International Management Accounting: May 2007

Thursday, May 31, 2007

Our Survey said...Shake it up!

To traditional pollsters, a random survey adjusted to reflect the general population is the only way to measure public opinion properly. Read original article.

First developed in the 1940s by George Gallup, the father of modern polling, random sampling requires hours of costly legwork by an army of specially trained pollsters.

But some survey companies that offer an Internet-based alternative to traditional polls are trying to make inroads, including a British one, YouGov, which plans to introduce its methods in the United States for the next presidential election.

Working with a large panel of respondents who answer a range of questions through an online questionnaire, YouGov says it can predict election outcomes and consumer preferences with greater accuracy for far less money than ever before.

To reflect a broad spectrum of opinion, the online panelists are recruited from all walks of life, and efforts are made to reach out to people who are less likely to be online, like the elderly and people with low incomes. Panelists are paid to participate — which is a big no-no in conventional polling — and their identities are validated by their home addresses and other personal details.

To be sure, traditional pollsters and political consultants do not view online surveys as scientifically acceptable. The sampling of consumer opinion tapped through an online questionnaire cannot be as random as traditional measures, they argue, and it is easier for people to misrepresent themselves and their opinions online. Another critical difference is that in traditional polls, participation is voluntary, not paid.

“Voter polling by the Internet is not yet viable,” said Joel Benenson, a Democratic pollster working for the presidential campaign of Senator Barack Obama of Illinois. “There are some uses for online polling, but it still misses out on too much of the population for us.”

Despite the strong skepticism, Internet-based survey results are likely to get some publicity during the 2008 elections, and executives from companies that conduct these surveys hope that they can use the attention to gain credibility for their methods.

YouGov, for example, has formed a partnership with Polimetrix, an online survey company based in Palo Alto, Calif., for surveys in the United States. Polimetrix, with a panel of one million people, plans to track the 2008 presidential election with a 50-state survey covering a minimum of 1,000 panelists in each state.

“State-by-state election results are an important way for us to prove that our methodology delivers accurate results,” said Douglas Rivers, a Stanford University political science professor who founded Polimetrix in 2004. “You can be lucky once, but not 50 times.”

Professor Rivers said that the margin of error for Polimetrix surveys is similar to that of polls conducted by telephone. YouGov said that its own results in recent British elections were as close or closer to the actual votes than traditional polling methods.

Mr. Benenson of the Obama campaign said that the Internet can be an effective way to test ad campaigns for specific populations, but that the variables are too great for judging the views of the general population. Polls on which public policy decisions are based still require walking the streets, said Leendert de Voogd, managing director of TNS Opinion in Brussels, one of the world’s largest polling companies.

“It is still way too early for public opinion polling to go online,” Mr. de Voogd said. “Internet polling is like the Far West, with no rules, no sheriff and no reference points.”

Among the surveys run by TNS Opinion is Eurobarometer, a survey of public opinion across Europe conducted for the European Commission since 1973.

“The decisions made on the basis of our polls are far too important to be left to an online survey,” Mr. de Voogd said. “Online polls can miss very important parts of the population.”

For YouGov, developing a balanced panel of regular respondents from all sectors of the population is a priority, said Nadhim Zahawi, YouGov’s chief executive. “We expend a lot of effort reaching older people and other demographics” of people who are less likely to use the Internet, he said.

Mr. Zahawi added that modern technology has made old-fashioned polls more cumbersome and unreliable. “Thanks to the increased use of mobile phones, the traditional pollsters face a growing problem of how to track down people at home,” he said.

In London, The Daily Telegraph, which uses YouGov’s services roughly twice a month, appreciates the ability to query a large number of people in a short time.

“They allow us to ask twice the number compared with most polls,” said Anthony King, a professor of government at the University of Essex who commissions surveys for The Daily Telegraph. “The bottom line is that they get results faster and as good or better than other polling agencies.”

But to Mr. de Voogd of TNS Opinion and other polling company executives, nothing less than classic polling methodology will deliver results. This technique calls for a country like Britain to be divided into 150 cells, or sampling points, with a starting address chosen at random for the pollsters to begin their walk.

“You cannot replace wearing down shoe leather to do good polls,” Mr. de Voogd said. “It does take money and time walking house to house, but quality has a price.”

From the starting address, the interviewer follows a random route that could resemble this: Walk left away from the first address, turning left on the first street, then count three blocks and turn right. On that block, count five houses and knock on the door of the sixth house. Ask to speak with the person whose birthday is closest to the date of the interview.

If the person is not there, the interviewer must attempt to contact that same person up to eight times or until the person declines to participate.

A separate person does a follow-up interview with 20 percent of those polled to verify that the interviews were conducted strictly according to the methodology.

The technique is different at YouGov, where a panel of 175,000 Britons is developed, nourished and surveyed. Each member of the panel, who is confirmed to fit a certain demographic category, receives points for answering questions posed — and answered — on the Internet. When enough points are accrued, the panelist receives £50, or about $99. Individual respondents may be contacted up to once every two weeks.

YouGov has also set up a partnership with a brokerage firm, Execution Limited, to analyze the impact of consumer trends on the imminent financial results of companies. This would, for example, allow a company to determine whether consumers prefer clothes this season from Gap or Marks & Spencer, a British retailer, Mr. Zahawi said.

For all these advantages, online polling cannot work in places with low Internet penetration, Mr. de Voogd said.

“Perhaps you could do an online poll in the Netherlands, where almost everyone has Internet, but that’s about it,” Mr. de Voogd said. “Only eight European countries even have half the population online.”

The problem, according to both Mr. de Voogd and Mr. Benenson of the Obama campaign, is that Internet users do not necessarily reflect a nation’s population.

“Rural voters, older voters and lower-income voters tend to be underrepresented on the Internet,” Mr. Benenson said. “By the mere fact that someone in these categories is on the Internet thus makes them unrepresentative for extrapolating views of their demographic.”

But Professor King of the University of Essex does not agree with this argument.

“There is no evidence to suggest that people who use the Internet are fundamentally different from those without it,” he said. “One mad, awful lady living in a poor neighborhood without Internet does not differ much from her mad, awful friend next door who goes online.”

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Wednesday, May 30, 2007

Oxford to Silicon Valley III

Kulveer Taggar moved to Silicon Valley in California after graduating from Oxford and working as an investment banker. His start-up is now getting ready for business, but as his third report suggests, life in the Valley is not just about work and long hours.

Read original article

Tuesday, May 29, 2007

IT PRO goes mobile

Mobizine We've created an IT PRO Mobizine for you, it's a small application that sits on your phone, and you can access IT PRO any time, even on the tube!

Cyber warfare

IMAGINE that agents of a hostile power, working in conjunction with organised crime, could cause huge traffic jams in your country's biggest cities—big enough to paralyse business, the media, government and public services, and to cut you off from the world. That would be seen as a grave risk to national security, surely? Read original article

Yes—unless the attacks came over the internet. For most governments, defending their national security against cyberwarfare means keeping hackers out of important government computers. Much less thought has been given to the risks posed by large-scale disruption of the public internet. Modern life depends on it, yet it is open to all comers. That is why the world's richest countries and their military planners are now studying intensively the attacks on Estonia that started four weeks ago, amid that country's row with Russia about moving a Soviet-era war memorial.

Even at their crudest, the assaults broke new ground. For the first time, a state faced a frontal, anonymous attack that swamped the websites of banks, ministries, newspapers and broadcasters; that hobbled Estonia's efforts to make its case abroad. Previous bouts of cyberwarfare have been far more limited by comparison: probing another country's internet defences, rather as a reconnaissance plane tests air defences.

At full tilt, the onslaught on Estonia was also of a sophistication not seen before, with tactics shifting as weaknesses emerged. "Particular 'ports' of particular mission-critical computers in, for example, the telephone exchanges were targeted. Packet 'bombs' of hundreds of megabytes in size would be sent first to one address, then another," says Linnar Viik, Estonia's top internet guru. Such efforts exceed the skills of individual activists or even organised crime; they require the co-operation of a state and a large telecoms firm, he says. The effects could have been life-threatening. The emergency number used to call ambulances and the fire service was out of action for more than an hour.

For many countries, the events of the past weeks have been a loud wake-up call. Estonia, one of the most wired nations in Europe, actually survived pretty well. Other countries would have fared worse, NATO specialists reckon.

National security experts used to dealing with high-explosives and body counts find cyberwarfare a baffling new theatre of operations. In Estonia's case, "botnets" (swarms of computers hijacked by surreptitiously placed code, usually spread by spam) swamped sites by deluging them with bogus requests for information. Called a "distributed denial of service" (DDOS) attack, this at its peak involved more than 1m computers, creating traffic equivalent to 5,000 clicks per second on some targets. Some parts were highly co-ordinated—stopping precisely at midnight, for example. Frank Cilluffo, an expert formerly at the White House, says that the attack's signature suggests that more than one group was at work, with small-time hackers following the initial huge sorties.

Most countries have been complacent about guarding information infrastructure. In America, a congressional committee for computer security has given failing grades to many of the federal bodies it scrutinises. The Department of Homeland Security supposedly has a "cybersecurity czar" but the throne has not yet found a steady occupant.

Private firms have had more experience in fighting off internet attacks. Organised crime gangs, often from Eastern Europe, extort money from gambling and pornography sites by using botnets to make them unreachable. Last week a large DDOS attack hit YLE, Finland's public broadcaster. This week Britain's Daily Telegraph was hit. No political or financial motive was apparent. A Romania-based hacker led the Finnish attack.

Firms of varying competence and credibility peddle technical solutions. The typical protection against DDOS attacks is to buy lots of extra computers and bandwidth to handle an unexpected spike in traffic. "Mirroring" content across several servers means the cyber-attackers must hit many more targets simultaneously before disrupting anything. A system's architecture helps too: Estonia's open approach, with its built-in flexibility and resilience, and co-operation between the state, business and academics, worked well. Mr Viik hopes this will deter those trying to build cyberdefences on a military or state monopoly model.

Counterattacks are possible, but tricky. Security firms' staff can pose as hackers to infiltrate cybergangsterdom. This used to be a mere battle of wits. Now there are real fears of violence. "It's changed now that big money is involved. It is not beyond the realm of imagination that someone might be targeted," says Mikko Hyppönen of F-Secure, an internet security firm.

But technology and sleuthing offer only a partial fix. The real question facing industrialised countries is how to create a legal environment that counts cyberaggression not as a kind of practical joke, but a grave breach of the legal order, akin to terrorism, international organised crime, or aggression against another state.

NATO is rethinking its position. It is designed to protect members against physical attack. When Estonia appealed for help it could only send an observer to Tallinn to monitor the attacks. For now, informal alliances are more useful. Internet companies in friendly countries such as Sweden headed off many of the attacks before they even reached Estonia. Ken Silva, the security chief at VeriSign, which runs big chunks of the internet's domain-name system, advocates defences at the core of the network to tackle malicious data-packets before they reach their target. But finding agreement among the world's privately run internet networks is hard.

The urgent need is for an international legal code that defines cybercrimes more precisely, and offers the basis for some remedies. The Council of Europe, a continent-wide talking-shop that is the guardian of many international legal conventions, has a treaty on cybercrime dating from 2001. Acceptance has been partial. From overseas, America and Japan have signed up; Russia so far hasn't.

The International Telecommunication Union, which unites all 191 countries that use the world telephone system, hopes to take the lead in pushing for a global convention against cybercrime. Alexander Mtoko, its expert on cyberwarfare, says the key issue is anonymity: "We are in an industry where there is no control, no rules, no identities—it's the wild west. But for critical applications you have to know who you are dealing with." NATO experts agree. At a minimum, any international cybercrime convention is likely to oblige internet service providers to co-operate in blocking DDOS attacks coming from their subscribers' computers.

Yet the underlying problem is the internet itself. Wreaking havoc with anonymous telephone calls is hard. The internet's inherent openness allows hackers to hide. Yet that also helps make it cheap and innovative. Some countries may be more willing than others to trade freedom for security.

Mr Viik thinks a new global cybersecurity treaty may be reached by 2012. But victory will never be complete, thanks to the asymmetry between cat and mouse, notes Bruce Schneier, a security expert. "It is easier to come up with a new attack than with a new defence," he says. The strongest defence, says Mr Cilluffo, may be resilience: "the ability to reconstitute quickly, recover and absorb.

Battling for global leadership

Landov Read original article

TRADERS cannot resist a bet, even on their own fate. Amid a bidding war over Chicago's derivatives exchanges, the US Futures Exchange, also based in the Windy City, has launched a “binary” contract which allows speculators to take a punt on whether the IntercontinentalExchange (ICE) can snatch the Chicago Board of Trade, America's oldest derivatives exchange, from the grasp of the biggest, the Chicago Mercantile Exchange (CME). Until recently ICE, a fast-growing electronic upstart from Atlanta, had the edge. Then the CME upped its offer to $9.8 billion and its chances of success—as measured by the binary contracts—leapt to over 70%.

The shoot-out in Chicago is part of a pattern of bold deals that are reshaping financial exchanges. In April the New York Stock Exchange (NYSE) completed its merger with Euronext, itself formed from the union of the Paris, Amsterdam, Brussels and Lisbon bourses. Germany's Deutsche Börse, which had wanted Euronext, has consoled itself by agreeing to buy ISE, an American options market, for $2.8 billion. And having failed to conquer the London Stock Exchange (LSE), NASDAQ is now eyeing up other exchanges on both sides of the Atlantic.

Financial exchanges are a booming business. This reflects the growth of capital markets, which expanded at twice the rate of global GDP from 1993 to 2004, according to McKinsey, a firm of consultants. As stock-, derivatives and bond markets get bigger, investors are shifting money into an array of tradable financial products.

Furthermore, cheaper-to-operate electronic markets are spreading at the expense of traditional “open outcry” trading floors. Hard-trading hedge funds have added to the explosion of activity. The value of shares traded worldwide increased by 28% last year, to $69.8 trillion. The unprecedented surge in competition has caused many exchanges to seek safety in size. Indeed, takeover speculation has sent the prices of shares in exchanges soaring (see chart 1).

But exchanges are also under pressure from regulators and clients. New rules on both sides of the Atlantic—America's Regulation NMS and the European Union's MiFID directive—will require trades to be routed through the market offering the best price (or best combination of price and robustness). They also seek to improve transparency. NMS was introduced earlier this year and MiFID is supposed to be implemented by November.

Another relationship

The pressure from clients is a response to a decade of transformation. One by one, exchanges have shed their mutual status to become for-profit, publicly traded entities. This has “obliterated” the old set of relations between marketplaces, their users and their users' clients, says Benn Steil, a financial-markets expert at the Council on Foreign Relations.

When exchanges were broker-owned utilities, they charged just enough to tick along. Innovation was not a priority. Now, they serve shareholders who want to maximise revenue. That means streamlining trading, developing new products and selling them widely. However, the picture is a complicated one. Many brokers continue to own stakes in exchanges and, in the more competitive environment, all of them have benefited from lower prices, new technology and product innovation.

Yet one sign that brokers sometimes see today's exchanges as foes is that they have been stepping up their investments in any new marketplace that promises to lower their costs. ICE, which was founded seven years ago, is backed by powerful Wall Street firms, including Goldman Sachs and Morgan Stanley. BATS Trading, a one-year-old electronic market based in Kansas City, has attracted investment from Lehman Brothers, Merrill Lynch, Morgan Stanley and Credit Suisse. It has cornered more than 10% of the trading in NASDAQ-listed stocks, forcing its bigger rival to cut prices for some clients.

Another way in which banks and brokers are circumventing the big exchanges is through “internalisation”: dealing with each other directly. There are now dozens of “dark pools” of liquidity, in which banks and institutional investors anonymously trade large blocks of shares. Computer software trawls through brokers' order books looking for matches. When they are found, both sides are alerted. Banks have long traded directly with each other through their “block desks”, but the use of pools enhances this and technology makes it easier for the pools to link up. This week, for instance, Credit Suisse and Instinet, a broker, signed a mutual access agreement for their dark pools in Japan. An estimated 10-15% of all stock trading is now done in the dark. As the head of one exchange puts it: “The liquidity is no longer in the marketplace. It's on trading desks.”

European dream

Alternative trading networks are most common in America, where they have helped to push the cost of trading relentlessly lower. Joshua Carter, an analyst with Goldman Sachs, expects the average transaction fee among the American exchanges he follows to fall by 2.4% annually over the next five years. In Europe, by contrast, upstarts have yet to make an impact. At least nine ventures have been launched, but the national exchanges still enjoy near-monopoly status in their own markets. As a result, prices have stayed high—as much as ten times the amount charged by American exchanges.

That may be about to change. For one thing, NYSE Euronext has vowed to shake up pricing in Europe. The NYSE has the lowest all-in trading costs for wholesale investors, according to a recent study by Elkins/McSherry, a consultancy. If it can bring some of that efficiency to Euronext, Frankfurt and London will have to respond with price cuts of their own.

Moreover, the MiFID directive will make it easier for new entrants. One is Project Turquoise, a pan-European trading platform being set up by a group of large banks that control more than 50% of the order flow in European equities. Interestingly, it is by adopting the old mutual model ditched by most traditional exchanges that Turquoise hopes to compete.

Some exchanges saw this as a bluff by their customers. But Turquoise has recently signed up the Depository Trust & Clearing Corporation, which handles trades for American exchanges, as its clearing house. It will soon unveil its trading platform, according to a spokesman. It has also launched a venture, known as Boat, that will try to loosen the exchanges' grip on the lucrative market-data business. NYSE Euronext earns as much revenue from selling data as it does from trading equities in Europe. Turquoise's backers predict it could quickly cut the cost of buying and selling European equities by half, which would encourage more trading. But not everyone is convinced that the seven banks will continue to collaborate successfully, given their longstanding rivalries.

Deutsche Börse and the LSE have so far failed to cut their prices by more than token amounts. “It has long been clear that they will only act when they absolutely have to,” says Bob Fuller, head of Equiduct, a new, pan-European stock exchange that hopes to be up and running by next February. He says the coming revolution will be to share dealing what the low-cost airlines have been to air travel in Europe. An Equiduct trade will cost a maximum of €0.90 ($1.20) and take a mere 10-15 milliseconds. It has already signed up 1,300 stocks from 30 countries.

One response of the big exchanges has been to buy electronic networks that pose a threat, as the NYSE did with Archipelago and NASDAQ did with INET. This also brings in technology and fresh thinking. John Thain artfully used the Archipelago deal to revamp the New York exchange, where he is chief executive. He saw that it could be a “catalyst for cultural change”, injecting entrepreneurial spirit into a stuffy 215-year-old institution, says Nelson Chai, NYSE Euronext's chief financial officer (who came from Archipelago).

The big exchanges have begun to compete more vigorously with each other. The NYSE and NASDAQ used to operate in largely separate worlds, the NYSE in blue-chip stocks and NASDAQ in technology firms. Now they fight for every transaction. NASDAQ's share of trading in NYSE-listed stocks has risen to over 15%. In an effort to poach listings, NASDAQ has even begun offering a service that finds prospective board members for its companies.

Transaction factories

Whereas the NYSE has the stronger brand, NASDAQ likes to think it has an edge in technology. Robert Greifeld, NASDAQ's chief executive, believes that the future pecking order “will be determined not by whether your market trades round the clock, as some think”—he may have Mr Thain in mind—“but by how successful exchanges are at creating efficient transaction-processing machines. It's not sexy, but it's crucial.” Once you have invested in a trading platform, the cost of running extra transactions over it is minimal. So the secret will be versatile systems that can support high volumes and a variety of securities, from stocks to options.

That is easier said than done. Some within NYSE Euronext remain to be convinced that equities, derivatives and other products can be squeezed onto a single trading platform. Even if such a platform can be designed, the big exchanges are finding it harder to stay ahead of the gadflies, thanks to the falling cost of technology. Whereas the software and hardware needed to set up a trading system used to cost hundreds of millions of dollars, it can now be assembled for $10m or less. BATS's systems cost a mere $7m to set up and run in its first year.

This helps the small fry to assemble top-notch technology and make money from renting it to others. OMX, a Nordic exchange, has done this in neighbouring markets. The Montreal Exchange, hardly a colossus, has successfully marketed its impressive SOLA trading system to bourses in Asia. Boston's options exchange already uses it. “The new and the small are today's agents of change,” says Philippe Loumeau, Montreal's chief operating officer and a former Paris bourse executive.

Even the most robust systems will be tested as never before when trading volumes rise. The delays seen at the NYSE and other exchanges on February 27th—when a wall of sell orders sent the Dow tumbling and overloaded messaging systems—demonstrated how quickly a snowfall can turn into an avalanche when so much trading is generated by computers. Larry Tabb, a consultant working with exchanges, points out that messages sent by brokers (or their trading programs) in the American market have risen from 25,000 to 300,000 per second in a little over two years.

Derivative thinking

Exchanges are racing to stay ahead. But upgrading or merging their systems will not be enough in itself. With margins on stock trading dragged down by falling trading costs, exchanges know that their healthy return on equity—26% a year on average for American bourses between 2001 and 2005—will be hard to sustain. So they are looking to new markets, particularly Asia, and new products, such as bonds and derivatives, to keep shareholders happy.

Asia's attraction is its spectacular growth (see chart 2) privatised. Many of these firms now prefer to list at home. Trading on the region's stockmarkets jumped by 37% last year.

American and European exchanges are desperate to do deals in Asia, but there is not much on offer. The NYSE has gone furthest, signing alliances with Tokyo and India's National Stock Exchange. But these fall far short of mergers. The Japanese exchange is not even planning to demutualise until 2009. Most of the deals struck so far in Asia are “little more than agreements to be friends”, says Mr Tabb. Still, there is hope that China will look for a partner for its exchanges, once it has finished the more urgent task of mending its banks.

The move into derivatives has produced more tangible results. The NYSE got the London-based LIFFE futures market through its merger with Euronext. It also recently set up an options exchange, which already has more than 11% of the American market. If Deutsche Börse gets its way, it will add ISE to its well-regarded Eurex derivatives market. NASDAQ plans to open its own options market, if it does not buy one (it has held talks with the Philadelphia exchange, which has had some success switching from stocks to options). As with the fight in Chicago, derivatives are fast becoming the bloodiest front in the battle for global dominance.

The attraction of moving into futures, options and swaps is that derivatives markets tend to command higher valuations than those that trade only shares. There are a number of reasons for this. Growth has been spectacular: trading on the CME, for instance increased at an average annual rate of 36.4% in 2000-05, compared with 14.5% on the NYSE. Hedge funds are attracted to derivatives as a way to manage risk and punt with borrowed money, whether economies are stagnating or booming. Whereas growth in stock trading is constrained by the number of firms listed—not to mention regulations such as Sarbanes-Oxley—derivatives are limited only by the capacity of financial eggheads to concoct new contracts.

André Cappon of CBM Group, a financial consultancy, points to two further factors. One is scarcity value. There are only a dozen or so derivatives exchanges of any size. The other is the firm grip such bourses have on their own products. Whereas a stock exchange can poach trade from rivals, futures markets have ownership rights over many of the contracts that trade there, thanks to licensing agreements with the owners of the underlying indices, such as the S&P 500 and the NASDAQ 100. That said, new exchanges are free to introduce contracts that are similar, but not identical, to existing ones—as ICE did so successfully with oil futures.

The derivatives exchanges with the tightest lock on trading are those that have their own clearing houses such as the CME and Eurex, since they can offer clients cheaper and swifter settlement. Such vertical integration is controversial and may not last. In the past the European Commission has hinted it might force Deutsche Börse to shed its clearing operations, although the pressure seems to have eased for the moment.

One other reason for exchanges to own their own clearing houses, says Antonio Riera, of the Boston Consulting Group, is so that they can offer the back-office services their users are clamouring for. Collateral management, for instance, involves things like cross-margining, in which offsetting exposures are lumped together, allowing investors to reduce the overall amount of capital needed to be set aside to cover positions. It means more bets can be made with a given dollop of capital.

Moreover, because of their expertise in designing, trading and settling complex instruments, exchanges that own their own clearing houses feel confident that they can wrest some business away from the giant over-the-counter (off-exchange) derivatives markets. The CME has had some success with its centrally cleared markets for foreign exchange and swaps, for instance, though both ventures are at an early stage. Mr Carter thinks that, as contracts become standardised, exchanges could grab a big chunk of the market for credit-default swaps, worth a massive $29 trillion in notional value and traded mostly privately. This is likely to antagonise the banks that currently dominate that market.

Spotting who will come out on top in all this is not easy. If the CME succeeds in taking over the Chicago Board of Trade, it will move far ahead of the competition—so far, indeed, that some are calling for the deal to be blocked on antitrust grounds. (The CME counters that its competition comes from the over-the-counter market, as well as other exchanges.) If ICE wins, the industry's balance of power will shift back towards Wall Street. The CME might then turn its attention to another target, such as the New York Mercantile Exchange, a commodity-futures market.

Nor is Deutsche Börse's offer for ISE certain to succeed. The hedge funds that own half or more of the German group would prefer to see cash returned to shareholders. One of them, Atticus Capital, with a stake of over 11%, has expressed fury at an “emerging pattern of ignoring shareholder concerns and input”. Meanwhile, some of the hedge funds that own perhaps 10-20% of the LSE—which has already seen off four suitors—are quietly nudging it to seek a better offer. Exchanges, it would seem, have cut their old links to brokers only to see them replaced by an even more demanding set of owners.

The pressure to do deals is not coming from poor performance. Indeed, the LSE beat expectations with a 55% rise in operating profits before exceptional items for the year to March. Instead, it is being driven by a fear of being left behind and a belief that exchanges, parochial for too long, need to catch up with the rest of the globalising financial industry.

Mr Thain thinks the future belongs to a handful of exchanges offering a basket of products—equities, bonds, exchange-traded funds, futures, options and more—across several time zones. He is probably right. And with companies worth $30 trillion trading on its platforms—four times more than its nearest rival—NYSE Euronext is well placed to become one of the giants. But would you bet on it? Time, perhaps, for the US Futures Exchange to cook up more of those binary futures.

Disruption, internet services and a whole new ballpark

EVER since Bill Gates disrupted IBM's dominance of the computer industry and made Microsoft the world's biggest software company, he has feared being disrupted in turn. That is why in 2005 he hired Ray Ozzie, a veteran software guru. On arrival at Microsoft Mr Ozzie wrote a memo, called "the internet services disruption", in which he detailed the threat (Google), the trend (toward free web services) and its new revenue model (online advertising). By buying aQuantive, an online-advertising agency based in Seattle, Microsoft has begun to implement Mr Ozzie's anti-disruption strategy in earnest. Read original article

Last week's deal is nonetheless unusual for Microsoft. At $6 billion in cash, it is more than four times bigger than its previous big acquisitions (of Navision and Great Plains, two software companies, in 2002 and 2001). In "frothiness" it resembles only Microsoft's investments in cable and telecoms firms during the late 1990s, says Matt Rosoff at Directions on Microsoft, an independent research firm.

It might therefore look like a somewhat desperate response to Google which, as the most popular search engine and biggest seller of online advertising, has been upstaging Microsoft. In April Google increased its market share of searches to 55%, whereas Microsoft, in third place after Yahoo!, slipped to 9%, according to Nielsen/NetRatings, a market-research firm. Google's lead in keyword-related advertising, thanks to its huge network of affiliated websites, is even larger. Last month Google extended that lead into display advertising by outbidding Microsoft to buy DoubleClick for $3.1 billion.

That deal set off a round of panic buying. Yahoo! bought Right Media, a smaller display-advertising firm, and WPP, a more traditional advertising conglomerate, snapped up a firm called 24/7 Real Media. Microsoft initially responded—with a certain cheek, given its own record as a monopolist—by objecting to the DoubleClick deal on antitrust grounds, arguing that Google was becoming "dominant". But it then bid high for aQuantive.

Buying aQuantive poses some problems, however. Its largest unit, Avenue A | Razorfish, is an agency that designs websites and online-marketing campaigns. Its second business, called Atlas, serves advertisements and sells tools that other agencies can use to design and track campaigns, and that website owners can use to make the most out of their inventory. Its third business consists of two advertising-syndication networks, called DRIVEpm and MediaBrokers. This is aQuantive's smallest business, but the one most relevant to Microsoft's strategy. Combining these businesses with Microsoft presents conflicts of interest. The same company will, for example, now own an agency that buys web space on behalf of advertisers and one of the biggest sellers of such space—MSN, Microsoft's web portal.

But Microsoft feels that it had no choice. Google appears intent on offering ever more of the things that used to be sold as software—such as word processing or spreadsheets—as free online services. This week there was talk of a tie-up between Google and Salesforce.com, a firm that offers business software as an online service and thus also competes with Microsoft.

Mr Ozzie counters that Google and Salesforce have it wrong by thinking that the world will shift entirely to "software as a service". Instead, he says, the future lies in "software and a service"—ie, in coupling web-based services with local software. He recently introduced a set of technologies called Silverlight, which will allow such hybrid software to be built. Such software will also involve advertising—and demonstrating how this might look during Mr Ozzie's launch speech was a creative type from Avenue A | Razorfish.

Could Google oust Nielsens?

By Scott Shaffer

After Google announced their TV Ads beta test, I pondered what could happen if Google could offer TV advertising in the form of "pay-per-view".

In addition to "pay-per-click" ads on the PC, what could happen if they could measure the eyeballs on the TV and the mobile phone and deliver relevant and timely ads based on actual eyeballs.

Why couldn't Google become the realtime, dynamic rating corporation? They are missing one component though. What does Google need in order to make it happen?

Peter Suciu from TechCrunch has a summary of Mobile TV Viewing and provides the clues to what Google needs to make it happen :

a company that specializes in measuring TV viewing
will provide figures on just how many viewers of video programming and of video ads there are on mobile handsets today
this information could help provide the U.S. TV networks with the data they need as they look at advertising possibilities on the mobile phone platform

Sarkozy and a surprisingly good start

DURING the campaign, his opponents called him "dangerous" and "brutal". They even threatened riots if he won. But France's new president, Nicolas Sarkozy, has in his first week disarmed critics with an artful mix of political inclusiveness, policy creativity and symbolic renewal. Read original article

It is hard to overstate the impact of the choice of Bernard Kouchner, a man of the left and a hugely popular humanitarian champion, as foreign minister (see article). Had Mr Kouchner been lured into a minor ministerial job in a government of the right, the bridge-building symbolism would still have been clear. By giving him foreign affairs, France's public face to the world, Mr Sarkozy has deftly undercut his leftist opponents.

Mr Kouchner is one of four men of the left in the government of François Fillon, Mr Sarkozy's choice as prime minister. The new Europe minister, Jean-Pierre Jouyet, is an old family friend of the defeated Socialist candidate, Ségolène Royal. Eric Besson, a junior minister for public policy attached to Mr Fillon's office, acted as Ms Royal's chief economic adviser earlier in her campaign. Martin Hirsch, who gets a junior anti-poverty portfolio, was head of Emmaüs France, a charity for the homeless. And on top of these four, Hervé Morin, once a right-hand man to François Bayrou, the centrist presidential candidate, is the new defence minister.

With seven women in a cabinet of 15, only two cabinet ministers who went to the elite Ecole Nationale d'Administration, and the first Frenchwoman of North African origin in a top post (Rachida Dati, the justice minister, whose mother was a cleaning lady), Mr Sarkozy has stunned those who expected an ideological president. He has put merit before loyalty. And he has responded to a public desire for bipartisanship that was expressed in the strong first-round vote for Mr Bayrou.

The public seems to like it. Fully 66% of Socialist voters told a poll this week that they approved of Mr Sarkozy's left-wing appointments. The Socialist Party has fumbled for a response, managing only to evince sourness and confusion. It evicted Mr Kouchner from the party. François Hollande, its boss, was left looking vaguely absurd by asking voters to back Socialists in June's parliamentary election because "the French need to feel represented."

Mr Sarkozy has been quick to stamp his mark and spring surprises elsewhere. This week, he invited in France's ecological protest groups, more used to taking their grievances to the streets than to the Elysée Palace. Alain Juppé, the new ecology minister, who converted to greenery during a year teaching in Canada after his suspension from public life for political corruption, symbolically staged a press conference under some trees.

For his part, Mr Fillon has announced that the unions have until September to do a deal over minimum service on public transport during strikes; and until December to agree to a new, single job contract meant to break down the labour market divide of insiders versus outsiders. A law giving universities more autonomy will be passed by an extraordinary parliamentary session in July, after the June election. Tax cuts are expected in the new government's first budget, due in September.

Other appointments also point to a possible new approach. By giving Christine Lagarde, former chief of a big American law firm, the agriculture ministry (traditionally a conservative bastion) Mr Sarkozy may be preparing the ground for a more flexible attitude to farm subsidies. An interim review of the European Union's common agricultural policy is due in 2008. Although she was careful to say this week that agriculture would continue to have a "strategic" role, Ms Lagarde also said that France could not continue its posture of "intransigence" for ever.

Mr Sarkozy's carve-up of ministerial portfolios reflects his own priorities. The finance minister, Jean-Louis Borloo, a popular former social-affairs minister who regenerated the industrial town of Valenciennes when he was its mayor, has taken a chunk of the jobs ministry. The idea is to persuade the French, weaned on subsidised job creation, that economic growth is the only sure source of employment opportunities. Similarly, Eric Woerth, the new budget minister, has inherited the public service, formerly a separate ministry, pointing to cuts in France's overweight bureaucracy. Mr Sarkozy has promised to replace only one in two retiring civil servants.

Even the new style is a break with Jacques Chirac—and not just in the presidential jogging outings and celebrity-style photos of the complex Sarkozy family. As president in charge of foreign and defence policy, he has already visited Berlin and Brussels. But he also dropped in on an aircraft factory and a hospital in his first few days, showing that he has no intention of leaving domestic policy to the prime minister. It is striking that he has opened up foreign jobs to the left and centre, but kept those that deal with domestic reform in the hands of his closest advisers.

Not all the changes will be smooth. Mr Borloo and Mr Woerth will have equal cabinet status, so it is not clear which of them will have more say over fiscal policy, central to the Sarkozy reform agenda. On social matters, the perils of broad-based government emerged after Mr Hirsch raised objections—only to withdraw them—to Mr Sarkozy's plan for a non-reimbursable charge for visits to the doctor.

Implementation of these plans will have to wait for the new parliament. Two-round legislative elections take place on June 10th and 17th. Mr Sarkozy seems well placed to win a hefty majority. One poll this week, by TNS-Sofres, gave his UMP party a solid 40% of the vote, with 28% for the Socialists and only 15% for Mr Bayrou's centrist Democratic Movement. This would translate into 365-415 seats, out of a total of 577, up from the 359 the UMP has now. Mr Bayrou's party, bereft of many deputies who have defected to Mr Sarkozy, would fall to single figures.

In "Testimony", the book he wrote as a pre-campaign manifesto, Mr Sarkozy argued that "the biggest mistake, which is common, is to undertake reforms sequentially. First you do pensions, then education, and then finally welfare or immigration. With this system, you often end up stopping after the second reform, exhausted by the battles over the first." If he wins such a huge parliamentary majority, Mr Sarkozy will have the strongest possible mandate to carry out a big burst of reform—and to face down the street protests that seem sure to greet it.

Sunday, May 27, 2007

Is the nine-to-five redundant?

Worker under stress

The out-of-hours economy is growing, a study suggests

The traditional nine-to-five day is becoming a thing of the past, according to a new survey. Read original article

But is this a victory for flexible working, or a sign that Britons are being kept at their desks longer than ever?

Top Ten employment shortages by country

Manpower has released the results of a survey of nearly 37,000 employers in 27 countries. The study found that the global average shows 41% of them are having trouble hiring the people they need. Read more

United Kingdom

1. Skilled Manual Trades
2. Administrative Assistants & PAs
3. Engineers
4. Sales Representatives
5. Management/Executives
6. Laborers
7. Accounting & Finance Staff
8. Chefs/Cooks
9. Machinists/Machine Operators
10. Supervisors

Total Number of Respondents: 1,805
Employers indicating difficulty filling positions: 34%
Employers indicating no difficulty filling positions: 66%
Margin of error: +/- 2.4%

* In this survey, Skilled Manual Trades refers to a broad range of job titles that require workers to possess specialized skills, traditionally learned over a period of time as an apprentice. Examples of skilled trades jobs are: electricians, bricklayers, carpenters, cabinetmakers, masons, plumbers, welders, etc. Where possible, these jobs are listed in order of highest demand for each country.

Battle of Britain’s Free Newspapers

A distributor handing out The London Paper in Piccadilly Circus. The free paper, published by Rupert Murdoch’s News Corporation, says it has a circulation of about 502,000. A rival’s circulation is put at 400,000. Read original article

British tabloids typically send out paparazzi to poke into the lives of the royals, soccer coaches and supermodels. Lately, however, two free newspapers fighting a circulation battle on the streets of London have turned the cameras on each other.

One of the papers, London Lite, sent a video recently to media buyers that showed distributors ostensibly dumping 2,900 copies of its rival, The London Paper, into garbage bins. The London Paper responded by saying that it had pictures of dumped copies of London Lite.

The accusations matter to advertisers because newspaper ad prices are largely based on circulation. The British Audit Bureau of Circulations, an industry group, said that it would investigate.

The London Paper has a circulation of about 502,000, according to the audit bureau, in contrast to 400,000 for London Lite. But analysts say it is hard to know how many of those copies are actually read, because The London Paper and London Lite are distributed by street hawkers who try to press as many copies as they can into the hands of evening commuters.

“It’s all very well giving people a paper, but you then have no idea what they do with it,” said Jane Wolfson, head of nonbroadcast media at the London office of Initiative, a media buying agency.

The distribution method has also irked municipal authorities, who want London Lite and The London Paper to contribute to their recycling costs.

London free sheets are not the only newspapers that have faced circulation problems. In the United States, for example, a number of traditional papers bought by subscribers or sold on newsstands have been punished by the American audit bureau over the last few years for inflating their reported sales figures, sometimes through dumping.

One way around the problem might be for advertisers to look more at a newspaper’s readership and to pay less attention to circulation, said Piet Bakker, a journalism professor at the University of Amsterdam who tracks the free newspaper market. Readership is measured through surveys asking consumers which newspapers they regularly read. So papers that are dumped, by consumers or distributors, would not show up.

Because London Lite and The London Paper started publishing only last September, readership data is not available yet. Given the uncertainties, Ms. Wolfson said, advertising in free papers might be more expensive than in traditional London tabloids like The Sun, at least under the ad industry’s standard price comparison gauge, the cost of reaching 1,000 readers.

Ms. Wolfson said that from an advertiser’s perspective, the free papers had made up for that possible shortcoming through the “creativity of their executions.” For instance, they sometimes wrap articles around unusually shaped ads, to try to draw readers into the advertising.

With more than 26 million free newspapers circulated daily across Europe, Mr. Bakker said, the publishers are increasingly battling not just established papers that are sold, but also each other, for readers and advertisers. In Denmark, a hypercompetitive market for freebies, one of five such papers shut down in April.

In London, the battle between The London Paper and London Lite features the added element of Fleet Street rivalry. London Lite is owned by Associated Newspapers, publisher of The Daily Mail and The Evening Standard, while The London Paper is published by the News Corporation, which also owns The Sun and The Times.

As the battle between the free newspapers has heated up, each has taken out ads in trade publications aimed at media buyers and ad executives.

London Lite said that it had hired a former Scotland Yard detective inspector, Philip Swinburne, to uncover dumping of The London Paper.

“Now, how much does The London Paper charge you for advertising?” the ad asked media buyers. “D. I. Phil might call that daylight robbery.”

The London Paper countered by accusing Associated Newspapers of mounting a “dirty tricks campaign to destroy competition in the London newspaper market,” adding that it had dismissed the “rogue distributors” who dumped the copies.

Newspaper journalists sometimes joke grimly about how quickly their work ends up wrapping fish and chips or lining the cat box. For advertisers, who pay good money to cozy up to readers, even those ignominious ends must seem better than the reported fate of some free papers in London.

Betting on the future of low-profile print publications.

He understands the value of these regional newspaper franchises. A few people on the stock market forgot that.

As Rupert Murdoch trains his sights on Dow Jones & Company, owner of The Wall Street Journal, another veteran of the British newspaper wars is betting on the future of lower-profile print publications.

Last week, while Mr. Murdoch wooed reluctant Dow Jones shareholders and as the financial information providers Thomson and Reuters were explaining their case for a possible merger, David Montgomery was quietly seeking to buy control of the Dutch publisher Koninklijke Wegener.

Koninklijke Wegener’s newspapers, including De Twentsche Courant Tubantia, may not have the global name recognition of The Wall Street Journal, but they attracted a bid of up to 806 million euros, or nearly $1.1 billion, from Mr. Montgomery, through Mecom, the London company that he heads.

In a series of deals since 2005, Mecom has acquired more than 100 local and regional newspapers in the Netherlands, Germany, Poland, Denmark, Norway and Ukraine at a cost of more than 2 billion euros.

Mr. Montgomery, a onetime copy editor who was chief executive of the Mirror Group of newspapers in the 1990s, is going after smaller targets than Mr. Murdoch or Samuel Zell, the Chicago investor who recently bought the Tribune Company, owner of The Chicago Tribune and The Los Angeles Times.

But his acquisition spree reflects similar trends, analysts say. After several years of handwringing about readers and advertisers defecting to the Internet, some investors see value in old-fashioned print publishers — at least, if their share prices have fallen enough to create bargains.

“There’s a lot of money sloshing around, and things are not as bad as people suggest,” said Gavin O’Reilly, president of the World Association of Newspapers, during a presentation last week to journalists and financial analysts in London.

Mr. Montgomery, who started Mecom in 2000, is bullish on the industry despite — or perhaps because of — the often-cited threat of the digital media revolution.

“We are in the most exciting stage of development not only in the history of our business but also the entire history of print,” he said last week in a phone interview. “Newspapers have totally underestimated the main resource they have, of content gathering and content projection.”

So far, newspapers in Europe may have lost fewer readers to the Internet than their counterparts in the United States, analysts say.

Last year, circulation of paid-for newspapers rose 0.7 percent in Europe, in contrast to a 2 percent drop in North America, according to the World Association of Newspapers, which is based in Paris.

But like North American newspapers, European papers have been hurt by a more sluggish advertising market.

Over the last five years, newspaper ad revenue has risen only 11 percent in Europe, compared with 16 percent in North America and 21 percent in Asia, according to the newspaper association.

Harsh business conditions have created an opportunity for investors like Mr. Montgomery, a native of Northern Ireland. In 2005, Mecom and a partner, the New York investment firm Veronis Suhler Stevenson, bought control of the owner of Berliner Zeitung, becoming the first foreign owners of a major German newspaper.

Mr. Montgomery’s reputation as a cost-cutter in Britain preceded him, and his investment in Berlin prompted protests from the paper’s journalists.

The editor who led the revolt, Uwe Vorkötter, has since been replaced, and Mecom has moved to take full control of Berliner Verlag, the paper’s parent company.

Mr. Montgomery has said he wants to raise profit margins across the company, in part by cutting costs. But that may be more difficult on the Continent than in Britain, where labor protections are weaker, analysts say.

“Montgomery still has to prove he can do that in Europe like he did in the U.K.,” said Oskar Tijs, an analyst at Kempen Research in the Netherlands.

By keeping costs low, some publishers in Britain have turned regional papers into a lucrative business. One of these companies, Johnston Press, has enjoyed profit margins of more than 30 percent in recent years.

On the Continent, margins are typically tighter, in part because costs are higher. Employees at Koninklijke Wegener, for instance, receive 70,000 euros (about $95,000) in annual pay and other benefits, considerably more than their British counterparts, Mr. Tijs said.

Still, Mr. Montgomery is not the only European publisher who is sanguine about the prospects of Continental newspapers.

Axel Springer, the German publisher of the tabloid Bild, recently started a paper in Poland, and it plans to introduce a tabloid this year in France, one of the most depressed European newspaper markets in recent years. And Metro International and other publishers of free newspapers have expanded rapidly across the Continent; two-thirds of the 40 million free dailies circulated globally are distributed in Europe, according to the newspaper association.

Mecom is not wedded to any one type of publication. It owns or holds majority stakes in paid-for broadsheets like Berlingske Tidende in Denmark and Rzeczpospolita in Poland, as well as tabloids and free papers.

One of the advantages of owning large clusters of newspapers, Mr. Montgomery said, is the economies of scale. Mecom has been able to eliminate overlapping administrative jobs, he said, and to buy newsprint and other supplies in bulk.

“Scale is not just a defensive mechanism through cost reductions,” he added, “but also part of an offensive strategy, in terms of generating new lines of revenue.”

Consolidation has helped small publications with limited resources develop an online presence, he said. And Mecom is also prodding its papers to develop new business lines that tap existing subscribers, selling them wine or financial services, for instance.

Despite moves to make the papers more businesslike, Mr. Montgomery insisted that editors, not business managers, maintained control over content. But he said journalists “have to understand the commercial realities of a changing newspaper environment.”

Mr. Montgomery said he would continue to look for opportunities to expand, primarily in Northern European markets with fragmented newspaper ownership.

Mr. Tijs said: “I think he understands the value of these regional newspaper franchises. A few people on the stock market forgot that.”

Weak anti-fraud measures earn bank hefty fine...

The Financial Services Authority has fined the BNP Paribas bank £350,000 because of its ineffective anti-fraud measures. Read original article

Recently a senior employee at the bank transferred £1.3 million out of clients' accounts without permission.

According to the FSA, the bank did not have a review procedure for transactions over £10,000 from clients' accounts.

Margaret Cole, FSA director of enforcement, said: "BNP Paribas' failures exposed clients' accounts to the risk of fraud. This is unacceptable particularly with the overall increase in awareness around fraud and client money risks.

"Senior management must make sure their firms have robust systems and controls to reduce the risk of them being used to commit financial crime."

Other firms should take the action as a warning that the FSA is "stepping up its game" in this area and firms should as well, Ms Cole added.

The FSA warned the BNP Paribas in August 2002 that its methods needed improvement.

However, the bank took no steps towards changing the systems in place.

Meanwhile, the FSA recently found no evidence of mis-selling of the policies used to contract out of the State Second Pension (S2P) since 1988.

A three-year investigation of the quality controls and sales practices used by firms led the financial watchdog to conclude that there was no evidence of misdemeanours.