$)($%&$"$(&#(&%&')($##%&'$#!*"#(#(#(
(('##
For more information about the Association and its Members please visit our
Web sites at www.horatioalger.org and www.horatioalger.ca.

#!

Chairman and Chief

Executive Ofcer
AutoNation, Inc.

!#"

""( ! #"
Owner, President, & General
Manager
Dallas Cowboys

&$'"

Chairman of the Board

Automobile Club of
Southern California

Founder and Chairman

World Wide
Technology, Inc.

$"$!$$

! "'"

President
Columbia
Investments, Ltd.

Chairman Emeritus
Trammell Crow
Residential Company

INVESTINg
KEN FISHER PORTFOLIO STRATEgY

ALL OR NOTHING
in 2014

FORBES has tracked. I hope to return

to form in 2014, and, with that in mind,
these fve stocks should help.
The business press seems oblivious, but Spanish banks are on a tear.
Spains challenges morphed them
into a relative oligopoly, and BANCO
SANTANDER (SAN, 9.3) sits at the pinnacle,
up 32% since recommended last Apr.
15and with room to run. There is no
complete alternative to its full scope of
services. As long-term global interest
rates rise, so will Santanders sales and
proft margins. Its at nine times my

consulting) versus uglily for a quality

stock in todays market at nine times
my 2014 earnings estimate with a 2%
dividend yield.
Another fts-and-starts laggard that
should start soon is diversifed medical products maker ABBOTT LABORATORIES
(ABT, 40). Profts plummeted after spinning of $80 billion market cap AbbVie
(completed last year). I like Abbotts
broad product line, great research,
butt-of-the-joke Wall Street image and
opportunity to focus now, postdeal,
on the business. It sells at 16 times my
estimated 2014 earnings with an annualized 2.2% dividend yield.
A strong stock that should get
stronger is SEAGATE TECHNOLOGY (STX, 61),
one of the two dominant disk-drivememory frms. Like the well-known
Moores Law, which has propelled
semiconductors to unimaginable gains
for almost 50 years, Kryders Law
(named after physicist and former
Seagate chief technical ofcer Mark
H. Kryder) now rolls as fast or faster in
magnetics. Seagate smothers the mar-

the bears are suFFering From boywho-cried-wolF syndrome

2014 earnings estimate with a likely
7% 2014 dividend yield.
Todays doggiest stockhigh up
most lists like best brand, most
respected, most innovative, most
new patents, etc.is INTERNATIONAL BUSINESS MACHINES (IBM, 189). I havent recommended it in years. Thats good. Its
been doggy. Now is the time. Why?
Now it only needs boredom to beat expectations. IBM has too much that can
surprise positively (like cybersecurity

kets high end but is at only ten times

my June 2015 earnings estimate with a
2.8% dividend yield.
Half of America hates WAL-MART
STORES (WMT, 77). Half loves it. Any half
is big enough for me. Then come
overseas markets, which mostly love
it. Expect moderate revenue and
earnings growth. Its a bargain at
50% of annual revenue, 13 times my
January 2015 earnings estimate and a
2.4% dividend yield. F

MONEY MANAGER KEN FISHERS LATEST BOOK IS MARKETS NEVER FORGET (BUT PEOPLE DO) (JOHN WILEY, 2011). VISIT HIS HOME PAGE AT WWW.FORBES.COM/FISHER.

58 | FORBES FEBRuARY 10, 2014

Thomas KuhlenbecK for forbes

The 2013 rally gave most bulls fear

of heights: too much, too fast! Now its
tough to fnd credible forecasters calling for more than 13% this year, with
most expecting a correction sometime.
(Could happen! Might not!) No one
consistently predicts corrections or
ever has, so thats a risk always best ignored. At best a bear market might be
partially avoided, but trying to do anything other than ride through a correction will likely get you whipsawed. You
cant time a correction. Period.
Then, too, 2013 fatigued most bears
beyond their post-2008 terror, as their
endless calls for past ghosts to morph
into ghastly new ghoulish forms never
materialized. They sufer from boywho-cried-wolf syndrome, and you
cant fnd credible forecasters now
calling for worse than a down 6% year.
To my study of history, that 19-percentage-point spread is what is now
discounted into pricing. Hence the
market is most likely to continue
booming, up 20%-plus, or ofcially correct, down more than 10%. All or nothing, embarrassing basically everyone.
The downside happens if new,
undiscussed big bad forces emerge.
Shy of that the surprises are all on the
upside. For now, believe in that.
So how did I fare last year?
FORBES statheads calculate that
equal bucks bet on each stock pick
from my twelve 2013 columns, less a
fat 1% brokerage haircut, would have
done 2% worse than if put in the S&P
500 at the same times with no haircut. Partly that fowed from my picks
being fully global when U.S. stocks (the
S&P 500) bested foreign ones. Partly
it fowed from subpar picking. This
was my ffth lagging year in the 18 that

Make taxes less taxing.

With the All-New

CLOUD SCANNER + DIGITAL FILING SYSTEM

Deduct stress from tax time.

Your accountants best friend.

Do more with your data.

NeatConnect saves you time with

Send scanned items straight to your

Assign tax categories, easily

taxes by transforming paper

favorite cloud services, or email

create reports, and export data

receipts into digital documents

receipts right to your accountant

to popular accounting software,

that are accepted by the IRS.

without ever turning on a computer.

to go from tax time to relax time.

NEATCONNECT SCANS DIRECTLY TO:

Order NeatConnect in time for tax season

& GET 3 FREE MONTHS OF NEATCLOUD

Call 866-893-0834
Visit www.neat.com/forbes

INVESTINg
wIllIam baldwIN INVESTor chEckup

Bet AgAinst
The GovernmenT

ETF (TLT) will get hammered. You

can buy put options on this fund on the
Chicago Board Options Exchange.
The funds shares were recently
changing hands at $104. The ONEYEAR $100 PUTan option expiring in
January 2015 and entitling the holder to unload a share for $100was
ofered at $5.10. Theres a frictional
cost here, given that the true value
of the option was more like $5.03,

Be unpaTrioTic. Sell america ShorT

so you give up a few pennies to a
marketmaker when you get in (and
again to exit, if the option has value
at the end). You also owe brokerage
commissions.
Aternatively, you could have a fund
place bearish bets on your behalf. The
ProShares UltraShort 20+ Treasury
ETF (TBT) maintains doubled-up
short-sale positions on Treasurys. Id
recommend it if not for the 0.93% expense ratio. Thats stif, even for this
high-proof whiskey.
These two bearish bets behave

GO TO FORbEs.COm/sITEs/bALDWIN fOr MOrE ON TAX-WISE INVESTING STrATEGIES.

GO TO FORbEs.COm/INVEsTORCHECkUP fOr MOrE yEAr-END TAX ADVICE.

60 | fOrBES fEBruAry 10, 2014

diferently. If you are betting against

$100,000 of Treasury bonds, youd be
choosing between puts on 1,000 TLT
and a $50,000 stake in TBT. The options are more likely to lose money, but
the most they can lose is the $5,100
you spend on them. The ProShares
stake could go all the way to zero.
As for frictional costs, the puts
are the better choice. For positions
of this size held for a year, overhead
(commissions, bid-ask spreads and
expenses) would run $90 to $180 on
the puts and $500 on the ProShares.
Switch to junk. High-yield corporate bonds are less sensitive to
interest rates than Treasurys of the
same maturity. (Thats partly because
they return cash faster and partly
because the call options buried deep
inside ofset the interest efect.) I like
the VANGUARD HIGH YIELD CORPORATE FUND
(VWEAX). Annual expenses on the Admiral share class are 0.13%.

Understand that investing in junk

bonds doesnt reduce your risk; it
merely diversifes it. You have less
risk from spiking rates but more from
a receding economy.
Lastly, a report card. My investment picks for 2013 would have
earned you 20.5%, 2.8 points worse
than identically timed investments
in stock and bond indexes. I sufered
from a weakness for commodities
and foreign stocks. I expect both sectors to rebound, and Im rolling over
all the positions to 2014. F

thomas kuhlenbeck for forbes

The U.S. TreaSUry is underwater, with a net worth of $17 trillion.

Its time to wager against it.
Treasury paper will not go into
default, since the government can
always print (and has been printing)
the money it uses to pay its bills. But
a distinct possibility is that lenders
like China stop enabling American
profigacy, with the result that interest rates go up and prices of Treasury
bonds decline.
How do you make money from
this crashor at least lessen your
losses from it?
Shorten maturities. You could sell
a 20-year Treasury bond and buy a
10-year bond, or sell a 10-year and
buy a 2-year. Youd still lose money in
a bond crash, but youd lose less.
Unless your portfolio is 100% invested in equities, it probably contains
either T bonds or a close equivalent in
the form of mortgage-backed or agency paper. If you do your fxed-income
investing through no-load funds, you
can migrate to the shorter end of the
maturity spectrum without transaction costs.
The drawback to short-term
bonds is their meager coupons. At the
extreme low end of the yield curve,
money market funds ofer a 0% return, which comes to 2% after infation. You cant linger here forever.
Consider the maturity-shortening
strategy a temporary one. Plan on getting back into longer-term bonds after
a year or two, at which point bond
yields will (you hope) be higher.
Buy puts. If interest rates shoot up,
the iShares 20+ Year Treasury Bond

investing
marc gerstein screen test

Quiet
Bargains
Forget what you learned in
school about efcient markets. You
cant base stock price expectations
solely on estimates of value. Nobel
laureate Robert Shiller argues that
you need to account for the impact
of investors who are susceptible to
headlines and fads. Measuring the
impact of these noise traders can
help you make money.
Noise is every bit as much a part
of equilibrium stock pricing as value
is. In other words, P = V + N (price
equals value plus noise). Ideally I
want low-noise stocks with a catalyst
that may cause noise to rise and boost
the stock price. As a proxy for noise,
I divide market capitalization into
two components, value and noise.
For value I use aftertax operating
proft divided by an estimated cost of
equity. Whats left is noise, refecting
growth expectations, stories, dreams,
predictions and sentiment.
Consider Apple. Trailing 12month aftertax operating proft was
$36.2 billion. If we assume cost of
equity is 8%, then the stocks immediate here-and-now value would be
$452.5 billion ($36.2 billion divided
by 8%), which accounts for 92% of
its $491 billion market capitalization.
That leaves only 8% to be explained
by noise. Google and Amazon.com
are far diferent; noise at these frms
accounts for 63% and 98%, respectively, of market capitalization.
Using a conservative estimate
for value that excluded all growth
expectations, I conducted a tenyear back-test of a low-noise strategy. I targeted potential stocks in the
Russell 2000 small-cap universe
and identified nonfinancial stocks
for which noise accounted for 25%
62 | FORBES

FEBRuaRY 10, 2014

or less of market cap. I selected the

top ten based on one-week change
in consensus EPS estimatea potential catalyst for higher noise
and rebalanced monthly. My
low-noise stocks averaged a 16.3%
annual return, versus 8.9% for the
Russell 2000. Here are four quiet
bargains to consider:
BALLY TECHNOLOGIES (BYI, 81): Only 17%
of market cap is attributable to noise.
But sentiment (noise) should rise as
it integrates its SHFL Entertainment
acquisition and brings more technology to bear on electronic gaming and

If it switches to debt reduction, itll

probably be Look out above!
for EPS.
ACTUANT (ATU, 37) (noise level: 18%)
produces industrial products such
as pipeline connectors and moorings
for energy drilling platforms as well
as hydraulic tools and lift products.
Its the defnitive infrastructure play
for a growing economy.
Noise? The silence around chemical producer OLIN (OLN, 29) is deafening.
Its noise stands at 31%, meaning the
stock trades for less than the value
of its here-and-now operating proft.
Olin is a leading producer of chlorine
used for vinyls and water treatment,
and of caustic soda, used in detergents and soaps. The strongest part
of the company is its Winchesterbranded ammunition, where demand
for bullets is soaring. Sooner or later
bullish decibels should rise as Wall
Street takes notice of Olins cash fow
generation, which is already supporting acquisitions. Olin also has a 2.8%
dividend yield.
I usually refresh my models and

Finding stocks that have tuned out

noisy traders can Be very proFitaBle
the casino systems business.
The noise component for restaurant chain operator BRINKER INTERNATIONAL (EAT, 47) is near zero. But that
should change, given the makeovers
going on at Chilis and Maggianos.
Brinker is more debt-heavy than
most restaurants, but thats because its been using its considerable cash fow to repurchase stock.

change my portfolios on a monthly

basis, so I cringe when I see my recommendations tracked annually, as
FORBES does for its columnists. But
last year turned out fne, powered by
an especially strong gain from Navios
Maritime Holdings. Overall my picks
were up 33.5% in 2013 compared
with 17.5% for similarly timed investments in the S&P 500. F

MARC GERSTEIN IS EDITOR OF FORBES LOW-PRICED STOCK REPORT, RESEaRCH DIRECTOR aT PORTFOLIO123 aND
auTHOR OF SCREENING THE MARKET (WILEY, 2002). FOR MORE FROM GERSTEIN, GO TO WWW.FORBES.COM/GERSTEIN.

promotion // Economic DEvElopmEnt

InnovatIng In MexIcos northern regIon

Mexicos recent reforms are revitalizing the oil and gas industry and opening the sector to private investment.
exicos biggest company, Petrleos Mexicanos,
better known as Pemex, is one of just a few hydrocarbon giants worldwide with interests at every step
of the value chain, from downstream exploration
and production to upstream activities like distribution, sales and
petrochemicals. In 2012, Pemex posted record sales of more
than $126 billion, fueled by strong domestic demand, and contributed close to $70 billion to federal coffers.
Set up as a state-owned concern 75 years ago to protect
the nations resource interests, Pemex has long served as a
mainstay of government fnances, to the detriment of its own
proftability. But reforms pushed through by President Enrique
Pea Nieto in December 2013 now look set to bring the companys monopoly on Mexicos oil and gas to an end, enabling
the country to increase private-sector capital and revitalizing
the industry.
Mexico is the ninth-ranked oil-producing nation worldwide,
with an output of more than 2.5 million barrels per day (bpd) of
crude and almost 6.4 billion cubic feet of natural gas per day in
2012. Experts believe that the change in the law, which will allow
overseas oil companies to drill for the frst time in decades, will
lead to a massive injection of new investment, pushing crude
production to as much as 4 million bpd by 2025.

Over the past decade, Pemex has seen production slide

from its 2004 high of 3.3 million bpd, while output at its leading offshore feld, Cantarell, has declined by 80%, due in
large part to insuffcient investment. Mexico, however, boasts
proven reserves of over 10 billion barrels; it is home to Latin
Americas largest deposits after Venezuela and Brazil; and
prospects for development at onshore felds in the northern
region are looking up.
Here, Pemex has pioneered innovative Integrated Exploration and Production Contracts (CIEPs), in which private-sector
players carry out exploration and production (E&P) under
Pemexs supervision. Unlike production-sharing contracts,
CIEPs offer incentives for concessionary companies by paying
compensation based on results rather than unit prices, thus
ensuring the Mexican state retains ownership of its hydrocarbon resources.
Changes made to Mexicos energy laws in 2008 led to the
creation of CIEPs, which add value for Pemex and its partners
by encouraging investment, even in mature felds. The CIEP is
a competitive contract model particularly suited to developing
unconventional resources in technologically complex deposits. It effectively anticipated the ambitious energy reform that
President Nieto signed into law on December 20, 2013.

ECONOMIC DEVELOPMENT // PROMOTION

To date, Pemex has signed 10 CIEPs for

periods of 30 to 35 years in the northern
region, most on blocks in the Poza RicaAltamira area that straddles the states
of Tamaulipas and Veracruz. The CIEPs
cover 3,660 square miles and hold an
estimated 6.3 billion barrels of 3P (proven,
provable and possible) reserves. Output
from 1,850 wells was over 30,850 bpd in
December 2013, equivalent to 15% of the
northern regions production.
That fgure, however, is forecast to rise
to 180,000 bpd by 2020 as new wells
come onstream. With 2.58 billion barrels of 3P reserves still to be spoken
for, Pemexs E&P division, PEP, plans to
allocate another 25 to 30 concessions
under CIEPs in the next two years. The
frst on the auction block in 2014 are Miahuapan, due on January 6; Amatitlan, on
January 16; and Pitepec, on January 24.
All are located in the Chicontepec Basin.
Stretching across the states of Veracruz, Puebla and Hidalgo in Mexicos
eastern central region, the Chicontepec Basin contains up to 40% of the
countrys crude reserves. Oil deposits
were frst discovered here almost 80
years ago, but have remained mostly

untapped until now as a result of the

felds low porosity and permeability,
resulting in limited recovery rates.
The regions geology and topography
also present challenges to conventional
development. Crude oil typically lies
in extensive beds, accessed via single
wells, but in the Chicontepec Basin,
reserves are found in isolated deposits,
requiring drilling at up to 15,000 smaller
sites. And the mountains under which its
oil felds are both diffcult to access and

home to fragile ecosystems.

But with medium- to light-grade oil
reserves, crude prices around $100 per
barrel and advances in fracking technology, Chicontepec is now seen as a
viable proposition. Last July, Pemex put
six production areas up for bidding, but
so far has only awarded contracts on the
smallest three: Soledad, Miquetla and
Humapa.
Sixteen companies met Pemexs
requirements to bid, and Halliburtons
Mexican subsidiary won the rights to
Humapa, containing 341 million barrels of 3P reserves. Meanwhile, two
homegrown operatorsOperadora de
Campos DWF and Petrolite de Mxico
were awarded contracts for Miquetla
and Soledad.
Of the three blocks scheduled for
January 2014, the biggest, Pitepec,
holds more than a billion barrels of 3P
reserves; Amatitlan contains close to
another billion; and Miahuapan holds an
additional 431 million barrels. By the end
of November 2013, PEP had received
registrations from 20 oil companies to
participate in the new round.
The Reynosa area, close to the Texas
border in the state of Tamaulipas, will see CIEP contracts
signed for its Misin, Cuervito,
Fronterizo and Olmos blocks
in 2014, in addition to the
Nejo block already in operation. Just to the south but still
within Tamaulipas, fve blocks
in the Burgos BasinRusco,
Comitas, Palmito, Ricos and
Benavidesare also scheduled for assignation in 2014.
Another key function of
CIEPs is to improve communities.
Since 2007, Pemex has commissioned
socioeconomic and environmental studies, working with the United Nations
Development Programme (UNDP) and
institutions like the Universidad Nacional Autnoma de Mxico, Universidad
Veracruzana and University of Calgary,
to develop a sustainable development
strategy that ensures its E&P activities
affect local people and the land as little
as possible (see sidebar).

Planned oil reserve

development area in
the Chicontepec Basin

Building a Better
Future Together

ustainable development is at the

heart of Pemexs plan to develop
the oil reserves of the Chicontepec
Basin. As part of its current corporate
social responsibility strategy, Pemex is
dedicated to reducing its environmental impact, promoting socioeconomic
development and managing production risks. Through its new, more
culturally focused eforts, Pemex is
focusing on long-term, preventive
policies.
Pemex is implementing an action
plan with municipal authorities, in line
with the Federal Development Plan,
that includes nance for sustainable
projects and infrastructure work to
benet and better connect local
people. Three key areas have been
identied: recovering abandoned
assets, working toward zero emissions and community development.
Speaking in March 2013 at a celebration of Pemexs 75th anniversary,
Mexico President Enrique Pea Nieto
said: As a state-owned company,
Pemex is not only committed to
protability, but also to progress and
social welfare. Its operations should
contribute to the development of
the communities in which they are
located.
Mexico - Pemex Section Project Manager:
Eduardo Magaa
For more information, contact:
Gabriel [email protected]
The sponsors of this report have provided
all statistical data.

WisdomTree founder Jonathan Steinberg (left)

and Michael Steinhardt, his biggest investor.

66 | FORBES FEBRuaRy 10, 2014

Michael Steinhardt forged the model for

making hedge fund billions before exiting the
game. With Wisdomtree, hes back to upend
Wall Street againthis time, with the little-guy
investor at his side.
By michael noer
PhotograPhs By matt Furman For ForBes

FEBRuaRy 10, 2014 FORBES | 67

FORBES

wisdomtree

uring the three decades that Wall Street

grew up, morphing from a gentlemens
investment club into a global fnancial colossus, Michael Steinhardt emerged as the
worlds greatest trader. From 1967 to 1995
his pioneering hedge fund returned an average of 24.5%
annually to its investors, even after Steinhardt took 20%
of the profts. Put a diferent way, $10,000 invested with
Steinhardt in 1967 would have been worth $4.8 million
on the day he shuttered his fund. (The same investment
in the S&P would have been worth $190,000.) It was a
performance that landed him on The Forbes 400 in 1993,
with a net worth estimated at more than $300 million.
Trading is all about timing, and by one key measure, he
failed. He walked away while in his 50s, just as the hedge
fund industry, which he helped create, was becoming the
most potent moneymaking machine ever invented. Had he
stuck with it, he very likely would be one of the very richest people in the world, mentioned in the same breath as
George Soros ($20 billion) and Steve Cohen ($9.4 billion).
I thought there must be something more virtuous, more
ennobling to do with ones life than make rich people richer, says Steinhardt. Theres no sin in making rich people
richer, but its not the sort of thing from which you would
go straight up to heaven.
Steinhardt says this in the most gentlemanlyeven
grandfatherlyway, a far cry from the notoriously shorttempered screamer of his heyday. He leisurely charts his
life away from Wall Street, a tale that touches on politics
(he was an early Bill Clinton supporter), Jewish cultural
values (an atheist, he is nonetheless an ardent supporter of
Jewish causes), animals (his country estate houses one of
the worlds largest private zoos) and even a type of French
feld strawberry, the fraise du bois, that his wife, Judy, once
tried to grow commercially.
But sitting behind a glass desk in his thickly carpeted
Manhattan ofce, Michael Steinhardt has another message that Wall Street should take note of: Hes back, and
rather than play by the rules that he helped establish, hes
blowing them up, positioning himself as an advocate for
the little guyand making himself a new fortune in the
process.
Steinhardt is chairman of the board and, with a 14.7%
stake worth some $330 million, the largest single stakeholder in WisdomTree Investments, the ETF shop created
by Jonathan Jono Steinberg, son of the late corporate
raider Saul Steinberg, who famously famed out at the end
of his career. Steinhardt was way early on hedge funds
his was among the frst dozen (there are 8,000 today). He
thinks exchange-traded funds have similar disruptive potential, with individual investors (and some savvy operators like him) reaping the benefts.
I cared about one thing, Steinhardt says of his trad-

68 | FORBES FEBRuaRy 10, 2014

pay it forWard
By his own estimate, Michael Steinhardt gives away $20 million a
year. I hope Im courageous and smart enough to die broke, he
says. Below, a few of his causes, over the years:
the Brooklyn Botanic garden: The Steinhardt Conservatory (above)
was dedicated one year to the day after the 1987 market crash.
Steinhardts $3 million gift lifted him out of a postcrash funkat the
time the largest gift ever given to a Brooklyn institution.
the israel museum: A once reluctant art collector, in 2001 Steinhardt donated Rembrandts Apostle Peter Kneeling to the Jerusalem landmark. Steinhardt personally has a valuable art collection,
including Judaica focusing on tzedakah (charity) boxes.
Birthright israel: Founded with $9 million from Steinhardt in 1999,
the organization has sent more than 350,000 young Jews to visit
Israel.
the Democratic leadership council: In the mid-1980s Steinhardt
became involved with the DLC, which aimed to make the party
more moderate and helped elect Bill Clinton. Although he has
since disavowed politics, Steinhardt was once the DLCs largest
donor, handing over $250,000 annually for a decade.
the steinhardt school: Steinhardt and his wife have donated
$20 million to New York Universitys school of culture, education
and human development, which is now named after them.
Samantha Sharf

ing years, and that one thing was having a better performance than anybody in America. He later adds: I want
to phrase this in the strongest possible way: Jono Steinberg has been, from my perspective, the single greatest
manager in the world of money management during the
last eight or nine years.
Whoa! To the extent that Wall Street has a take on Jono
Steinberg, its that hes married to Maria Bartiromo, business televisions money honey. In the 1980s he failed to
complete his undergraduate business degree at Wharton
(Steinhardts alma mater), despite the fact that his fathers
name is carved on one of the buildings. He later used his
familys money to rechristen a tout sheet called Penny Stock
Journal into Individual Investor magazine, which went bust
in 2001. Most critically, the man Steinhardt calls the greatest money manager of his generation has never managed a
signifcant amount of anyone elses money.

Michael Steinhardt
in his ofces on
Manhattans Fifth Avenue.

a point or two. Its a far cry from

Michael Steinhardts S&P-crushing performance, but its one
that is available to everyone, not
just a select few. WisdomTree is
also the only pure-play, publicly
traded ETF manager. Since the
beginning of last year its stock is
up 171.9% versus 35.6% for the
Nasdaq Composite and 47.7% for
a market-cap-weighted basket of
comparable asset managers.
Given that performance,
Jono Steinberg might be the
best money manager of the past
yearto the extent that he made
Steinhardt a killing. Steinhardt,
meanwhile, is no longer a legendary hedge fund has-been. He is
poised to have been in the vanguard of two revolutionary investment trendstwo that happen to
be diametrically opposite.

And that, of course, is Steinhardts point. Exchangetraded funds typically charge lower fees and have taxadvantages over traditional mutual funds. They are also
completely transparent: An obsessive-compulsive ETF
investor can check his funds holdings daily, rather than
quarterly, as is the norm for most mutual funds. This
magic combinationcheaper with lower taxes and greater
transparency (and often for the same underlying investment)means that over time ETFs will eat the lunch of
the $12.1 trillion (assets) mutual fund industry.
With $35 billion under management, WisdomTree has
only a 2.1% share of the $1.7 trillion (assets) ETF market,
but thats up from less than 1% in 2010, and it has been
steadily chipping away at BlackRock and State Street,
which have a combined 61.9% market share. The company uses academic investment theory to create ETFs that
seek to consistently outperform the market, albeit just by

hen Michael Steinhardt

started Steinhardt, Fine,
Berkowitz & Co. (later
just Steinhardt Partners), it was,
literally, a hedge funda fund,
as the term implies, equally willing to short stocks as to bet long,
thus providing a hedge against
down markets, of which in the
60s and 70s there were many.
I really shorted a lot. I liked to
short, says Steinhardt. I felt far
more gratifcation from making money on the short side
than from the long side, which is a very dangerous thing,
because the short side is so tough.
The fedging funds sharp-elbowed operators did
indeed protect their investors in bad timesSteinhardt
even made money during the horrendous 197374 bear
marketbut what turned heads was the outsize returns
they popped, regardless of investing climate. Hes a
legend and a terrifc money manager, says hedge fund
billionaire Julian Robertson Jr., who started 13 years
after Steinhardt.
For me, running hedge funds was an art. It was something that I thought I did exceptionally well, and most of
the world did not. But they didnt care the way I did, says
Steinhardt. I got depressed if I was having a bad day, a
bad week, a bad year.
Steinhardt was an aggressive, instinctual trader whom
FEBRuaRy 10, 2014 FORBES | 69

FORBES

wisdomtree
many considered the worst boss on Wall Street. His employees used expressions like battered children, mental
abuse, random violence and rage disorder to describe
working at his frm, he recounts in his autobiography, No
Bull: My Life In and Out of Markets.
When I did well, I was happy, Steinhardt says. When
I did poorly, I was intolerant and difcult and had a bad
temper.
Almost from the beginning there were whispers in the
more civilizedand lower-performingcorners of Wall
Street that hedge fund shops like Steinhardts were cutting
corners. There seemed to be no other rational explanation
for their returns. But hedge funds were considered a small
sideshow for qualifed investors, and the SEC had other
priorities than protecting rich people from taking advantage of other rich people.
By the early 1990s, however, all of that had changed.
Flush with institutional cash, which had arrived in bulk
during the 80s, the original hedge funds were now huge
and their managers were growing megarich as they
emerged as Wall Street bullies. Steinhardt, who had
started with $7.7 million under management in 1967, was
now running $5 billion and increasingly placing massive
macroeconomic bets in the bond markets.
In 1991 the SEC began investigating four
hedge fund managersSteinhardt, Soros,
Robertson and Bruce Kovnerfor colluding
with Salomon Brothers to corner the market in
two-year Treasury bills. Robertson and Soros
were eventually dropped from the investigation,
but in 1994 Steinhardt, Kovner and Salomon
agreed to pay to settle the allegations. Salomon
coughed up $290 millionthen the second-largest fne in Wall Street historywhile Steinhardt
Partners paid $70 million, 75% of it coming out
of Michaels personal pockets.
It was an annus horribilis for Michael Steinhardt in another way, too. His fund would end
1994 down 31% after making an ill-timed wager
on foreign bonds. It was far and away the worst
performance he had ever turned in for his clients. He vowed to make them back as much
money as possible. The next year he was up 26%.
Then he quit.
Having grown up in a lower-middle-class Jewish neighborhood in Brooklyn, I didnt know what
to do with all this money, he says. It didnt interest me, all this money. What interested me was to
be the best manager, doing the best job, achieving
the best rates of return for my investors. If he
wasnt going to be Americas best money manager,
he wasnt going to manage money at all.

70 | FORBES FEBRuaRy 10, 2014

hen assessing a money managers performance, Wall Street types distinguish between
betathe return of the overall market, usually
measured by some benchmark index like the S&P 500
and alpha, the amount by which the manager was able
to outperform the broader market. For sports geeks,
alpha measures the exact same concept as the current statistic of choice: wins above replacement player
(WAR). Youre measuring what kind of return you get
beyond if you just picked 1,000 stocks out of a hat (or
picked up a journeyman center felder of waivers).
Alpha is the only reason to pay someone to manage your
money, and its vanishingly hard to fnd: One long-term
study of mutual fund managers concluded that in the 30
years between 1976 and 2006 only 0.6% exhibited any
consistent skill at beating the market, and nearly 25%
of these fnancial pros posted returns with negative
alpha. Hedge funds arent doing any better: One recently published report concluded that just 16 of the largest
100 beat the S&P last year.
There are more of them, says Robertson, which
means that there is more competition for all of them.
Research like this, which has been replicated for a wide

variety of investment strategies under all sorts of market

conditions, is often used to support an academic theory of
the fnancial markets called the efcient market hypothesis. The theory postulates that all available information is
already contained in the price of an individual stock, and
the ugly consequence is that no one can consistently beat
the market, nor should they try.
Instead they should buy beta and be the market, and
do so at the lowest possible price. Ultra-low-cost index
mutual funds, managed by formulas rather than people,
were developed as a direct response to this sort of thinking. The most famous of these funds, the Vanguard 500
Index Fund, was created in 1975 to allow retail investors to
replicate the S&P 500 at a very low cost (currently 0.17%
of assets). It has $160 billion in assets, about 1.3% of the
entire domestic mutual fund industry.
But the efcient market hypothesis can run counter
to common sensethe theory doesnt allow for market bubbles, for instance, since it insists that all assets,
whether Florida real estate in 2005 or Internet stocks in
1999, are always properly priced for their level of risk. It
ignores the fact that information is not shared and interpreted evenly. And it shrugs of star traders like Michael

Steinhardt as very lucky outliers.

If you believe that causal outperformance is impossible, then you would also say that asset bubbles are impossible, says Frank Salerno, who joined WisdomTrees
board in 2005 after a long career at Bankers Trust and
Merrill Lynch. I think you have to temper your basis in
fnancial theory with what goes on in the real world.
And it was in the wake of one of the biggest asset
bubbles of recent historythe dot-com bubble of the late
1990sthat some people began to seriously rethink stock
indexes. What if instead of weighting by market capitalizationwhich during the bubble resulted in investors
having greater and greater exposure to stocks whose price
had gone up a lotyou created an index that was weighted
by fundamentals like profts and dividends? Could such a
product reliably outperform the broader market over long
periods of time? It wasnt alphathese indexes would be
managed by computers and algorithms, not the instincts of
Wall Street prosbut it wasnt pure beta either. It was, for
lack of a better word, beta-plus.
At the company that would become WisdomTree, three
very diferent men came together around this vision. The
frst was Jeremy Siegel, a well-respected fnance professor at Wharton and bestselling author who had famously
warned of the bubble in technology stocks in early 2000.
The second was Jono Steinberg, who was seeking redemption after the subsequent dot-com collapse destroyed his
business. And the third was Michael Steinhardt, the master of pure alpha, who after a decade-long hiatus would
soon return to The Street as the champion of smart beta.

ono Steinberg frst learned about ETFs in 1997, while

he was still running Individual Investor magazine, and
the lightbulb went of right away.
When the liquid, transparent, tax-efcient structure of
the ETF became apparent to me, I had an idea that if you
could create a better index and marry it to the ETF-structure, you could give investors a better investing experience, he says.
But for years the idea remained just thatan idea
as Jono and his publication rode the great bull market.
When the stock market crashed in March 2000, it was
hard on fnancial publications across the board, but the
ones that had cheered loudest got hit the worst. In the
summer of 2001, with advertising reportedly of by a
third and his stock delisted (he claims voluntarily) from
Nasdaq, Steinberg was forced to shutter Individual Investor and fre its staf. He sold the magazines subscriber list
to Kiplingers, but he kept the rights to a performanceweighted stock index called Americas Fastest Growing
Companies. On the strength of that and his increasingly
distant glimmer of an idea about ETFs, he renamed his
company Index Development Partners in 2002 and went
FEBRuaRy 10, 2014 FORBES | 71

FORBES

wisdomtree
knocking on doors. And knocking.
He pitched it everywhere, says venture capitalist
Jim Robinson IV, whose frm, RRE Ventures, initially
passed on Jonos idea. (Robinsons father, and the founding general partner of RRE, is Jim Robinson III, who ran
American Express from 1977 to 1993.) We knew ETFs
sounded interesting, but we were worried about how a
small, unknown company could emerge. And, frankly,
we werent sure how you got from the magazine business to that.
A couple of months later, Jono Steinberg called back
and told Robinsonwhom he had known for more than
a decadethat he had a big fsh nibbling on the line: Michael Steinhardt seemed interested. But Steinhardt would
invest only if Jono could fnd someone to go in with him.
After a certain amount of wrangling with his partners,
Robinson agreed, and in 2004 RRE and Steinhardt invested a combined $9 million in Index Development Partners,
which was renamed WisdomTree the following year. It
was the companys entire capitalization.
I invested with Jono because I felt throughout my
investment life that the average guy was not served well by
Wall Street, says Steinhardt. He dealt with some schlubby broker. He dealt with some schlubby mutual fund. And
none of this was truly competitive with others who had
more insight or more money. I thought that Wall Street
was not a great place in terms of it serving the interests of
those who most needed to be fnancially served.
He had a reasonably intelligent approach to outperforming the averages, Steinhardt continues. It wasnt
going to outperform the averages like a hedge fund, but it
was going to outperform.
And Steinhardt being Steinhardt, he made a terrifc
trade, buying into WisdomTree a total of two or three
times for just pennies a share (the stock recently closed
at $17.59). Jono Steinberg owns just 4%. In absolute,
non-infation-adjusted fgures, Steinhardt has made more
from his WisdomTree investment than he did in 28 years
of running a stellar hedge fund. At last count there were
30 American hedgies on the FORBES list of the worlds
billionaires, but its only after WisdomTrees recent performanceadded to his old Wall Street stash and extensive art collectionthat Steinhardt has, for the frst time,
qualifed himself.

teinhardts investment brought instant viability to

WisdomTree, but the company still needed someone to bring more intellectual heft to the concept of
fundamental weighting than Jono could plausibly provide.
Fortuitously, Jeremy Siegel, who knew Jono slightly from
a prior life as a columnist for Individual Investor, was already thinking along the same lines.
I had been a big advocate of Vanguard and market-cap

72 | FORBES FEBRuaRy 10, 2014

MichaelS
Menagerie
Steinhardt calls his 57-acre estate in
Bedford, N.Y.which is within camel
spitting distance of Martha Stewarts
country homethe only physical
possession in my life from which I really derive great pleasure.
The property is a veritable Noahs
Ark of exotic animals and edible plants:
There are 90-year-old land tortoises,
playful marmosets, African servals, rare
zonkies (half-zebra and half-donkey)
and apple-munching camels (at right).
And oodles and oodles of berries:
gooseberries, jostaberries, currants,
blackberries, blueberries, huckleberries and cranberries. I wanted to grow
every conceivable berry.
In the fall the maple garden,
which contains 400 to 500 trees of
many varieties, blazes brilliant red. It
is, as Steinhardt puts it, amazingly
beautiful. It almost lights up the sky
its so beautiful with its color. M.N.

weighting, Siegel says. It was as a result of the Internet bubble in 2000 that I began to rethink my position. I
looked at my portfolio and said, Gee, I wish I didnt hold
these tech stocks. There must be an index that we can devise that would underweight stocks that appeared to have
gone way outside their fundamentals in terms of price.
Thats what got me interested in exploring alternative
indexation.
Siegel took Jonos indexes and, with a research assistant, spent an entire week running them against an
enormous database of historical stock prices. He was
impressed enoughusing very long-term data there is
statistically signifcant outperformance by fundamentally weighted indexesthat, in return for WisdomTree
stock, he was willing to lend his name and reputation
to the embryonic company. At one point, if you include
shares he had purchased, he owned 2% of the company;
he has since partially cashed out.
The secret to that outperformance, according to Siegel,
is what investors like Benjamin Graham and Warren Buffett have preached all along: value.
People overbuy growth stories, Siegel says. They
pay too much for growth stocks. They ignore value stocks.
They ignore slow growers. They tend to be underpriced.

Equity Income fund (12.5%). The Japan

fund, which lets U.S. investors bet on big
Japanese companies while zeroing out
the currency risk, has been killing it since
the Bank of Japan began more aggressively easing its monetary policy last year.
Through 2013 the fund accounted for $9.8
billion of WisdomTrees net asset inows,
or 68% of the total. It has nothing to do
with what WisdomTree promotes as its
special sauce: beta-plus, or fundamentalweighting.
By the companys own reckoning, 14
of WisdomTrees current 61 ETFs are
pure beta-plus equity plays, although
many of its other products contain elements of fundamental weighting. Since
inception, 10 of the 14 funds have outperformed their benchmark indexessome
dramatically. But all four of its domestic
dividend-weighted funds have underperformed.
They have had six or seven years to
try it, and so far they have proved nothing: N-O-T-H-I-N-G, says John C. Jack
Bogle, the founder of the Vanguard Group
and intellectual father of the low-fee
index fund, spelling out the last word for
emphasis. You cant say it works, you
Therefore over the long run you are going to get a better
cant say it doesnt.
return.
He continues: That original fund idea, which had
With Siegel and Steinhardt providing their own Good
a certain amount of intelligence to itit wasnt a guarHousekeeping Seal of Approval, WisdomTree was able to antee that you were going to win, but it was certainly
lure Salerno, the former Merrill exec, out of retirement to a guarantee that you wouldnt lose too much and you
advise on the nitty-gritty of building the business. (They might winit now represents just 5% of their assets
had an idea, Salerno says. They didnt have anyone with under management. WisdomTree is a marketing compaasset-management business experience to make it hapny trying to nd something that the public wants.
pen.) Arthur Levitt, who had been chairman of the SEC
To that, Steinhardt shrugs. In his years running a
from 1993 to 2001, was brought on board to help grease
hedge fund, he was famous for changing his mind in a
the skids with regulators. Levitt had just taken command heartbeatthere are stories of Steinhardt closing out
of the SEC when Steinhardt paid the $70 million ne that a traders entire position while he had stepped out
helped drive him from the hedge fund business. Levitt
to grab lunch. While he remains a firm believer that
says he didnt know him then. As allies, though, he says
beta-plus will beat the market over the long haul, if
that its Steinhardt who put the wisdom in WisdomTree.
the market wants a Japanese-currency-hedged fund
I have huge admiration for an individual who is so multi- today, thats what WisdomTree will sell them. It
dimensional, which isnt a characteristic of most people I just proves that they are continuing to innovate,
have dealt with on Wall Street.
Steinhardt says.
In the meantime, WisdomTree has used Steinhardts
ince WisdomTrees inception, 85% of its assets have
name and likeness in its marketing and advertising to
outperformed their peers, as tracked by Morningstar. let nancial advisors know that its ETFs are safe and
But thats a little bit misleading, since a full 49% of
warm. The original hedge fund terror as a 21st-cenits assets are concentrated in just two fundsthe Japan
tury Charles Schwab? Just your everyday Wall Street
Hedged Equity fund (36.5%) and an Emerging Markets
turnaround. F
A camel plants a big, fat wet
one on Michael Steinhardt at
his country home.

FEBRUARY 10, 2014 FORBES | 73

At Suja two young entrepreneurs teamed with some adult supervision

and created one of the fastest-growing beverage companies ever.

I WAS INTO JUST MAKING really healthy food, living

a pretty relaxed lifestyle, surfng and doing a lot of yoga,
says Eric Ethans, 30. Dressed in a wrinkled black T-shirt
and gray jeans, hes squeezing lemon over a bowl of freshly
scooped avocado, reaching up to brush away a stray lock
of hair, bleached by the sun and salty with the tang of the
Pacifc Ocean. This one, he says, nodding at his lunch
companion Annie Lawless, 26, really pushed me to make
sure I could maybe provide for a family one day. Lawless
laughs, Noooo. No. You can stop talking now.
But its a nice little story. A surfer dude and self-taught
chef teams up with a law-school dropout turned yoga instructor to create one of the fastest-growing organic juice
makers ever. In a little more than a year and a half, Suja
Juice, tucked away in an ofce complex among scrubby
hills outside of San Diego, has expanded from minimal
revenue to $18 million in 2013, its frst full year of operation. This year its poised to do $50 million in sales. I
dont think anyone here thought this was going to be as
big as it is, says Ethans.
Or as big as it can be, pipes up another diner in the
conference room. He is Jef Church, 52, a Harvard Business School grad, private equity veteran and, since May
2012, CEO of Suja. Without him there would be little more
than a kitchen operation of store-bought produce, a few
juicers and repurposed coconut-water bottles. Suja is the
tale of two young entrepreneurs who had the good sense
to hire some adult supervision. And, even then, its been a
wild, seat-of-the-pants journey.
74 | FORBES FEBRuaRy 10, 2014

Today Suja makes three lines of

juices from fruit, vegetables and exotic ingredients. The Classic retails
for $8.99 a bottle; a set of six diferent
favors (yes, nearly $54) can replace an
entire days worth of food in a so-called
cleanse. The less radical Elements,
nine favors at $4.99 a pop, are snacks
or supplements. And the upcoming Essentials, a slight nutritional step-down,
will cost $3.99 a bottle. Things have
come a long way from Ethans original concoctions.
Homeschooled for the frst half of high school, Ethans
lasted two years at Golden West College before opening a raw-food restaurant in Encinitas, Calif. called Raw
Food Guy, while living at a pro surfers house nearby.
When that fopped he jetted of to Bali, Indonesia, then
followed a loop around surf spots in the Pacifc for four
yearsAustralia, Fiji, Hawaiisupporting himself by
cooking at restaurants and serving as a private chef for
vacationers.
He returned to California in 2007 and launched Blissfull, a restaurant and juice-delivery service in San Diego.
It closed after six months. We were undercapitalized,
Ethans says. Another failure, another trip to Bali, another
California homecoming. As a permanent fxture at the La
Jolla Yoga Center, he met Lawless, a receptionist, yoga
teacher and law student at UC San Diego.
A native of Phoenix, Lawless led a more conventional

ROBERT GALLAGHER FOR FORBES

BY J.J. COLAO

The Suja quartetJames Brennan, Annie Lawless, Eric Ethans and Jef Churchstarted out as a messy kitchen operation that moved to a nightclub.

life, studying philosophy at Arizona State, working at a

commercial real estate frm and moving to San Diego.
Growing up with celiac diseasean inability to process
glutenshe began making homemade juices as a teenager
to supplement her nutrition. One day in March 2011 she
saw Ethans walk into the center with a bottle of homemade green juice.
Soon they began their own ragtag operation, selling
homemade juices to fellow yoga students. Lawless would
rattle of the ingredients needed for an ideal nutrient-rich
blend while Ethans fgured out how to make it palatable
with odd ingredients like black walnut husk and lavender.
The two bought produce at Whole Foods, then poured the
juice into empty coconut-water bottles. Soon they had a
team of ten part-timers from Ethans beach bungalow near
La Jolla delivering Igloo coolers full of bottles. They were
literally taking the product into peoples homes and put-

ting it into their refrigerators for them, Church marvels.

It was probably breaking a ton of laws.
Ethans and Lawless would never have met Church
without James Brennan, a restaurant and nightclub entrepreneur. Even that was a chance encounter. With curly,
slicked-back hair Brennan, 40, looks more like a New York
City frefghter than a cold-pressed-juice afcionado. A fasttalking transplant from Rockaway, N.Y., he became an avid
customer after his pregnant wife began buying the juice in
the fall of 2011. When she mentioned how pricey it was, he
didnt blanch: I was pretty intrigued by something that cost
11 bucks and didnt have vodka in it.
He began a ten-day cleanse guided by Ethans, supplementing his diet with the juice for another 30 days. In
two weeks I was totally hooked, he says. Observing their
slapdash operation, he ofered to help out. I said, Look,
if you ever want do something, I have a lot of resources.
FEBRuaRy 10, 2014 FORBES | 75

americas

most promising companies

Cooks and kitchens, whatever. (Brennan recently sold a

51% stake of his Enlightened Hospitality Group to Hakkasan.) Ethans and Lawless passed on the oferuntil, a
month later, exhausted after late nights flling juice bottles
and barely eking out a proft, the two reconsidered.
Brennan introduced them to Church, a local entrepreneur and buyout whiz; the two had coinvested in Flank
Marketing, a digital marketing startup. A Cleveland native,
Church started as an accountant at Ernst & Young, then
got an M.B.A. at Harvard. He spent ten years helping to
turn around Erico, a Cleveland maker of industrial electrical equipment. His equity stake rocketed in value from
$100,000 to a couple million by the time he left in 1998.
Eager to do his own buyout, he moved to L.A. that year
and bought Aztec Concrete Accessories, which produces
plastic fasteners for concrete construction, for $13 million.
When it sold in 2000, investors got a sevenfold return.
Lynx Grills he unloaded in 2006, making eight times his
initial nut. He had less success with Universal Building Projects, a
constructionjust before the
products comfDA cAme by for A
pany bought in
first inspection,
2006 that fled
for bankruptcy
they frAnticAlly
four years later.
pAinteD stAirwells
A self-deAnD polisheD the
clared midwestfloors.
ern meat-andpotatoes guy,
he agreed to
meet with Ethans as a mentor but warned he probably
wouldnt like the juice. I tried it, and it just stopped me in
my tracks, Church recalls. But dealing with Ethans, not
so much. As Church peppered him with questions about
the business, asking for administrative passwords for his
website, Ethans clammed up. Annie and I were pretty
paranoid at that point, Ethans remembers. Their fears
subsided when Church placed a $1,000 order after the
meeting.
As the two generations talked regularly, they warmed
to each other. Church considered becoming more than a
mentor. His wife became a fan, drinking the juice to ease
arthritis pain. He and Brennan decided to chip in to a pot
that totaled $1.2 million. But they worried about how to
ramp up the business.
Cold-pressed juice is prized because no nutrients are
lost in the heat of traditional pasteurization. But because
its raw, it has a shelf life of only 3 to 4 days before microbes
begin to spoil it. As a result, Ethans and Lawless never
considered selling through distributors, since the product
would expire before it reached shelves. But Church discovered high-pressure processing (HPP), a method used by
rival BluePrint juice, to kill pathogens without heat. With
76 | FORBES FEBRuaRy 10, 2014

sUJa

HPP, plastic juice bottles are placed in a machine, then subjected to water pressure of 87,000 pounds per square inch,
fve times the pressure found at the bottom of the Mariana
Trench. That kills microbes but leaves the nutrients intact
and extends shelf life tenfold.
Ethans fretted that the process would ruin the taste. But
when the team put some bottles through an HPP facility in
Long Beach, Calif. and he noticed no change in the favor,
he initially refused to believe it had even been processed.
I still cant taste any diference, he admits. Armed with a
scalable model, Church became CEO that May.
Next up: rebranding. The juice needed a new bottle designand name. After a fruitless monthlong search, Ethans
struck up a conversation with a woman behind a booth at
a local health food store. She introduced herself as Suja, a
Hindi name meaning long, beautiful life. He walked out
gleeful; a design frm quickly mocked up a label and logo.
(Months later, at a trade show, Suja was shocked to see
Ethans manning the booth of an upstart juice company
sporting her name. In return, he says, she gets free juice
for life.)
Now for the distribution. Thanks to his startup Nika
Water, a bottled water company that donates profts to
clean water initiatives in developing countries, Church
knew local buyers at Whole Foods. Normally you wait
four months for a one-minute meeting if youre lucky,
he says. But a rep at Presence Marketing, which hawks
natural food brands to retailers around the country, passed
samples along to buyers in the Southern California region.
They went gaga, says Church. Smitten, Whole Foods
placed an order for 2,500 bottles that September.
Fulflling that order was hardly a snap. Suja commandeered the third-foor ice closet of Brennans San Diego
nightclub for a makeshift production line. Just before the
FDA came by for an inspection, Brennan frantically ordered
his own team to paint stairwells and polish the foors, then
routed inspectors up a carefully orchestrated route.
Nightclubs dont look so great in the daytime, Church
quips. While he and Lawless took care of sales and marketing, Ethans focused on production deadlines, with family
members and friends processing hundreds of bottles a day
out of the nightclub. Church ended up trucking the bottles
himself to the HPP plant in Long Beach, supervising en
route via mobile.
Only after the team fnished the initial batch for Whole
Foods did Church learn that Sujas label had no varnish
to protect it from the water pressure of HPP. The entire
shipment had labels that scratched of with the press of a
thumb. Whole Foods never noticed, and the problem was
fxed by the next shipment. Lawless, who had dropped out
of law school the previous spring, didnt mention her new
project to her parents until the bottles were on the shelves
at Whole Foods. I wasnt about to tell them that I left law
school for juice, she says.

most promising companies

Suja launched in 45 stores in Southern California in the

fall of 2012, often selling out within days. People freaked
on it, says Ethans. The company has since launched nationwide with Whole Foods and now produces 250,000
bottles each week for the food retailer, as well as for Kroger
and Costco and Safeway. Nearly half of last years sales,
$7.5 million, came in the last quarter. The company isnt yet
proftable but claims gross margins of 40% to 50%.
Church has invested $10 million or so in an onsite plant
that will soon produce 200,000 bottles a day; a new factory will open later this year in Philadelphia. Fresh fruit
and vegetables, sourced from company-owned organic
farms, start at one end of the production line and end
up as bottled juice on the other end within hours. Chefs
trained by the Culinary Institute of America taste each
batch, often cutting the produce themselves to test favor
and consistency. This month Suja will install its own HPP
machine just down the street.
How to pay for all this? Six months after the seed round
in March 2012, Suja raised another $2.5 million from outside investors that September. Last July Boulder Brands,
owner of Smart Balance, led a $10 million round. And in
December Suja picked up another $17.5 million from Alliance Consumer Growth, a New York City private equity
frm, valuing the company at an estimated $150 million.
The Suja quartet says its still holding 50% to 60% of the
equity, roughly divided in four.
Suja produces 20 diferent juices. Flavors for its original
Classic brand include Fuel, with carrot, orange, lemon and
turmeric, and 12 Essentials, with celery, cucumber, kale,
chard and ginger. Among the nine varieties of Elements, a
line made exclusively for Whole Foods, are Mango Fuego
(apple, banana, mango, baobab, ginger, chili, lime and
camu camu, an Amazon rain forest fruit like cherries) and
Green Charge (apple, pineapple, banana, mango, kiwi,
kale, spinach, chia seeds and faxseed, among others). The
new line, Elements, has fewer exotic ingredients and is
designed for a broader array of palates; you can soon pick
it up in chains like Safeway and Costco.
For now Suja is the only major independent making
cold-pressed juice. But so do much bigger rivals. Brands
like Starbucks Evolution Fresh and Hain Celestials BluePrint are keeping a close watch on Suja.
I would have been happy if this thing were a fraction
of its size, says Ethans.
With a history of expanding (and fipping) companies,
Church obviously feels otherwise. He insists Suja has a shot
at becoming the next Chobani, the independently owned
Greek yogurt brand that did $1 billion in sales last year.
Worth remembering that, like Suja, Chobani was a
supplier to Whole Foods until it was suddenly cut of last
year. The diference is Whole Foods amounted to less
than 0.5% of Chobanis retail sales. Suja, on the other
hand, has 30% of its business tied up there. f
78 | FORBES FEBRuaRy 10, 2014

tHe ranKings

Petite
But Elite
These select private companies are
standouts because of their rapid
growth and outstanding management.
EDITED BY HOLLIE SLADE AND EMILY INVERSO

The childrens place: Fuhu cofounder and President Robb Fujioka and
CEO Jim Mitchell recently signed a deal with DreamWorks Animation.
1. fuhu

2013 REVENuE: $175 milliON

Makes educational Android tablets for kids.

2. airpuSh

REVENuE: $98 milliON

Delivers ads to 120,000 mobile apps.

3. SuJa

REVENuE: $18 milliON

Produces and sells organic cold-pressed juices.

4. evOlenT

REVENuE: $40 milliON

Sells software and consulting services to hospitals.

5. lenDing cluB

REVENuE: $98 milliON

Ofers peer-to-peer lending for personal loans online.

6. SMaShBurger

REVENuE: $228 milliON

Serves up burgers in a fast casual chain.

7. uTeST

REVENuE: $24.1 milliON

Uses 100,000 part-time testers to fnd bugs in apps.

8. anchOrfree

REVENuE: $35 milliON

Provides a virtual private network for secure browsing.

9. yODle

REVENuE: $163 milliON

Ofers online marketing services for small businesses.

10. hirevue

REVENuE: $9.3 milliON

Runs a digital platform for screening, recruiting and interviewing.

MICHAEL LEWIS

americas

SM

INTRODUCING FEDEX ONE RATE.

Simple, at rate shipping with the reliability of FedEx.
Now you can ll a box and ship for a at rate. Find a location
at fedex.com/onerate #onerate
Terms, conditions and weight limits apply. Proper packing required. 2013 FedEx. All rights reserved.

americas

most promising companies

11. OnDeck

31. Bluekai

REVENuE: $65 milliON

REVENuE: $64 milliON

Uses online software to provide small-business loans.

Runs an online data management platform for marketers.

12. TapaD

32. pirch

REVENuE: $23 milliON

REVENuE: $57.8 milliON

Lets advertisers track consumers across their devices.

Sells high-end kitchen, bath and outdoor products.

13. iSenD

33. SevOne

REVENuE: $158.6 milliON

REVENuE: $39.5 milliON

Helps immigrants and expats make electronic payments.

Helps companies monitor and avoid network problems.

14. carDcaSh

34. MagneT 360

REVENuE: $55 milliON

REVENuE: $25.5 milliON

Buys and resells unwanted gift cards.

Installs Salesforce.com systems.

15. ThrilliST

35. ShOpkick

REVENuE: $83 milliON

REVENuE: $26 milliON

Ofers city guides; JackThreads has fash sales for mens duds.

Provides in-store deals via a location-based app.

16. MenchieS

methoDology
One metric never says
it all. For our Most
Promising list we strove
for a holistic gauge of
young, privately held
companies, trying to pin
down their trajectories
by looking at a slew
of variables. Over the
course of six months we
reviewed thousands of
applications. The fnal
assessment is based on
growth (both in sales
and hiring), quality of
management team
and investors, margins,
market size and key
partnerships. We
gathered those myriad
signals into a fnal score
that FORBES uses as an
initial guide in producing
the list. After verifying
sales numbers, speaking
with each company and
debating their merits
and blemishes, we
produce a fnal ranking.

tHe ranKings

36. phunWare

REVENuE: $188 milliON

REVENuE: $22 milliON

Operates a chain of self-serve frozen yogurt shops.

Develops mobile apps and analytics for brands.

17. icrackeD

37. kaBBage

REVENuE: $10 milliON

REVENuE: $16.8 milliON

Runs a network of repair pros for Apple devices.

Provides small business fnancing.

18. cOllecTive BiaS

38. pk4 MeDia

REVENuE: $15.6 milliON

REVENuE: $7.1 milliON

Recruits freelance bloggers for marketing campaigns.

Delivers ads and video syndication across platforms.

19. crafTSy

39. inTerSecT enT

REVENuE: $23.1 milliON

REVENuE: $17.8 milliON

Ofers online interactive video classes for hobbyists.

Develops a steroid-releasing implant for chronic sinusitis.

20. yexT

40. riTani

REVENuE: $33.4 milliON

REVENuE: $13 milliON

Collects and manages data for brick-and-mortar businesses.

Enables online design of engagement and wedding rings.

21. WOrk MarkeT

41. Therapearl

REVENuE: $40 milliON

REVENuE: $9.5 milliON

Serves as a job marketplace for contractors and freelancers.

Makes fexible hot and cold therapy packs.

22. Delphix

42. cpxi

REVENuE: $15 milliON

REVENuE: $111.4 milliON

Helps companies get fast, efcient access to data.

Runs a handful of diferent digital advertising businesses.

23. OneSOurce virTual

43. OriBe

REVENuE: $37 milliON

REVENuE: $26.3 milliON

Manages functions like h.r. and fnancial services.

Sells luxury hair-care products.

24. 24hr hOMecare

44. cODe42

REVENuE: $29.2 milliON

REVENuE: $40 milliON

Supplies in-home assistants for the elderly.

Creates cloud-based backup systems.

25. aparTMenTliST

45. ZeTa inTeracTive

REVENuE: $18.1 milliON

REVENuE: $112.3 milliON

Runs a digital platform for home renters.

Drives sales leads via data and e-mail marketing.

26. vMTurBO

46. peTplan

REVENuE: $12.5 milliON

REVENuE: $53 milliON

Sells monitoring software to IT departments.

Provides health insurance for pooches and kitties.

27. WeDDingWire

47. DSTillery

REVENuE: $ 34.1 milliON

REVENuE: $50 milliON

Helps engaged couples hire services for that big day.

Helps brands to target digital customers.

28. careclOuD

48. SOlve MeDia

REVENuE: $10.5 milliON

REVENuE: $13 milliON

Ofers online software to help doctors run their practices.

Turns CAPTCHAs into advertising opportunities.

29. SMule

49. Big aSS fanS

REVENuE: $21 milliON

REVENuE: $115 milliON

Develops music-creation apps for mobile phones and tablets.

Designs industrial, agricultural and residential fans.

30. BillupS WOrlDWiDe

50. JOBviTe

REVENuE: $102 milliON

REVENuE: $15 milliON

Provides research and buying for billboard and taxi ads.

Ofers an online video interview and recruitment platform.

80 | FORBES FEBRuaRy 10, 2014

Kristen Soltis Anderson, The Winston Group

Janet Napolitano, Former Secretary, U.S. Department
of Homeland Security

the ENTREPRENEURSHIP of
Kathryn Minshew, The Muse
Gayle King, CBS News, The Oprah Magazine

EVERYTHING
MAY 14-15, 2014 NEW YORK CITY

Power does not come in a one-size-fits-all package, and at Forbes

we are redefining what power means. Today, in order to effect
meaningful change, one has to possess an entrepreneurial mindset,
spirit, and approach.
Whether its leading a multinational firm focused on innovation,
launching a startup solving a decades-old challenge, or spearheading
a social movement that will improve the lives of millions, its all
entrepreneurship. And it defines every aspect of our lives.

Tory Burch, Tory Burch LLC

Moira Forbes, ForbesWoman

Hosted by Moira Forbes, this multi-generational gathering of

influencers will come together to forge partnerships, find solutions,
and take actions to make the world a better place.

Entrepreneurs dont just come up with ideas.

They make things happen.

Please join Moira Forbes

for a revolutionary gathering.

For more information and to request an invitation

please visit forbes.com/conferences
Donna Karan, Urban Zen, DKNY

americas

most promising companies

search engine (and adver

tising machine) or the most
prodigious professional
network on the planet but
by letting you browse the
Internet anonymously
protecting you from the
prying eyes of malicious
hackers, governments bent
on stealing your private
data or even your everyday
snoop by ofering socalled
activity encryption for
anyone who accesses the
Web. Just like an antivirus
protects your computer, we
protect everything you do
online, says David Gorod
yansky, the 31yearold
cofounder and CEO. We
wanted to make the world
a better place.
Making the world a bet
ter place can be a pretty
good business. Anchor
Free has been buoyed by
dissident movements in
the Middle East, Thailand
and Turkey. But its also
gained fans in the U.S.,
with heightened concerns
about intrusions by relent
less data gatherers, from
the NSA to Google and
Facebook. The companys
virtual private network
app, Hotspot Shield, has
been downloaded 200 mil
lion times since late 2007;
another 250,000 people
sign up every day. With net
margins of 30%, Anchor
Free pulled in revenue of
$35 million last year, up
from $25 million in 2012.
Half comes from almost
AnchorFree lets you access the Web anonymouslyanywhere,
nonstop popup ads and
anytime. Its great for privacy. But, oh, those relentless ads.
paid content; the rest from
a sliver of its 25 million
BY KARSTEN STRAUSS
monthly subscribers who
YOU WOULDNT KNOW it from its modest adobeand
pay $30 a year for its Elite (adfree and faster) service.
bricktile headquarters on National Avenue, but like a lot of
It took a while for Gorodyansky and cofounder Eugene
its larger neighbors in Mountain View, Calif., AnchorFree
Malobrodsky, also 31, to fnd their focus. Both the children of
aims to change the world. Not by becoming the biggest
computer engineers who immigrated to Silicon Valley as the
This paid Wi-Fi
stuf had to
die: cofounders
Eugene
Malobrodsky
and David
Gorodyansky.

82 | FORBES FEBRuaRy 10, 2014

ERIC MILLETTE FOR FORBES

Secret Lives

americas

most promising companies

Soviet Union crumbled, the two met at their Palo Alto syna
gogue 18 years ago and have remained inseparable. Gorod
yansky, an intense, fasttalking Muscovite, and Malobrodsky,
a laidback techie born in Lithuania, founded their frst ven
ture in 2002: Intelligent Buying, a networkequipment sales
platform that reached $1 million in revenue.
The duo aimed higher. While keeping the business and
their college courses going, they met in cofee shopsand
groused. This paid WiFi stuf has to die, Gorodyansky recalls
thinking. It has to be free, and it has to be secure. Why not
provide such a serviceand get advertisers to pay for visibility
on their network, covering infrastructure costs and leaving a
little proft? AnchorFree lumbered into the world in 2005.
In classic entrepreneurial form, they maxed out their cred
it cards, spending $50,000 or so to fnance WiFi antennas
in downtown Palo Alto and San Francisco. The ploy snagged
a few thousand users and caught the attention of then San
Francisco mayor Gavin Newsom, who invited Gorodyansky
to advise his tech council, which included Craigslist founder
Craig Newmark
and Google folks.
we wanted to be
Through their
a business with a
lawyers, Wilson
Sonsini, which
soul and a real
took its fees in eq
social mission,
uity, the founders
instead of just a
met former MCI
financial one.
Communications
CEO Bert Roberts,
who convinced
RENN Capital of
Dallas to lead a $6 million Series A round in 2006.
Great idea, but little money in it. The cost of upkeep and
infrastructure just doesnt generate enough revenue to pay
for itself, explains Malobrodsky. So we started thinking
about what kinds of products would.
AnchorFree jettisoned everything except Hotspot Shield.
Heres how it works. When you download and activate the
program on desktop, tablet or mobile, you visit websites via
the companys servers in the U.S., the Netherlands, Germany,
Switzerland and Japan, which scrub any information (includ
ing IP addresses) that could determine your location or iden
tity. After you log of, your data are deleted. The free download
caught fre. We had to add servers literally every two days
because it would get oversaturated, Malobrodsky recalls.
The slimmeddown company rises in popularity when
ever repressive regimes crack down. In 2010, after Chinese
authorities blocked the site, AnchorFree fgured out a bypass:
It sent emails to its entire user base with links to download
Mac and Windows versions of Hotspot Shield; because Web
surfers rode Gorodyanskys servers, they steered clear of the
censors. That helped us quadruple trafc, he says.
During the 2011 Arab Spring, when governments shut
down websites like Facebook, YouTube and Twitter, protesters
84 | FORBES FEBRuaRy 10, 2014

ancHorFree

focked to Hotspot Shield. That January, as crowds in Tah

rir Square tried to oust Egyptian president Hosni Mubarak,
Hotspot Shield downloads there jumped literally tenfold over
night to 1 million. We were the only way to get to social media,
to communicate and to share, says Gorodyansky. Last year,
when Turkish Prime Minister Recep Tayyip Erdogan threat
ened to raze a park in Istanbul, thousands of people discovered
the AnchorFree loophole, boosting usage 1,000% nationwide.
You might think the two exSoviet founders had been
inspired by legendary dissidents Andrei Sakharov and Natan
Sharansky. Gorodyansky, a onetime Forbes.com contributor,
shakes his head. We pretty much grew up here. He points to
his paternal grandfather, Aaron Leonid, a Red Army recon
naissance photographer in World War II, who used to tell
him, Dont just stop because theres a wall or a door in front
of you. Keep going! The Arab Spring uprisings, however dis
appointingly they turned out, clarifed AnchorFrees mission.
Says Gorodyansky: We wanted to be a business with a soul
and a real social mission, instead of just a fnancial one.
Making dough sometimes clashes with that higher goal.
Hasslefree communication and browsing come with a
pricea relentless barrage of ads that follow you like black
fies wherever you go on the Web. Some are content teases by
publishers; AnchorFree distributes content for the likes of AP,
UPI, PC World, Mac World, National Geographic and News
Distribution Network, which pay for the service. Many ads are
annoying and randomgetting hit with an ad for a dating ser
vice, say, when youre visiting a musical instrument site, served
by an ad network from Google, Yahoo or AOL. Says Gorodyan
sky: If you dont like the ads, pay for the Elite service.
But the app can be a challenge for some advertisers, too.
Because AnchorFree doesnt collect an individuals data and
deletes everything except page cookies, brand advertisers
glean only the most minimal information about potential cus
tomers. They know youve come to a site via the app and hope
theyre hitting you with something youll click on.
AnchorFree may have to reconcile its competing inter
ests at some point. In three rounds of fnancing it has raised
$63 million. Its biggest backer is Goldman Sachs, which led a
$52 million Series C round in May 2012, giving AnchorFree
a valuation of $250 million. (Goldman declined to comment
on its investment.) Half that wad went to pay of some early
investors and stafers. Roughly onethird of the equity is still
in the hands of the founders and their 70 employees.
Bert Roberts, the onetime MCI chief who owns more than
10% of AnchorFree, is letting his money ride a while. There
may be an acquisition of a company or two that develop secu
rity and identity management apps for mobile. AnchorFree
is also beta testing a portal called KaboomIt.com that lets
users express themselves and share information, pictures and
videos before disappearing them, la Snapchat. Roberts talks
about achieving a user base on a par with some of those other
Valley titans trying to change the world. AnchorFree, he in
sists, has that kind of potential. F

photograph by david yellen For Forbes

86 | FORBES FEBRUARY 10, 2014

Hidden under tHe iconic Brooklyn

and Manhattan suspension bridges, a neighborhood little-known outside New York glistens
like a movie set, if that fick combined On the
Waterfront with Sex and the City. In Brooklyns Dumbo the streets are carved from cobblestones, the hulking industrial edifces ooze prewar charm and approximately one-quarter of
the companies leading the Big Apples design
and tech boom, including West Elm and Etsy,
lie within, alongside art galleries, artisanal
shops and boutiques with precious names like
Peas & Pickles and Recycle-a-Bicycle. The spacious apartment lofts, many with spectacular
water views, rent and sell for higher prices than
many of their Manhattan equivalents.
In a city that has thrived for three centuries
on capitalist chaos, the architect of this urban
perfection, concocted with the detailed obsession of a Disney imagineer, sits in a windowless sixth-foor conference room. Nothing in
Dumbo is accidental, and its all the product of
David Walentas.
Thirty-fve years ago Walentas borrowed

Cash crises, political grudge matches, suicide. None of it

stopped David Walentas from forging a ten-digit fortune
by creating an entire neighborhood in New Yorks
underdog borough. And hes about to do it all again.
By CaleB MelBy

FEBRUARY 10, 2014 FORBES | 87

FORBES

Brooklyns Billionaire
$12 million to buy 2 million square
feet of this neighborhoodthe lions
share of what was then a dying industrial district flled with underused warehouses. Today you can
fnd one of his frms Dumbo apartments, a swank penthouse in a vintage clock tower, listed at $15 million. Even after selling of 700,000
square feet of the initial parcel and
later accumulating more property,
his 2.3-million-square-foot portfolio
plus other assets, factoring in debt,
makes Walentas worth an estimated
$1.4 billion. Manhattan has produced
numerous real estate tycoons (see opposite), and a few have made fortunes
building for the masses in places like
Queens. But Walentas is the frst billionaire to ever make his money almost entirely in New Yorks coolest
borough.
It was an untouched industrial
neighborhood, he marvels, one
scufed white Nike propped on the
edge of the conference table, his leg
drawing an angle too sharp for any
75-year-old. We got the whole neighborhood. You had the freedom to create a neighborhood. In New York. And
whatever you did with one building
would add value to the others.
It was, in retrospect, one of the
best New York real estate deals since
Peter Minuit bought Manhattan
for trinkets and beadslocals even
cooked up its clunky name (an acronym for Down Under Manhattan
Bridge Overpass) to scare of developersalbeit one preceded by death
and controversy, and one with the
potential to produce an even grander
sequel, Mayor Bill de Blasio willing.
umbo in the raw held
natural appeal for
Walentas, who came
from a faded industrial town, Rochester,
N.Y., and still carries a gruf demeanor learned growing up poor there.
His father, a postal worker, had a
stroke that left him paralyzed when
88 | FORBES FEBRUARY 10, 2014

Walentas says he made his frst $10

in the city selling a pint of blood; he
used it to pay for a meal, fll up his
car and return to Rochester. It would
be another four years before he returned to New York, during which
time he got his M.B.A. from UVa and
worked for sewing machine manufacturer Singer in Australia and
Japan. He came back to New York in
1966 to work for consulting frm Peat
Marwick.
After work he would spend many
nights wandering around its rough
edges. I just wanted to be a real estate developer, he says. I was attracted to the ability to build stuf, to
collect rent, to own it. But he never
had enough cash, and the banks had
no interest in lending to a
broke consultant without a
property background.
it was one of the best
He eventually befriendnew York real estate
ed Jef Byers, a third-gendeals since Peter Minuit eration member of the
bought Manhattan for W.R. Grace family, one of
the richest in Manhattan.
trinkets and beads.
Handsome and fashionable,
Byers knew plenty of people with deep pockets, though aphis junior year for paying a clandesparently didnt have much money
tine visit to a nearby all-girls school.
of his own. The duo formed Two
He went back to work in Rochester
Trees, named for Byers grandmothuntil he had saved enough money to
return to UVa and fnish his degree in ers farm, and raised $40,000, much
of it from Byers friends and fammechanical engineering. He graduated in 1961 and headed to Greenland ily, to invest in their frst rent-controlled building on the edge of Harto clean septic tanks for the military,
lem in 1967. Byers managed invessomething my farm days prepared
tors, while Walentas was the operame well for, he says. It was good,
tions guy, fxing leaks and collecting
fast money, and after fve months he
rent checks. Over the next decade
went to visit his brother, then in the
the partners bought up buildings in
air force in Madrid. He quickly blew
the Bronx, Queens and even Atlanta
through his cash, buying a white
and Baltimore.
Volkswagen bug and eventually travAt some point Byers told Waleneling down to Casablanca, where he
tas he wanted to take some money out
spent his days on the wharf lookof Two Trees. Walentas refused. Then
ing for a ship to take him home and
his nights in hostels, picking up feas. in 1977 Byers committed suicide, citing business problems in his goodA small Danish freighter eventually
bye note. Walentas maintains that he
agreed to cart Walentas and his VW
has no regretsthe suicide, he says,
bug in exchange for labor.
stemmed from Byers excessive lifestyle
The ship landed at a pier on
and personal debts. But many close to
Brooklyns west shoreline in 1962.
Walentas was 5. His mother worked
two jobs to support him and his
older brother. When that still wasnt
enough, she sent the boys of to live
and work on nearby farms. They
spent their days, recalls Walentas, as
something between an orphan and
an indentured servant, with a daily
routine consisting of shoveling s--t
and milking cows, going to school,
coming home, shoveling s--t and
milking cows. He acted out at school
and was suspended fve times but
still managed to become class president, with high enough marks to win
a four-year ROTC scholarship to the
University of Virginia.
His rascal behavior didnt stop
there. He lost his scholarship during

Real Estate
Royalty
New york Citys real estate Market
is BooMiNg, as resideNtial aNd
CoMMerCial priCes rise aNd huge
New projeCts get uNder way. these
are NiNe of the riChest developers
with skiN iN the gaMe. Not iNCluded
are soMe of the storied real
estate dyNasties whose fortuNes
are split aMoNg NuMerous faMily
MeMBers.

Richard LeFrak

Stephen Ross

net worth: $5.6 billion

net worth: $4.8 billion

one of tristates
biggest landlords owns
5,000-apartment complex
in corona, Queens, dubbed
leFrak city. grandfather
harry began developing
properties in 1901; father
sam expanded business.

construction has
begun on his
$20 billion hudson yards, an
entire neighborhood on Manhattans West
side. building citys largest
afordable housing complex
since 1970s in hunters point
south, Queens.

Sheldon Solow

Jerry Speyer

net worth: $3.5 billion

net worth: $3.5 billion

brooklyn-born
son of bricklayer
was small-time
builder when
he risked everything on 9 W. 57th street.
Marquee property now
home to kkr, apollo; address inspired name of nine
West shoe brand.

Father fed nazi

germany. Jerry
studied german
lit at columbia.
tishman speyer, cofounded with now exfather-in-law in 1978, has
stakes in such landmarks as
chrysler building, rockefeller center and Metlife.

Donald Trump

Jef Sutton

net worth: $3.5 billion

net worth: $2.7 billion

son of brooklyn developer

invaded Manhattan in mid1970s. today
the donald, star of The
Apprentice, owns trump
tower on 5th avenue, 67story trump building at 40
Wall street, among others.

landlord to
many of citys
top fashion
brands owns
120 properties,
mostly prime retail space in
buildings; commands some
of nations highest rents, including $19 million annually
for prada on Fifth avenue.

Mort Zuckerman

David Walentas

Leon Charney

net worth: $2.3 billion

net worth: $1.4 billion

net worth: $1.3 billion

boston properties, the reit

he cofounded
in 1970 and still
heads as executive chairman, owns 60%
of 50-story general Motors
building at 767 Fifth avenue, home to the apple
cube store.

bought 2 million
square feet of
dumbo in 1979
for $12 million,
developed into
brooklyns glitziest hood.
now plans to spend
$1.5 billion creating new
skyline in Williamsburg,
also in brooklyn.

Former Jimmy
carter advisor bought one
times square on
night carter lost
reelection. now he owns
three skyscrapers in times
square with a total 1.2 million square feet of commercial space.

225 RectoR Place

color diamonds represent the corresponding billionaires key new york holdings.
in some cases they own just stakes in the buildings or parts of them.

FORBES

Brooklyns Billionaire

90 | FORBES FEBRUARY 10, 2014

in the shadow of the Manhattan Bridge, dumbos hip tech set wanders its cobblestone streets.

were right to have been concerned.

Dumbo, and Walentas $40 million
gentrifcation plan for it, turned into
a soap opera. The administration of
then mayor Ed Koch refused to rezone the neighborhood, blocked
largely, it appeared, on the say-so
of deputy mayor Kenneth Lipper
a friend of Walentas deceased partner and a previous Two Trees investor. Walentas still maintainsas New
York magazine did thenthat Lipper
blocked the Dumbo project because
he was among those who blamed
Walentas for Byers suicide. Lipper

countered that Walentas was simply

unft for the job. Lipper declined to
comment for this story.
The citys maneuvering threatened Walentas entire investment.
So Walentas turned to the new governor, Mario Cuomo, who had visited the area and promised to protect
its manufacturing jobs. As Walentas tells it, Cuomos ofce threw him
a lifeline: They told him to publicly threaten to not renew the leases of
his industrial tenants, who accounted for 1,700 neighborhood manufacturing jobs. Walentas did, and a deal

alaMy

Byers reportedly blamed Walentas for

the death. After he paid Byers family
$1.8 million for his stake in Two Trees,
Walentas found himself cash-depleted, cut of from the wealthy investors
whom Byers had courted and were now
hostile toward him.
In his early landlord days Walentas implemented a somewhat lecherous policy: He required his agents
to make all potential young women
renters personally interview with
him. It paid a dividend, though: his
second wife, Jane, who in turn started Walentas on his billion-dollar
path. Jane was an art director at Clinique, the division of Este Lauder
run by Ronald Lauder, the younger
son of the cosmetics company founder. Both in their mid-20s, Jane and
Ronald became friends. A year after
his partners death, Walentas got
Ronald and his brother, Leonard, to
invest $2 million in the Silk Building
in Greenwich Village in 1978, his biggest deal to date.
A short time later, while dining nearby, Walentas stumbled onto
Dumbo, then still known as Fulton
Landing. The area had fallen into disrepair, with dilapidated buildings, an
abandoned waterfront and plenty of illegal squatters. But Walentas saw its
potential as an outpost for Wall Street
frms, which were expanding quickly
and threatening to move to New Jersey.
Within a year Walentas had arranged to buy 2 million square feet
of old industrial buildings from the
legendary Harry Helmsley. The
agreed-upon price, $6 a square foot,
including $6 million in debt, was a
bargain, since space in the buildings
was collecting annual rent of $2 a
square foot. Yet no bank would lend
to him. So he turned again to the
Bank of the Lauder Brothers, who
lent him $6 million. Ronald and I
were of the mind that you backed
people, not institutions, Leonard,
who is worth $7.9 billion, recalls.
David was good people.
The banks, it seemed at frst,

was quickly cut. He would allow all

interested tenants to renew their
leases, and the state would move the
ofces of the Department of Labor
and its 1,000 jobs from the World
Trade Center to a building in Dumbo.
The deal provided precious cash for
Walentas, and the rent was more
than 50% cheaper, saving New York
State taxpayers money. But Dumbo
was still not rezoned for residential
use until 1997, when Rudy Giuliani
was mayor.
By then the Lauders were out of
the picture. They had sold their stakes
to third parties in the late 1980s. It
got to a point where being a real estate investor in New York was something that we didnt fully understand,
Leonard says, who declines to say
how much they made in Dumbo. Our
profle was getting large enough. We
dont want to invest in anything that
could have a potential public relations
risk for us. And as Dumbo matured,
Walentas was able to buy out his new
partners beginning in the mid-1990s.
He no longer needed money from
outside investors. He converted buildings one at a time, often selling a fnished project to fnance the next.
Slowly a neighborhood emerged. He
redeveloped and sold of 700,000
square feet of the initial parcel, while
buying up another 1 million that he
didnt own already.

alentas is a victim of his own

success. He
scofs at a Starbucks that anchors a building near Two Trees offces, brought in by a new developer.
Id never put a Starbucks in here,
he says, even though the storefront
is almost always full. And he doesnt
buy in Dumbo anymore, though he
still lives therehe has priced himself out. In October Ivanka Trumps
husband, Jared Kushner, paid $375
million to the Jehovahs Witnesses for 1.2 million square feet of six

buildings in need of renovation

roughly 50 times what Walentas initially paid in the area. When we look
at this asset, we look at it historically and how far its come, Walentas
says. When Jared Kushner comes
and looks at this asset, hes comparing this in asset value to other things
hes looking at around town. And you
get very diferent results.
I think it is more rational for us to
ask the question: Is there a ceiling and
can this go on forever? adds Walentas son Jed, 39, who joined his father
at Two Trees in 1997 and now serves as
CEO. Were very cautious about not
believing too much of our own b.s.
That realization has led them elsewhere, including Manhattan. Jed recently oversaw the $600 million de-

i think it is More
rational for us to
ask the question:
is there a ceiling
and can this
go on forever?
velopment of the Enrique Nortendesigned Mercedes House, 1.2 million square feet of tiered, glassy luxury in Manhattans Hells Kitchen. It
was fully leased in a little more than
a year on the market.
But it is back on six blocks of the
Brooklyn waterfront where they are
betting their future, this time in Williamsburg. After a drawn-out fght
between its previous owners, Two
Trees bought the Domino Sugar refnery and its surrounding 11 acres
in October 2012 for $185 million,
$30 million more than its initial bid.
They know how to work on the
waterfront, which is very difcult.
They know how to do afordable
housing, ofce space, ground-up construction, historic rehab, which is all
part of this project, says Chris Havens, a former Two Trees employ-

ee who is now a commercial broker.

They also know how to do the politics, how to do the give-back.
That latter point will be tested.
Walentas pre et fls spent a year refning and tweaking their designs
for the new development, incorporating feedback from the community, departing from the previous owners plan for fve clusters of shorter
towers to four taller, roughly 50-story
skyscrapers, a public waterfront park
and a new public square. The towers
will have 2,200 apartments, including
660 earmarked for afordable housing, and come in Tetris shapes, one in
the form of an O, another in an inverted L, designed to allow more
evening sunlight to the neighborhood
behind. The quirky Walentas touch
remains: The original Domino Sugar
refnery will be kept intact, including
its iconic sign, and converted into offce space. Total cost: $1.5 billion.
The local community board and
Brooklyns borough president voiced
support for the plan prior to the end of
Michael Bloombergs tenure as mayor
in December. (I wanted Bloomberg
for life, says Walentas.) But now hes
facing Bill de Blasio, who is avowedly hostile to the wealthy, and a more
liberal city councila tough combination. Hopefully well survive our new
mayor, he says. Its just a question of
what works and what doesnt. [De Blasio] has never run anything. Running
New York City is a business. He cant
put political cronies in. But maybe hes
smart enough not to do that.
Unlike those early days in Dumbo,
Walentas has a plan B: The original
plan with fve clusters was previously approved. Were not just going to
sit there and do nothing, says Jed.
And also unlike with Dumbo, Walentas doesnt need outside investors.
With his cash and asset pile, he can
self-fnance to a large degree, carving
yet another neighborhood onto the
Brooklyn waterfront over the next
decade, building by building, detail
by detail. F
FEBRUARY 10, 2014 FORBES | 91

NEBrASkA toUriSM

By ZaCK omalley GreeNBurG, JoaNN muller aNd ChriStoPher helmaN

92 | FORBES FEBRuaRy 10, 2014

FORBES

reinventing america the new rail Boom

KaNSaS City SoutherN (KSu)

Running The Rails

Strong cross-border business with Mexico and a

rebounding auto sector propelling growth.

Though technology, economic recovery and the u.S. oil

boom are driving shippers back to americas freight rail
system, not all big railroads are performing equally.
BNSF (SuBSidiary oF BrK.a)

CaNadiaN PaCiFiC (CP)

NorFolK SoutherN (NSC)

CaNadiaN NatioNal (CNi)

CSX CorP. (CSX)

uNioN PaCiFiC (uNP)

duce from California to the Mid-Atlantic, and rusty blue boxcars bear lumber from the Pacifc Northwest to points
east. We stay busy, says Orr. Its like
New Yorkthis place doesnt sleep.
Rail is on a roll, and not just in North
Platte. Thanks to leaps in technology, the
rising price of diesel and improved delivery speeds, more and more freight traffc has moved from roads to rails, where
trains can move one ton of goods about
500 miles on a single gallon of fuel. Since
2009 Union Pacifcs weekly carloadings
have increased from 133,000 to 180,000,
helping the company achieve record
earnings every quarter since the beginning of 2010. Since 2009 its stock price
has surged 350% while competitors like
Kansas City Southern and Canadian Pacifc have seen shares more than double, all of which makes Warren Bufetts
$34 billion purchase of the rival Burlington Northern four years ago look like the

great train robbery: FORBES estimates

BNSF is worth about $65 billion today.
The industry, so recently an aging also-ran in the age of superhighways, is
now a fountain of superlative fgures: Industrywide, revenues have surged 19%
from $67.7 billion to $80.6 billion since
2009, creating 10,000 new jobs at railroad companies and countless thousands in related industriesand paying
out $21 billion in wages last year alone,
up nearly $1 billion. As the U.S. population swells, the Federal Railroad Administration projects that the tonnage
of freight shipped by the U.S. rail system
will increase 22% by 2035.
This is the best theyve been doing in
half a century, says rail consultant Carl
Martland, a retired MIT lecturer. Its
hard to imagine a scenario where there
is not growth. People are going to continue to eat, heat our homes, buy cars. If everything else is outsourced, that means

January derailment and oil-car fre in New

Brunswick adding to drumbeat for regulation.

n an overcast Tuesday
morning in dusty North
Platte, Nebr., Tony Orr
stands at the center of
the worlds largest freight
rail yard, watching as billions of dollars worth of commodities and goods
roll by. Hes the general superintendent
of Union Pacifcs Bailey Yardat 2,850
acres, its three times the size of New
Yorks Central Park and handles 10,000
train cars per day on 315 miles of track.
Orrs view is a soot-caked cross-section of the American economy. To his
left a 1.25-mile-long train trundles west
toward Wyoming to refll after dropping of 30 million pounds of coal; to his
right 140 double-stacked cars clack of to
the East Coast with furniture, auto parts
and electronics from China and Japan.
Beyond, westbound grain trains shriek
through the yard while refrigerated cars
the color of dirty snow carry fresh pro-

94 | FORBES FEBRuaRy 10, 2014

Activist investor Bill Ackman trimmed his stake

last year after his shares value doubled since 2011.

Dogged by the decline of coal, the largest railroad

in the Eastern U.S. has underperformed its peers.

Construction and ag rebound will help, but

dependence on coal tempers the outlook.

Created by Lincoln in 1862, it is the oldest publicly

traded railroad in U.S.and largest by market cap.

SoUrCES: ASSoCiAtioN of AMEriCAN rAiLroADS; iNtErACtivE DAtA viA fACtSEt rESEArCh SyStEMS.

Warren Bufetts railroad is a huge benefciary of

the oil fracking boom in North Dakota.

Siemens AG, 2013. All Rights Reserved.

American manufacturing
is brewing something big.
Siemens answers are redening manufacturing for companies like Schlay Bottleworks brewery.

Somewhere in America, a new era of manufacturing has

dawned. An era where manufacturers in every industry
are relying on a highly skilled workforce and innovative,
new technologies to produce more complex products,
more efciently than ever before. And theyre turning
to Siemens to get it done.
In St. Louis, Siemens has helped Schlay Bottleworks
brewery double production without sacricing the quality,
craft brews that built the company.

By combining intelligent hardware and software,

the Siemens system also enables the brewery to easily
transition production between beer styles and make better
use of working hours. Today, it has a distribution area the
owners never thought possible.
Siemens is working with some of the most forwardthinking companies to improve efciency and productivity,
to make more with less and to grow the economy. Because
its not just about making things right, its about making
things right for people, for business and for America.

Siemens technology
helped this brewery
double production.

siemens.com/answers

FORBES

weakness in the coal industry and other commodities, and are still
16% below peak 2006
levels. And as rail has
been rejuvenated, so
have concerns about
safety and the environment, highlighted by a
string of deadly oil-train
explosions. But rails new
success is far from a fad.
Theres plenty of indication that were just in the
early stages of a surprising renaissance.

all the products are going to be coming

into the United States at a port in containers. How are they going to get where
theyre going? Theyre going to Chicago,
Memphis, everyplace else by rail.
All of which is driving a multibilliondollar revival in rail R&D and infrastructure, investment unseen in America since
the transcontinental railroad. Thousands
of new state-of-the-art locomotives
far more fuel efcient and less polluting
than the ones they replaceare now operating on U.S. railroads.
The most impressive fact of all is that
the boom has been underwritten by industry, with no cost to taxpayers. Thats
annual infrastructure spending of $20
billionincluding $3 billion so far on a
massive, federally mandated safety upgrade known as Positive Train Control.
Contrast that to Americas highways,
which receive $40 billion a year in federal subsidies. Its paid for by private investors, says Union Pacifc Chief Jack
Koraleski. In todays world, where the
tax dilemmas are mounting and there are
so many issues, the rail industry is one of
the true success stories.
It isnt all good news, of course. Carloads were roughly fat last year, due to
96 | FORBES FEBRuaRy 10, 2014

mericas second
great rail boom
started with tragedy. On a sunny southern California day in September 2008, an engineer guiding a crowded commuter train, reportedly distracted
by texting with a teenaged train enthusiast, blew through a red light and rammed
head-on into a Union Pacifc freight
train. The driver was killed, along with
24 passengers; an additional 135 were injured. It was the worst accident on the
rails in nearly two decades. The following month Congress passed the Rail Safety Improvement Act of 2008, requiring the countrys major railroads to fund,
build and implement a new, safer Positive Train Control system by the end
of 2015. The law called for Union Pacific alone to reft an average of 2.5 locomotives and 10 miles of track per day
for seven years, placing GPS devices on
every locomotive.
Diesel fuel had topped $4 per gallon. At
first it seemed the new technology might
reduce costs substantially. UP alone consumed 1.2 billion gallons of fuel that year
second only to the U.S. Navyleading prognosticators to believe the efficiency gains
brought on by the new system could cut
fuel consumption by as much as 8%, saving
UP nearly half a billion dollars a year.
Then the bottom fell out of the economy. Rail revenues plunged 20% in 2009

to their lowest levels in fve years. Railroads laid of 14,000 employees and
stripped more than $2 billion in wages
from their books in a single year. Then
there was that pesky train-control system, which looked a lot more expensive
after diesel dipped toward $2 per gallon.
Even the government has said its a
dollar returned for every $22 invested,
says Koraleski. Its a pretty complex law,
and its probably the single most complex
piece of technology the railroad industry
has ever undertaken.
Nonetheless, with the plodding pace
of a coal train snaking through the Rockies, the beefed-up train control system
more likely to be completed, Congress
willing, in 2020has been revolutionizing freight hauling in America, allowing the railroads to pinpoint a locomotives location within one yard (and remotely stop it if an engineer ignores a signal). Safer, yes, but also more efcient:
Instead of sending trains speeding across
the country only to stop at each red signal, the new system means conductors
will be able to know about planned stops
well in advance, allowing them to simply reduce speed (and fuel consumption)
to a level that wont force them to stop altogether and burn major amounts of fuel
when restarting from a standstill.
These increased efciencies have
dovetailed with a better economy. Diesel is once again edging toward $4 a gallonso Positive Train Control costs feel
a bit less of an albatrossand manufacturers are turning to rail for shorter and
shorter shipping jobs. Less than a decade ago diesel prices were so low that
manufacturers rarely considered rail for
shipments of less than 1,000 miles. Now
theyre ditching trucks in favor of trains
for jobs as short as 500 miles.
Ironically, the biggest growth area for
the rail industry is oil itself. The Great
American Energy Boom has been a boon
for the railroads, especially when the
gushers are found in spots uncrossed by
pipelines, like the Bakken formation of
North Dakota. EOG Resources contracted the frst crude oil train out of the Bakken in 2009. Now BNSF, for one, is

iCAhN: JoNAthAN kozoWyk

reinventing america the new rail Boom

FORBES

reinventing america the new rail Boom

michael nemeth for forbes

moving 600,000 barrels of oil per day

(enough oil, once refned, to fll up the
gas tanks of 1.35 million cars), up from
54,000 barrels in 2010.
Canadian crude is moving by rail as
well. With a few more years of growth,
railroads might be handling as much Canadian oil as was meant for the sandbagged Keystone XL pipelineabout
300 million barrels per year. BNSF now
has 10,000 tanker cars dedicated to moving oil. Were on the path to 1 million
barrels per day on our railroad, says
BNSF Chairman Matt Rose. The growth
is like nothing Ive seen in my career.
Its not just crude the railroads are
shipping. For every new oil or gas well
that gets drilled and fracked, the oil
companies haul in 40 railcars of materials. Theres crushed rock and concrete to build pads for drilling rigs.
And fracking each well requires hundreds of tons of sand that gets shot
down the wells to prop open tiny
cracks to let the oil and gas through.
Much of that sand is fowing by rail
from mines in Wisconsin.
All this moving oil, of course, poses
increased risk. On July 6 an oil train operated by Montreal, Maine & Atlantic
Railway crashed in Lac-Mgantic, Que.,
killing 47, destroying the towns core and
spilling hundreds of thousands of gallons. In Alabama last November, 25 cars
on a 90-car oil train derailed in another
inferno that dumped thousands of barrels into marshland. And in the last week
of December a BNSF train carrying grain
derailed near Casselton, N.D., causing a
collision with a 106-car oil train; 18 oil
cars derailed and several burned. Recent data from the Manhattan Institute
fnd trains are four times more likely to
have accidents than pipelines, but pipeline spills release signifcantly more oil
than train accidents. Still, the railroads
carry oil right through town, over rivers and pastures, says the Sierra Clubs
Wayde Schafer. When routing pipelines
at least you can take them around populated areas.
Prompted by these incidents, the National Transportation Safety Board in-

We are in a special moment in time, says Russell Stokes, new CEO of GE Transportation.

vestigated the safety of moving Bakken

crude by rail. It determined that many
railcars now moving Bakken oil are too
old and need to be replaced or retroftted
to meet new safety standards. Both Ottawa and Washington are likely to impose
stricter regulations on oil shipments.
Newer railcars are much stronger and
dont crack like an egg, says Schafer.
The industry agrees. Edward Hamberger, president of the American Association of Railroads, says its time for
the Department of Transportation to review standards for tank cars that carry
hazardous materials. Theres 92,000
cars that need to be assessed, he says.
If they cant be retroftted, then they
should be phased out.
Who will beneft from that replacement cycle? Bufetts Berkshire Hathaway, for one. Even before acquiring
BNSF, Berkshire in 2007 bought Union
Tank Cars.

he next generation of railroading is taking shape inside a massive, sparkling white building in
Fort Worth, Tex. A starry-eyed developer once envisioned this building as
a sophisticated distribution center for
the likes of Amazon and Wal-Mart. Instead, GE Transportation, a subsidiary
of General Electric, turned the empty
shell into a showcase for advanced

manufacturing. For more than a century GE has been building locomotives at

a massive complex in Erie, Pa., where
it employs 5,000. But the Fort Worth
plant, which opened in January 2013
in anticipation of increased demand, is
20% more efcient.
Wal-Mart could ft nearly ten of
its discount stores inside this millionsquare-foot factory, where approximately 12,000 parts come through the
loading docks every day and four locomotives lumber out each week (the
plan is fve per week by the second
quarter). It is bright and airy, with ceilings so high a locomotive can be somersaulted to install its wheels. With the
help of massive, overhead cranes, a lean
staf of 400 newly hired GE workers in
matching black polo shirts, some toting iPads, snap locomotives together like
kids with a Lego set, popping fve preassembled modules onto a 73-foot-long
steel platform. The 12-cylinder engines
are brought in from GEs plant in Grove
City, Pa.; the alternators come from the
Erie factory; the traction-motor combos
from a GE facility in Mexico.
These 220-ton rolling power plants
are majestic. But GEs locomotivesas
well as those from rivals like Caterpillar, Siemens and Bombardierare smart,
too, crammed with as many as 250 sensors and 20 or more microprocessors to
FEBRUARY 10, 2014 FORBES | 97

FORBES

reinventing america the new rail Boom

monitor critical functions and performance. By analyzing the massive reams
of data collected, GE helps railroads and
their customers increase their productivity, decrease fuel use and minimize
downtime. GEs new monitoring and diagnostics software, RailConnect 360, can
even predict train breakdowns before
they occur.
An example: Trains snaking across
undulating terrain are like Slinky toys.
On the way up a hill the cars pull apart;
on the way down their tendency is to
crunch together. GE Transportations
new Trip Optimizer is a smart cruisecontrol system that knows the slope of
the hill, the length and weight of the
train, its contents and its braking ability.
It then automatically regulates the trains
speed to maximize its efciency and
consume the least amount of fuel.
The data come from GPS signals,
track-topography maps and sensors embedded in the locomotive. All of which
gets fed into complex train-handling algorithms. The train is not fully automated like some passenger rail systems (parts of the Paris Metro, for example); the conductor remains in control. But the system is smart enough to
know when a curve is coming or a section of track is occupied, and automatically starts slowing in a controlled manner to smooth out that Slinky efect.
The system is already in use by eight

railroads on 2,500 locomotives in North

America, Australia and Brazil. Customers have seen fuel savings of 3% to
17%, depending on the type of train service and topography, GE says. The company says locomotives equipped with
Trip Optimizer have already logged
100,000,000 real-world miles, saving
some 25 million gallons of diesel fuel.
Norfolk Southern estimates that an increase in network velocity of just one
mile per hour will save the company
over $200 million a year.
GE is also piloting new technology that will help rail yard managers get
the right railcar on the right train more
quickly. Currently railcars sit idle in a
rail yard about 40% of the time. That
lack of productivity irks customers like
Ford Motor, whose chief operating offcer, Mark Fields, met with railroad offcials last year to plead for faster turnaround times after its vehicles were piling up in parking lots waiting for enough
rail carriers to take them to dealerships.
That problem has largely been resolved,
Ford says.
Todays diesel locomotives are a lot
cleaner than those 19th-century coalfred steam engines, but theyre still not
clean enough. The rail industry faces
tough new diesel-emissions standards
starting in 2015, and GE spent fve years
developing new engine technology that
it says will meet the new regs without

Nearly ten Wal-Mart stores could ft inside GEs million-square-foot Fort Worth locomotive factory.
98 | FORBES FEBRUARY 10, 2014

the need for costly after-treatment.

Now GE is focused on fuel, rolling out
a new line of locomotives that can operate on liquefed natural gas and reap
up to 50% savings over diesel (of which
the freight-rail industry uses 3.5 billion gallons a year). Thats critical, since
rival over-the-road heavy truck feets
are shifting to cheaper natural gas, too.
BNSF and Canadian National are already testing converted natural gas
trains around North America.
I think its real, says Lorenzo Simonelli, who led GE Transportation until
last October, when he became CEO of
GE Oil & Gas. If LNG technology fulflls its promise and is adopted throughout the nations freight railroad locomotive feet, natural gas would be the most
transformative change in the railway industry since diesel replaced steam.
Meanwhile, back in the present, in
North Platte, Tony Orr and Union Pacifcs chief information ofcer, Lynden Tennison, are perched atop an observation tower nearly 100 feet above
the Bailey Yard, practicing a little innovation of their own, as individual railcars far below are sorted into new trains
through a time-honored technique
called humping. Mustard-yellow engines push chains of cars up one of the
yards two hills, or humps. Then, as each
car crests the incline, its remotely detached from its neighbor, rolling down
alone on its own momentum. Next, its
routed by a series of switches onto one of
a dozen or so trains forming on parallel
tracks at the bottom of the hill.
In recent years railroads have been
using this process to build longer and
longer trains, Tennison says, pushing
lengths from 10,000 feet to as much as
15,000 feet in some cases, thereby boosting fuel efciency and cutting crew costs.
In 2010 Union Pacifc even tested a double-stacked 18,000-foot train, running it
from Texas to Californiaand drawing
some complaints from motorists over
fve-minute waits at road crossings.
Theres almost no limit, says Tennison, staring out across the yard below.
For the trains, or for the industry itself. F

GooGle wa

100 | FORBES FEBRUARY 10, 2014

nts it all
Forget wearable computers and self-driving cars.
The search giant will continue its dominance
by sticking with its rootstaking $20 billion out
of the hides of some very familiar companies.
By roBert HoF

ts mid-September, and Volkswagen of America has a problem: It wont

have any new models coming out until the spring. Keeping VW front
and center in consumers minds has drawn a group of marketing folks
from the automaker and two of its ad agencies to Googles BrandLab at
its YouTube headquarters south of San Francisco. Dedicated to evangelizing the art and science of brand-building, the richly appointed
meeting space is basically a man cave for ad creatives, complete with
overstufed couches, booze and the mother of all big screens, an assemblage of 32 fat-panel displays massed into 300 square feet of video overload.
In one corner of the BrandLab, Googles Jef Rozic goes to work running VWs
folks through a rapid-fre succession of video ad campaigns the BrandLab feels have
worked. His earnest delivery is well-honed, courtesy of 100-plus similar private
workshops held for potential advertisers from Coca-Cola to Toyota over the past
year. VW has some catching up to do, a point Rozic makes intentionally or not by
highlighting 13 travel vignettes produced by a rival, Nissan Mexico. His larger point:
Dont clutter a story with too blatant a call to action. We shouldnt apologize for
trying to sell cars, one VW exec protests. Sure, Rozic shoots back, but you have
to be careful to distinguish when youre telling a story and when youre selling.
Fair point. Rozic is clearly sellingand its a product intended to change Googles
path. The king of the click is now lecturing one of the worlds most accomplished
advertisers to forget those clicks and amp up the image ads. CEO Larry Page can go
on as much as he wants about self-driving cars, wearable computers or any of the
companys other moon shots. But Google fundamentally remains the most disruptive advertising company of the past half-century. As its total advertising-revenue growth rate has halved in the past two years, from 29% to 15% (thanks in part to
Facebook and Twitter), its now charging full-bore toward the biggest pot of advertising gold it doesnt own: brand advertising, the image ads you see in glossy magazines and on television.
Most online adsthe banners that litter nearly every commercial website and,
most notably, Googles search adshave failed to help marketers move the needle on classic advertising measures like brand awareness and intent to purchase.
Instead, they mainly drive people to a product page to click the buy button.
Direct marketing is lucrative: Search is still upwards of 60% of Googles ad
revenue, helping it earn an estimated 15.8% net margin in 2013but image
ads will come to dominate digital advertising in this decade.
Look at the numbers: Digital brand advertising is an $18 billion market this
year, according to eMarketer. Its forecast implies that number will double by 2018,
at which point it will have passed search and direct marketing, with plenty of room
FEBRUARY 10, 2014 FORBES | 101

google the $20 BIllIoN PRIZe

102 | FORBES FEBRUARY 10, 2014

by 2020, or $20 billion a year. Given

that Googles total revenue this year
will come in at around $60 billion,
this is the growth the company needs
to continue its dominance.

usan Wojcicki was Googles

16th hire. Marissa Mayer
came a few hires later,
yet it was Mayer, now Yahoos CEO, who became
the fashy female face of Google. No
matter. Wojcicki (pronounced woJIT-ski), the senior vice president
in charge of all Google ad products,
plays the anti-Marissa. She favors
jeans and hoodies around the ofce,
displaying a self-deprecating plainness that one former employee says
is reminiscent of Chance the gardener from the movie Being There.
She never felt she needed to be the
smartest person in the room, says
another ex-colleague.
Instead, shes become the most
powerful personmale or femalein
advertising. She manages efectively without drama and thus has been
Pages go-to exec for wins such as the
introduction of AdSense, which pays
other sites to run Google ads (now a
$13 billion business), and the acquisitions of DoubleClick, an ad-serving pioneer, and YouTube. She only
works on big problems, not small
ones, says ShareThis CEO Kurt
Abrahamson, who worked for her a
decade ago.
Her vision of the future of advertising (and hence Google)? Since
content is fowing across so many
digital devicesa trend Google is
trying to accelerate with such initiatives as its Chromecast device for
streaming online video to TVs and
its furry of Android smartphones
and tabletsshe sees nearly all advertising eventually going digital,
too, putting it squarely in Googles
wheelhouse.
Advertisers will have to go where
the users go, says Wojcicki, sitting
outside her ofce at the Googleplex,

sipping a detox lemonade with

maple syrup and a dash of cayenne.
A big chunk of dollars will follow.
Wojcicki envisions an operating
system for advertising that can connect search, display, YouTube and
branded content, and bundle it all up
into campaigns that span computers, smartphones, tablets, connected
TVs andwho knows?maybe Google
Glass. Some marketers are moving
quickly in that direction. For the recent launch of its D Rose 4 sneakers,
Adidas ran ads on YouTube and the
Google Display Network, a partnership of some 2 million sites, backed up
by mobile ads for a second-screen experience and search ads to catch those
who want to buy them right away.
For some time Wojcicki has talked
about the perfect ad, the one that

Christopher peaCoCk for forbes

to grow. Television advertising, comprising almost entirely image ads, is

currently a $200 billion global market. And its a vulnerable one, as the
mediums iron grip on the bulk of
ad spending looks a little less frm
as younger people scatter to YouTube and Netfix when they arent
Snapchatting or Instagramming on
iPhones or skipping ads entirely on
their DVRs. Some 75% of respondents to an Interactive Advertising
Bureau poll of 5,000 ad execs expect
to see some spending move from TV
to digital video in the next year.
This explains the man cave. YouTube remains one of the greatest acquisitions of the Internet era.
Larry and Sergey paid $1.65 billion
in 2006 for a business that today
would conservatively be worth
$20 billion as a stand-alone. So
whats another $400 million or so to
build out a brand ad business?
The return has been fairly quick:
In October Publicis MediaVest, the
ad agency for Coca-Cola, Honda and
other big advertisers, inked a deal to
spend tens of millions of dollars over
the next year on Google video, display and mobile ads. It was Googles
frst agreement with such an online partner to buy ads in advance, as
agencies and marketers do on television. In November Publicis agencies
DigitasLBi and Razorfsh went bigger, committing to spend $100 million on YouTube and Googles banner and mobile ad networks this year.
Google is one of the few players
with a platform big and wide enough
to attract these dollars, says Razorfsh CEO Pete Stein.
And Google sources insist that
more of these upfront deals will be
announced shortly, which has investorswho have driven the stock to a
recent alltime high of over $1,150
feeling bullish. Tim Ghriskey, chief
investment ofcer at the asset management frm Solaris Group, a Google
investor, fgures the company could
capture about 6% of TV ad spending

people see at precisely the time they

want to know about a product or are
ready to buy it. Search ads now approach that ideal for direct sales, but
Wojcicki pictures image ads, supplemented by data on personal preferences and behavior, that can plant
the seed for brand or product preference just as well. Its an advertising
axiom that people are more receptive
to messages when theyre leaning
back on the couch watching TV than
when engaged in online activities.
Wojcicki contends the potential is for
just the opposite. If users are engaging with something, theyre choosing
to see it, she says, and Google can
use that overt choice to serve even
more relevant ads.
So how would a Web display ad
largely, the vilifed bannerengage?

Upstairs at Googles
display-ad headquarters of the main campus in
Mountain View, Calif. scrawled equations blanket a wall-size whiteboard.
The equations are a scrap of the impossibly complex mathematical formulas that power its $12.5 billion display network business. They turn
into beautiful rich-media ads, Neal
Mohan, Googles vice president of
display advertising, explains dreamily as we walk by.
When Larry Page took over as
CEO in 2011, he told Mohan to revolutionize display ads so theyre just
as useful as Googles obscenely profitable search ads. Mohan, a veteran
of pre-Google DoubleClick, is a true
believer. (With a reported $100 million in stock grants to keep the likes of

Facebook and Twitter at bay, he isnt

driven by the need for more money.)
He has bought or built what even rivals concede is the broadest set of
software needed by advertisers and
publishers to sell and place ads, including a state-of-the-art ad exchange
that sells space as fuidly as the Nasdaq sells stock.
Mohan, who likes to decry the
40% of spray and pray TV advertising he says is wasted on indiferent audiences, ofers a vision of the
future in which Google can marry
its data about individual consumers
with the reach of TV and measure
the results, too.
Google can generate that reach
with its display network, which
ranges from tiny outfts to the New
York Times and USA Today. It serves
ads on those websites for a cut of revenue. (Tellingly, even NBC partakes,
though Google has put a big, fat target on its back.) The network reaches
90% of the Webs population and
serves impressions to a billion people worldwide a month. It was tough
sledding early on, as ads began
showing up on dodgy niche sites,
but an ongoing cleanup campaign has big brand advertisers increasingly interested. The
number of advertisers booking
space months aheadan option
chiefy used by big marketers looking to infuence brand consideration
has quadrupled from a year ago, but
Google isnt ofering specifcs.
Still, the banner ads have been losing out to native ads, which use
content rather than a boring banner
to attract peoples attention. Facebook is a bigger bet for us right now
than YouTube, says Laurent Faracci,
the U.S. chief marketing ofcer for
Reckitt Benckiser, owner of brands
such as Lysol and Clearasil. Instead,
Mohan has bet on rich engagement
ads for the display network. For instance, one might expand to play videos, games or apps when hovered
over for two seconds. Samsung reFEBRUARY 10, 2014 FORBES | 103

cently ran millions of them to play

a live video stream of a new smartphone and smartwatch. In June
Burberry ran display and mobile
ads through Google that prompted
people to snap a photo of their own
puckered-up lips and send the digital
imprint of the kiss to a loved one.
Theyre starting to work. Now used
in about 1,000 campaigns daily, engagement ads command around double the price of standard banners,
which vary wildly but average around
$3 per thousand viewers reached.
Thats partly because advertisers can
choose not to pay unless someone actually views those adslike those who
pay for clicks rather than views in the
banner worldso theyre more valuable. Still, branding remains a challenge for a company whose success
so far derives from cold mathematics.
Back at the BrandLab, theres an elegant arrangement of two dozen digital photo frames mounted on a pedestal, all playing videos of fames. Great
stories are told around the campfre,
a Google project manager explains.
Cute. Except this campfre gives of no
heat. For that, Google needs some of
the sizzle of Hollywood.

he warren of studios
and soundstages southwest of Hollywood is
strewn with cameras,
lights, toolboxes and
half-empty cofee cups. One stage
features stock horror-movie sets,
like the hotel hall from The Shining. In another studio, three women,
one of them with scissors in hand,
are preparing to flm a video on how
to cut your own bangs. Once a hangar where Hughes Aircraft built
the Spruce Goose in the 1940s, this
41,000-square-foot building is now
YouTube Space LA, possibly the
worlds largest production facility
dedicated to online video.
Its YouTubes latest bid to shed
its dog-on-a-skateboard-video image
and make the site a cleaner, more

104 | FORBES FEBRUARY 10, 2014

well-lit place for big TV marketers.

That bid began a couple of years ago
with YouTubes $300 million drive
to create some 200 TV-like channels
from the likes of Shaquille ONeal
and Amy Poehler. While they dont
have TV networks quaking just yet,
YouTube has been able to command
higher ad prices closer to those of
TV than Web display ads. YouTube
gross ad revenue jumped 51% in 2013
to $5.6 billion, netting $2 billion after
payments to content and ad partners,
according to eMarketer.
Heres the funny thing, though: It
turns out that some of the most popular channels are not network wannabes. Theyre from producers such
as PewDiePie and Jenna Marbles, invisible to those over 30. Likewise,
some of the most popular ads on
YouTube dont even look like the TV
ads that Google has hoped to capture.
Its dawning on big marketers from
American Express to General
Electric that to take advantage of the social and in-

teractive nature of online they need

to forge a new sensibility, not simply
rerun TV commercials.
In a new take on its long-running Campaign for Real Beauty, for
instance, Dove launched a video on
YouTube in April that featured an
FBI-trained forensic artist sketching two portraits of women. One was
based on their own descriptions and
another on a strangers, which produced more attractive images. By
May the Unilever brands touching
three-minute video had drawn more
than 114 million views worldwide, becoming the most-viewed online video
ad ever. Its not just 30-second ads,
says Jamie Byrne, YouTubes director of content strategy. Its creating
something that people want to engage with and share with friends.
So now its up to Byrne, whose
previous job was head of YouTubes
original programming push, to make
it easy for big brands to reach YouTubes 1 billion monthly viewers.
Similar to Rozics ad-campaign boot camps in the
BrandLab, Byrne brings
companies such as PepsiCo and Johnson &
Johnson to YouTube LA
for a four-day workshop
on creating compelling
stories, videos and YouTube channels. Hes aiming to get more than 100
advertisers into the program this year, both at
YouTube LA and in a
new combo studio and
BrandLab being built in
New York.
If Byrne has his way,
the new world of brand
marketing online will look
a lot like a shoot at an unassuming neo-eclectic
house in Anaheim Hills,
45 minutes southeast of
Los Angeles. In the living
room a crew of six is flming the sixth episode of

Christopher peaCoCk for forbes

google the $20 BIllIoN PRIZe

Graces Faces, on Bobbi Brown Cosmetics I love makeup channel on

YouTube. It features Grace Helbig, a
28-year-old YouTube star whose own
self-produced channel, Daily Grace,
draws more than 2 million subscribers to her wacky takes on life. For this
new show, Helbig shows up at the
doors of fellow YouTube stars to do a
makeover.
Her subject this day is Rebecca
Black, the 16-year-old who became
an instant star in early 2011 for her
self-produced monotonous pop hit,
Friday, that years most-watched
video on YouTube. Marc Reagan,
manager of artistry at Bobbi Brown,
is showing Black how to apply various kinds of makeup. Dull barks
from a dog banished to the garage
only add to the authenticity, apparently. Helbig jumps into the frame,
bubbling with a whif of irony, You

look like an angel! For a companion

show, Touching Your Stuf, Helbig
prowls the house rifing through personal efects. In this medium you
can get your Idol moment without
paying $20 million, says Reza Izad,
whose Collective Digital Studio produces I love makeup and more than
200 other channels, such as the Annoying Orangea piece of talking citrus that heckles other fruit until they
get sliced with a knife.
Its all pretty nutty, but theres
nothing amateur about Graces Faces.
Or even overtly commercial. Bobbi
Brown isnt mentioned anywhere in
Graces Faces despite the use of its
cosmetics. Still, the company says its
happy with the 300,000 views the
channel got the frst week and the
70,000 channel subscriptions it drew
in the next two weeks. We felt like
comedic programming would be in

line with our brand personality and

would resonate with a younger audience, says Bobbi Brown President
Maureen Case. Marketers dont pay
YouTube to run the shows, but they
do pay to run lots of ads to drive people to watch them.
Google will ultimately win this
race for a simple reason: Video ads
perform better than TV spots, says
David Cohen, Universal McCanns
chief investment ofcer, based on
multiple studies his agency has
done. But TV advertising is a frictionless system, he adds, a welloiled machine. Google can play
around with Larry Pages moon
shots, one of which might eventually land, but what will pay for those
fights of fancy? Making digital display just as free of friction, something Google knows how to do. Its
just a matter of time. F
FEBRUARY 10, 2014 FORBES | 105

FOrBeS lIFe
travel

Stalins Bedtime Nightmare

A onetime Soviet showpiece, the Ukraina is now Europes poshest business hotel.
By kenneth rapoza

106 | FORBES FEBRUARY 10, 2014

Baroque meets Gothic meets Russian Imperial. Staring at this monumental structure above
the Moscow River, with its own skyline of
neon Cyrillic, you can almost hear Stings antiwar classic Russians.
But Stalin would be rolling over in his

the lobby of Moscows

radisson royal,
a.k.a. the hotel
Ukraina, where a
Soviet-era plafond
painting celebrating
the Ukrainian wheat
harvest coexists with
full-on capitalist
exuberance. Below:
Joseph Stalins fortress
of hospitality, the
Ukraina is still the
tallest hotel in europe.

StaniSlav SolntSev for forbeS (above)

heres a loud, pigeon-scattering buzz coming of Kutuzovsky

Prospekt in Moscow, like a
nest of angry wasps. The sound
draws closera shiny red Ferrari marking its turf. Beside it two women in
a white Porsche Cayenne pay it no attention.
Both turn into the luxury-car-packed parking
lot of the Radisson Royal, in former days the
iconic Hotel Ukraina. Seeing those cars here
is like seeing worlds collide.
One of Joseph Stalins Seven Sisters skyscraperssymbols of a superpower on the
risethe 34-story Ukraina was the tallest
hotel in the world for decades after its opening in 1957 and ground zero for inter-Soviet
political intrigues. And the hotel still retains a
particular throwback beauty, the style of a bygone era that stubbornly permeates Moscow:

FOrBeS lIFe travel

et glory to become the top ve-star business
hotel in Europe, according to the World Travel Awards, the kind of place that pays London
perfumer Penhaligons to patent a proprietary scent for its hallways. Scarlett Johansson stayed here last year, turning the Presidential Suite over to her entourage because it
was too large for her tastes. It seemed to suit
Halle Berry, however, and Iraqi Prime Minister Nouri al-Maliki. One thing all guests
can count on: Nisanov and Iliev arent nearly done yet.
I talk to God and Zarakh regularly about
their new investment projects at the hotel,
says the hotels general manager, Jesper Henriksen. Among other plans, theyre building
an 18,000-square-foot underground conference hall and ever more restaurants, like the
upscale Thai Blue Elephant along the Moscow River.
Russians have a need to demonstrate
and portray their greatness, muses Benjamin Sawyer, a professor of Russian history at
Middle Tennessee State University. Youve
seen it in the Soviet era, and you see it now.
At the Ukraina you can see both. The lobby
is dominated by a large-scale Socialist Realist painting with a golden hammer and sickle as the centerpiece. Its the celebration of
the Ukrainian wheat harvest, Henriksen explains. More period art and chandeliers hang
throughout the property, but theyre merely a
curiosity now. The Ukraina, Henriksen says,
is capitalism on steroids.
Indeed, and the Ukraina is positioned near
the center of the action. The view out the
windows is of Europes tallest building, the
Mercury City Tower in Moscows International Business Center, a place the government hopes will one day compete with the
securities market of Frankfurt.
Meanwhile, if the soul of the past lingers
at the Radisson Royal, it is fading into a soft
echo. If you want to wax nostalgic for a revolution while pung your Cuban Cedros de
Luxe No. 2 by Romeo y Julieta, you will be
doing it in the posh executive lounge, surrounded by unabashedly prosperous fellow guests in a city intoxicated by luxury. It
is tempting to say that the Ukraina today is a
symbol of the Russian soul, torn between its
past and its future. But maybe its really a symbol of something else entirely: the embrace of
a capitalist future with no looking back. F

treNDING
What the 54 million
Forbes.com users are talking
about. For a deeper dive go to
ForBeS.CoM/LIFeStyLe

IDEA

phone SUrVeILLanCe
old police work: follow
suspect on foot for a month
($168,000). thrifty modern
times: track him (or you)
through a mobile phone
provider ($30).
PEOPLE

the SILna BrotherS

best. Deal. ever. in perpetuity rights clause in nbas
1976 buyout of the abas
defunct St. louis Spirits has
rung up an estimated $800
million for former owners as
league nally buys them out.
COMPANY

GeorGe GoJKoviCH / GettY iMaGeS

grave if he could see the place now that God

has intervened.
By the turn of the millennium the Ukraina
had become a worn-out shadow of itself.
Then, in 2005, it was quietly acquired at
auction by billionaire developers God Nisanov and Zarakh Iliev (they share No. 34 on
Forbes Russia wealth list), who then lavished
7 billion rubles (around $241 million) on the
property, a kind of down payment on their
many planned improvements to the hotel and
its surroundings.
God and I are very proud of the Ukraina,
says Iliev. We were able to re-create this
unique monument of Russian culture and art
so that new generations will appreciate the
achievements of their predecessors.
The owners closed Ukraina and modernized it over a three-year period, reopening
in April 2010. They partnered with the hotel
rm Rezidor Group and branded it the Radisson Royalthough the old Ukraina sign is still
bolted over the front entrance and Ukraina remains the corporate logo on hotel stationery
and advertising.
The fur-coated Porsche Cayenne ladies
head inside, greeted by a doorman in a formal version of a trench coat. Then its on
through the metal detectors and the large revolving door and into a warm lobby. Elegant
as the Ukraina is, with its expanses of marble,
it somehow manages to convey a sense of cozinessits a ne place to come in from the
cold, as it were. There is also a slight air of the
surreal here in the former palace of the people. Flashy locals angle through the lobby,
mingling with buttoned-down international
businessmen, red-suited staf women in bellhop hats, gawking tourists and bodyguards
who look like the kind of people Daniel Craig
might punch out in a James Bond movie. At
one point a bewildered foreign guest emerges from the elevator in a ufy white bathrobe
and is immediately escorted back in by oor
security. It is cozy, but not that cozy.
In this new era the hotel is anked on the
left by Moscows only Rolls-Royce showroom. To the right, past boutiques selling
$500 shirts, is the Tatler Club, an outpost
of London-based Russian food czar Arkady
Novikov. It is one of ten restaurants in the vicinityor onboard the Radissons ice-crushing riverboat eetowned by Nisanov.
The Ukraina has evolved from faded Sovi-

appLe ItUneS
after ten years the itunes
store hits a brick wall, as
digital music sales drop for
the rst time. With streaming up, are downloads
headedrapidlythe way
of CDs?

FEBRUARY 10, 2014 FORBES | 107

FORBES // MARKETPLACE

TECHNOLOGY
HEALTH & FITNESS

Total Fitness In Only

Four Minutes a Day?
Preposterous, Right?
BY BRAD ANTIN

f you believe time is money, or

youd rather spend your time
doing something besides working out, you should
probably drop the old aerobic routine and start an
HIIT (High Intensity Interval Training) program.
Studies by Professor Izumi Tabata of Ritsumeikan University (creator of the world-renowned Tabata Protocol),
Professor Martin Gibala of McMaster University, and Jamie
Timmons, professor of ageing biology at the University of
Birmingham all proved that short bursts of high intensity training were actually much more efective than the long
steady-state cardio workouts of yesterday.
Te best news is that certain HIIT programs beat con-

ventional workouts for all three ftness goals: cardio, fat

burning, and maintaining muscle in only four minutes a day.
And when it comes to HIIT training, the best piece of
equipment I found was the ROM XLR8 from OC Fitness
Source.
Te frst thing you notice when you
mount the XLR8 is how solid it is.
Hand crafed in Pennsylvania, and
made from high grade 304 solid
stainless steel, its built to last and
guaranteed for life.
But while the design, engineering,
ft, and fnish are sure to impress, whats
truly amazing is the intense workout you
get in only four minutes.
Yes, four minutes!
Tis next generation exercise machine represents the
ultimate expression of engineering married to research, to
produce measurable benefts in both your health and productivity. Tink about it; what would you do with an extra
249 hours a year? Tats over six full work-weeks!
Free Resource
Learn more about the research behind this amazing ftness breakthrough. Read Perfect Fitness in 4 Minutes a Day
available free from OC Fitness Source. Just call them at:
1-800-989-2941 and ask for it.

FORBES // FRANCHISES

FEBRUARY 10, 2014

FORBES // FRANCHISES

FOR MARKETPLACE ADVERTISING, CALL 212-206-5563

THOUGHTS

FINAL THOUGHT
Johnny Carson had a good idea when he suggested that
maybe we should hold the next games in Afghanistan and
hope the Soviets pull out of that one, too.

mALcOLm FOrbes

ON THe OLympIcs
I knew there was a certain level that I could get to
within the sporting world. But as I continued with
my career, not only did I grow, but the sport grew. All
of a sudden, all of these doors opened to me. Its been
amazing. I guess I was born at the right time.
shAUN WhitE

I dont give up easily. I have

plans to be around for a while.
LiNDsEY VoNN

You will be competing against athletes from many

nations. But, most important, you are competing
against yourself. All we expect is for you to do your
very best, to push yourself just one second faster,
one notch higher, one inch further.
RoNALD REAGAN

Sport is an international
phenomenon, like science
or music. AVERY BRUNDAGE
The games of the 24th Summer Olympiad opening in Seoul,
Korea will be there largely by default. The recent history of the
Olympic Games is rich in athletic achievement, but richer still
in quadrennial political confrontation, economic loss and even
fatal violenceso much so that the Olympics had evidently
become too hot for any Western city to want to handle.
FRom thE FEB. 22, 1988 issUE oF FoRBEs

OTHer THOUGHTs FrOm THAT IssUe:

WATcH OUT, DOW JONes! Rupert Murdoch is itching to use the
Financial Times to bite of a piece of the lucrative market overwhelmingly dominated by the Wall Street Journal and its parent, Dow Jones &
Co. Says Murdoch: I dont think Dow Jones can be had. Theyll be there
forever. But I think theres room for more than one.
WILL TOys b GreAT? Helen Singer Kaplan, the noted psychiatrist
and specialist in human sexuality, believes her husband sufers from
an edifce complex. Her husband, Toys R Us founder and Chairman
Charles Lazarus, does not disagree. I like to have an expanding kind of
business, Lazarus admits. I like opening stores.

112 | FORBES FEBRUARY 10, 2014

Olympics are probably the most important thing

for Russians than any other athletes in the whole
world. Since I was a little kid and since everybody
was a little kid, their dream was playing in Olympic
Games, especially if we have a chance to represent
our country in Sochi, its unbelievable and its going
to be a great thing. ALEX oVEchKiN

The important thing

in these Olympics
is less to win than
to take part. The
important thing in
life is not the victory
but the contest; the
essential thing is
not to have won
but to have
fought well.

I may have become

a world champion
quicker than most,
but people should
look at me and
realize there are all
kinds of ways to get
where you want
to go. Because we
didnt plan it. We
just did it.

piERRE DE coUBERtiN

miKAELA shiFFRiN

SOURCES: ASSOCIATED PRESS; NBCSPORTS.COM; NYTIMES.COM; SIMPSONS CONTEMPORARY

QUOTATIONS; SI.COM; USA TODAY; THE YALE BOOK OF QUOTATIONS.

Read the story behind our performance.

100% of T. Rowe Price Retirement Funds beat their 5-year Lipper average as of 9/30/13.*

How our long-term view drives value beyond short-term noise.

A major automakers credit rating had been downgraded to junk status. The rating agencies
may have seen nothing but heightened risk, but our analysts long-term familiarity with the
company let us see beyond the market noise to improved operations and protability. We
spotted the value and invested early, before the auto companys ratings were upgraded. At
T. Rowe Price, were committed to conducting our own thorough and timely analysis, rather
than relying on the credit rating agencies alone. Its just one reason 100% of our Retirement
Funds beat their Lipper average for the 5-year period ended 9/30/13.* Past performance cannot
guarantee future results.
Visit our website to learn more about our Retirement Funds and determine whether they are
right for you. Or call your advisor, 401(k) provider, or a T. Rowe Price Specialist.

troweprice.com/retirementfunds | 1.866.417.8578
Request a prospectus or summary prospectus; each includes investment objectives, risks, fees, expenses, and
other information that you should read and consider carefully before investing.
The principal value of the Retirement Funds is not guaranteed at any time, including at or after the target date, which is the approximate
year an investor plans to retire (assumed to be age 65) and likely stop making new investments in the fund. If an investor plans to retire
signifcantly earlier or later than age 65, the funds may not be an appropriate investment even if the investor is retiring on or near the target
date. The funds allocations among a broad range of underlying T. Rowe Price stock and bond funds will change over time. The funds
emphasize potential capital appreciation during the early phases of retirement asset accumulation, balance the need for appreciation with
the need for income as retirement approaches, and focus on supporting an income stream over a long-term postretirement withdrawal
horizon. The funds are not designed for a lump-sum redemption at the target date and do not guarantee a particular level of income. The
funds maintain a substantial allocation to equities both prior to and after the target date, which can result in greater volatility over shorter
time horizons. *Based on cumulative total return, 12 of 12, 12 of 12, 12 of 12, 5 of 5, and 6 of 7 (86%) of the Retirement Funds for individual investors outperformed their Lipper average for
the 1-, 3-, 5-, and 10-year and since-inception periods ended 9/30/13, respectively. The Retirement 2010, 2020, 2030, 2040, and Income Funds began operations on 9/30/02; the 2005, 2015,
2025, and 2035 Funds began operations on 2/29/04; the 2045 Fund began operations on 5/31/05; and the 2050 and 2055 Funds began operations on 12/31/06. (Source for data: Lipper Inc.)
T. Rowe Price Investment Services, Inc., Distributor.
RDFA082135

2013 Samsung Electronics America, Inc. Samsung and Samsung Solve for Tomorrow are trademarks/service marks of Samsung Electronics Co Ltd.

West Salem High School,

2011 Samsung Solve
for Tomorrow Winners

Nurturing tomorrows
innovators starts today.
As a technology leader, we look constantly towards the future. Through
the products and solutions we create, we are dedicated to helping the next
generation discover a world of possibilities.
Thats why we created Samsung Solve for Tomorrow, a nationwide initiative
to promote science, technology, engineering, and math (STEM) education
among students in grades 6-12. A successful STEM program creates critical
thinkers, increases science literacy, and empowers tomorrows innovators.

To learn more, please visit

samsung.com/solve