Securing Very Important Data: Your Own(NYTimes, 10/7/07)

October 7, 2007
Re:Framing
Securing Very Important Data: Your Own
By DENISE CARUSO
AS long as we are willing to relinquish some personal data, Web applications have long allowed us to create virtual identities that can conduct most of the social and financial transactions that typify life in the real world.
But the newest generation of these services is starting to collect and store far more than just the standard suite of identity data — name and address, phone, Social Security or credit-card numbers — that populates the databases of banks and credit-card processors. They increasingly store information, generated by us, that is directly linked to those virtual identities.
And users are loving them.
For example, the start-up Mint.com won this year’s TechCrunch award for its Swiss Army knife approach to personal financial management. In exchange for customers uploading their account information and allowing sponsors to offer them specialized services, Mint will connect nightly to their credit-card providers, banks and credit unions. Then it automatically updates transactions and accounts, balances their checkbooks, categorizes their transactions, compares cash with debt and, based on their personal spending habits, shops for better rates on new accounts and credit cards.
A powerful project management and collaboration tool called Basecamp allows teams to store online entire project management plans, including performance targets, to-do lists, files, collaborative documents and messages. Provided by 37Signals L.L.C., based in Chicago, Basecamp has more than a million users around the world, including me.
Another site, Dopplr, from a company of the same name based in Finland, is still in its beta-test phase. It lets users upload and share their travel itineraries with a group of “trusted fellow travelers.” The site can connect with Facebook friend lists, and in September it announced that it had opened an invitation-only social network to business travelers from 100 leading companies and international organizations, including Google, I.B.M. and Nokia.
This type of sensitive, sometimes proprietary information was once locked up on hard drives or in file cabinets far away from anything resembling a global or even a local distribution network. Yet none of the users flocking to these services seem perturbed that they have relinquished personal control over this data to companies that, even with the best of intentions, may not be able to keep it safe.
The incidence of data theft — from wallets to data breaches, computer viruses or Dumpster diving — is soaring. This year alone, the security of nearly 77 million Americans’ records has been breached, according to the Identity Theft Resource Center in San Diego, nearly a fourfold increase over 2006.
Governments around the world are passing and enforcing laws that increasingly hold businesses financially accountable for avoidable data losses. Just last month, the TJX Companies, which owns T.J. Maxx, Marshalls and other retail stores, made a settlement offer, subject to court approval, to victims of a huge data breach, in which 45.7 million customers’ credit- and debit-card data was exposed to identity thieves.
As a result, some security experts are starting to ask whether the “identity data-for-services” business model, which is the engine for virtually all e-commerce companies, is a fair trade — not just for consumers, but for business as well.
In response, they are coming up with new protocols and frameworks for collecting, using and governing identity data. Given that virtually all businesses today collect and use these kinds of data, they aim to shift the status quo in ways that could help companies both improve their reputations with customers and avoid the mounting legal liabilities that now face companies that lose control of customer data.
“The myth is that companies have to know all this information about you in order to do business with you,” said Drummond Reed, vice president for infrastructure at Parity Communications, an identity technology company in Needham, Mass. “But from a liability perspective, the less I know about my customers the better.”
Parity is sponsoring a number of open software projects to shift more control to the users whose identity data is at risk. One of the most intriguing is called the CloudTripper Project, which is developing a way for individuals to “take their data with them” as they traverse the Web, just as they keep their wallets and checkbooks with them as they move around in the real world.
Another project, the Identity Governance Framework, aims to help organizations comply with national and international regulations, including the Sarbanes-Oxley Act and the Health Insurance Portability and Accountability Act. It establishes a new approach for securely sharing and auditing sensitive personal information, and has been widely embraced by major enterprise software vendors as well as providers of identity technology. While such projects are helping to close security gaps that should have been addressed long ago, at least one security expert says that such efforts are trying in vain to solve a social problem with technology.
“We’re in a situation where business holds all the cards,” said Mike Neuenschwander, vice president and research director of identity and privacy strategies at the Burton Group, a technology research and advisory service based in Midvale, Utah. “Businesses put the deal in front of the consumer, they control the playing field and the consumer doesn’t have any say in how the deal plays out.”
ONE way to change this, he said, is to make people more like organizations.
To this end, Mr. Neuenschwander and his colleagues have floated the intriguing concept of the L.L.P.: the Limited Liability Persona. This persona would be a legally recognized virtual person in which users could “invest” the financial or identity resources of their choosing.
Once their individual personas are created, consumers would be able to use them as their legal “alter ego,” even in financial transactions. “My L.L.P. would have its own mailing address, its own tax ID number, and that’s the information I’d give when I’m online,” Mr. Neuenschwander said. Other benefits include the ability for “personas” to limit their financial exposure in ways that individuals cannot.
“When you enter into a relationship with a company and give them your personal information, you’re at tremendous risk — and they aren’t,” he said.
“In the U.S., certain kinds of personal information aren’t treated like property at all. It’s very difficult to sue someone for misuse of personal information. And even if you do, they can never give you back your mailing address, your Social Security number or your DNA, for that matter.”
But if a company loses or tampers with an L.L.P’s data, “the law allows me to sue them because it’s corporate information,” Mr. Neuenschwander said. “It’s digital-rights management,” he added, referring to the access control technologies used by publishers and other copyright holders to limit use of digital media, “only you’re acting on behalf of your own organization.”
Mr. Reed of Parity agreed. “Companies use digital-rights management technology to protect their data from us,” he said. “But they’d be better off if we used it to protect our data from them.”
Denise Caruso is executive director of the Hybrid Vigor Institute, which studies collaborative problem-solving. E-mail: dcaruso@nytimes.com.

The Unsung Heroes Who Move Products Forward (NYTimes, 09/30/07)

September 30, 2007
Ping
The Unsung Heroes Who Move Products Forward
By G. PASCAL ZACHARY
AT first blush, the iPhone from Apple, the new microprocessor family from Intel and the ubiquitous Google search engine have nothing in common. One is a gadget, one is an electronic part and one is a service.
Yet all of these products — much acclaimed for their creativity — depend on obscure process innovations that, while highly complex and lacking glamour, are an essential part of establishing a winning edge in commercial electronics. Indeed, the success of Apple, Intel, Google and scores of other technology companies has as much or more to do with their process innovations as the products that inspire loyalty among fans and admiration from foes.
First, a definitional detour. Processes are the stuff in the proverbial “black box,” the alchemy unseen by consumers or the inelegantly termed “end users” who buy computers, cellphones, cameras and all manner of digital devices and services.
Snazzy products are the stuff of legends, romanticized by “early adopters” and skewered by neo-Luddites. Yet while these products bring glory to companies, novel processes are often more important in keeping the cash registers ringing.
The proof of this proposition is that while companies often spend millions to advertise and market new product designs and innovations, they guard intensely the details of their process innovations.
Consider the question of Google’s greatest business secret. Is it the algorithms behind its search tools? Or is it the way it organizes vast clusters of computers around the globe to answer queries so quickly? Perhaps predictably, Google won’t disclose the number of computers deployed in its vast information network (though outsiders speculate that the network has at least 450,000 computers).
I believe that the physical network is Google’s “secret sauce,” its premier competitive advantage. While a brilliant lone wolf can conceive of a dazzling algorithm, only a superwealthy and well-managed organization can run what is arguably the most valuable computer network on the planet. Without the computer network, Google is nothing.
Eric E. Schmidt, Google’s chief executive, appears to agree. Last year he declared, “We believe we get tremendous competitive advantage by essentially building our own infrastructures.”
Process innovations like Google’s computer network are often invisible to the public, and impossible to duplicate by rivals. Yet successful companies realize that maintaining competitive advantage depends heavily on sustaining process innovations. Great process innovators often support basic research in relevant fields, maintain complete control over the creation of every aspect of a product and refuse to rely on outside suppliers for important components. Certainly, there are exceptions to these patterns, but even companies like Apple that buy essential processes on the open market nevertheless invest in gaining a working knowledge of the technologies and an understanding of their future arc.
Intel treats its process innovations as a competitive weapon, striving to create a “new generation” every two years. That enables the company’s chips, even if there were no changes in their design, to perform better and cost less to make.
Consumers are usually blind to the importance of novel processes. Even when they learn about these innovations, they tend to think only of the product itself.
“The average consumer doesn’t care what processes are used,” says Mark T. Bohr, an Intel physicist who oversaw what is arguably the most important advance in decades in the technology for making microprocessors, the brains inside computers and other digital devices.
Faced with ever-faster chips that threatened to explode into flames, Intel searched desperately for new processes to make microprocessors. Enter hafnium, a rare metal. Designers led by Mr. Bohr in Hillsboro, Ore., chose hafnium to replace silicon oxide, the venerable insulator in chips and a material used in making glass. Mr. Bohr also helped to identify new materials, whose identity Intel is keeping secret, for the crucial transistor “gates” that sit atop a chip’s insulators.
On Nov. 12, Intel will begin shipping its first chips using the new processes. Gordon E. Moore, Intel’s co-founder, recently declared that the hafnium-and-gate process innovations should allow his so-called Moore’s Law, whereby chips grow ever faster and less expensive, to hold true for some time.
Despite the enormity of the achievement, Mr. Bohr is relatively anonymous, even within Intel. “The work of process development comes second to creating new designs for chips,” he says. Not surprisingly, when Intel starts shipping the new chips, neither the hafnium nor the gates innovations will be trumpeted as selling points. Rather, Intel will emphasize how customers can benefit from using the chips.
If process innovations are unheralded, consumers may misunderstand the nature of technological change.
“Process innovation tends to receive less attention from the informed public for the same reason that incremental innovation tends to receive too little attention: it is more difficult to encapsulate in a press release or photo opportunity,” says David C. Mowery, a business professor at the University of California, Berkeley, and a scholar of technological change.
“Process innovation, even more than most product innovations, also tends to realize its economic potential through a lengthy process of incremental improvement based on learning by doing and other types of learning,” he added. “So ‘breakthroughs’ in process engineering are, if anything, even rarer than in product innovation.”
As a result, process gurus are resigned to playing in the shadows, leaving fame, if not fortune, to others. John Feland, human interface architect at Synaptics Inc. in Santa Clara, Calif., knows this enduring truth of invention. He helps design arrays of sensors that drive the touch screens in the newest cellphones like the Prada from LG. Such touch screens are earning raves from consumers, yet Mr. Feland is essentially an invisible man.
“My job is to make our customers look like heroes,” he says philosophically. Then he sums up the special role played by fellow members of the process tribe: “We are like Q to James Bond.”
G. Pascal Zachary teaches journalism at Stanford and writes about technology and economic development. E-mail: gzach@nytimes.com.

At Starbucks, Songs of Instant Gratification (NYTimes, 10/01/07)

October 1, 2007
At Starbucks, Songs of Instant Gratification
By MATT RICHTEL
Like that song you hear playing at Starbucks, but just cannot wait until you get to a computer to download the song?
Starting tomorrow at certain Starbucks stores, a person with an iPhone or iTunes software loaded onto a laptop can download the songs they hear over the speakers directly onto those devices. The price will be 99 cents a song, a small price, Starbucks says, to satisfy an immediate urge.
“For the customer it’s an instant gratification,” said Ken Lombard, president of Starbucks Entertainment. “You’ll hear the song, be able to identify what it is and download to the device.”
And it’s just the tip of the iced latte. Businesses are using new technologies to enhance the impulse buy so consumers can purchase their temptations whenever they want, wherever they are, before the urge passes.
Amazon.com pioneered one-click shopping to speed purchases, whether made at home or on an employer’s time. But the development of more capable gadgets, coupled with mobile payment mechanisms, is allowing people to buy not just media, like music, videos and ring tones, but also hard goods, on the go.
This evolution follows the popularity of debit, gift and refill cards, which allow buyers to fill accounts and make cashless payments. Payments made with those cards exceed the payments made by cash and check, according to the Nilson Report, a credit industry newsletter, which used Commerce Department data.
Credit card companies in particular are experimenting with ways to turn the phone into a conduit for card purchases and to offer incentives, like coupons, for mobile purchases. Visa, for instance, is developing technology that will allow people to wave their cellphones in front of a reader to pay for items under $25 without a signature. (Swiping the card through a reader, an innovation several years old, is apparently too much of an impediment.)
The idea is no waiting, cashier or other buying barrier — aside from the charges that show up on a credit card or cellphone bill. And there, along with challenges revolving around security and business models, lies a chief rub.
The mobile-payment technology can create a desensitizing and seductive purchase experience, said James Katz, director of the Center for Mobile Communications Studies at Rutgers University.
“The more people think about a purchase decision, the more likely uncertainty creeps in,” he said. “One frame of mind is you’re helping create in consumers’ mind a source of pleasure, and enabling them to fulfill that pleasure,” Mr. Katz said of the mobile impulse temptation. Another is that “they’re preying on our materialistic souls.”
For now, the new Starbucks service’s preying capabilities will be limited. The concept is being introduced in around 600 cafes in New York and Seattle only, though Starbucks, based in Seattle, and Apple, of Cupertino, Calif., plan to offer the service in other major cities late this year and in 2008.
Impulsive music lovers will have to sign onto the cafe’s Wi-Fi network to discover what song is playing over the Starbucks speakers. With a few taps, users can download the song onto their iPhones (which double as an iPod), or the new Apple iPod Touch with its wireless connection. The 99-cent charge will appear on their phone bills.
Other coffee drinkers who have iTunes software loaded on their notebook computers can do somewhat similar things. When they open their laptops while sitting in a participating store, a Starbucks icon will pop up, giving them a chance to click and buy.
Starbucks said it was the first retail outlet to offer such capability. It is certainly not on the cutting edge of the downloadable music experience. For more than a year, Verizon Wireless has offered technology that lets consumers buy songs over the air. Other carriers, including Sprint and AT&T, allow over-the-air downloads.
Roger Entner, a communications industry consultant with IAG Research, which advises mobile carriers, said Sprint and Verizon were each offering around 60 million songs a month for downloading.
Verizon and others also allow users to buy video, pictures, wallpaper, ring tones and games — none of that revelatory anymore. Verizon also experimented with music fans’ buying concert tickets over the phone, then turning that phone into a bar code for concert entry.
John Harrobin, senior vice president for digital media at Verizon, said, “The fact that when you want something, you can get it instantly through the phone is something we believe in.”
Mr. Entner said the sticking point on the growth of the phone as a full-service payment device had less to do with technology, which is adequate, and more to do with business questions. He said that all the potential participants — phone carriers, retailers, credit card companies, music labels — wanted a cut of the action, and it was not clear how the money for over-the-air payments would be divided.
For example, he said, the mobile-carrier profits for downloadable songs were about 3 cents a song, which he deemed “razor thin.”
Visa, which takes a piece of the action of credit purchases and would love to see buying opportunities blossom, introduced a new microcard last week. It works like a credit card, but it is small enough to fit onto a key chain. At merchants equipped with wireless payment systems, consumers wave the card to pay; purchases under $25 do not require a signature.
Visa is also rolling out a “mobile payment platform.” That’s marketing-speak for software that not only lets consumers pay by waving their phones, but also lets merchants beam coupons to their customers on the go. For instance, Visa has experimented at its headquarters in Foster City, Calif., with sending employees coupons for discounts in the company cafeteria.
The plan got a strong reception by consumers, said Pam Zuercher, Visa’s vice president for innovation.
“Think about this as an extension of direct mail, but you have a much lower chance of leaving your coupon at home,” she said, adding that the technology “provides the ability to influence experiences within a retail location.”
Ms. Zuercher said Visa planned a test of its mobile payment system with its partner, Wells Fargo. It is already testing the system in South Korea and Taiwan. (Some of the mobile payment systems are more advanced overseas, where wireless networks are faster, allowing more complex services. But, Mr. Entner said, the United States may wind up in the forefront because credit payments are so tied up with consumer culture).
The prospect of coupons by phone, or location-based advertising, might give shivers to people already distressed by seeing every nook and cranny of public space crammed with commercial messages.
They are getting trade-offs. Services including the Internet and e-mail, like television before it, are subsidized by advertising and those who respond to it.
“One of the great steps forward for denizens of the online world was the development of one-click buying,” Mr. Katz from Rutgers said. Before that technology, “there was a vast amount of evidence that a small percentage of people who started the checkout process actually completed it.”
In the mobile world, the barriers fall further. No checkout aisle, cashier or money changing hands. Just an impulse — click and a buy.

Given Fewer Coupons, Shoppers Snub Macy’s (NYTimes, 09/29/07)

September 29, 2007
Given Fewer Coupons, Shoppers Snub Macy’s
By MICHAEL BARBARO
It was the boldest stroke in American retailing in decades. The Macy’s chain completed its takeover of 410 department stores around the country a year ago and renamed them all Macy’s, vowing to lure shoppers with innovations like price scanners in the aisles and exclusive fashions from the likes of Oscar de la Renta.
So far, the grand plan is not working.
A big reason? Macy’s forgot a basic law of human nature: Shoppers love a deal.
For years, the department stores that Macy’s acquired, like Marshall Field’s and Filene’s, had relied on 15- and 20-percent-off coupons to alert people, like a Pavlovian bell, that it was time to shop. As part of its reinvention, Macy’s tried to wean shoppers off them.
But the tactic backfired. With fewer coupons to clip, thousands of people from Washington to Los Angeles turned their backs on Macy’s.
Now the company’s chief executive, Terry J. Lundgren, one of the brightest stars in American retailing, is pleading mea culpa — and backtracking. Macy’s pledges to issue plenty of coupons for the holiday shopping season.
It’s a lesson that other companies have also learned the hard way. Since the first coupon was issued for the Coca-Cola Company in 1894, companies have occasionally tried to take them away — and suffered. Cuts by the Ruby Tuesday chain in 2004 hurt sales. Procter & Gamble’s effort in 1996 led to boycotts.
Even in this era of Internet shopping, it seems, Americans are wedded to a low-tech form of marketing: the dotted-line clip-out coupon.
For years, Karen Gundling, 41, a communications consultant in Parma, Ohio, relied on 20-percent-off coupons from Kaufmann’s in Cleveland to buy shoes. Then Macy’s took over. “Now that Macy’s doesn’t do coupons, I don’t buy shoes there,” Ms. Gundling said.
Curbing coupons was not the only change that upset shoppers.
In 2005, Macy’s, then known as Federated Department Stores, acquired May Department Stores, which owned 11 storied chains around the country, like Foley’s in Houston and Robinsons-May in Los Angeles. Last year, Macy’s changed all the store names, a move that upset loyal shoppers. Mr. Lundgren said the new chain, with 800 stores and $27 billion in sales, would be big enough to secure exclusive product lines from big names — as it did, with Elie Tahari and Martha Stewart — then blanket the country with advertisements to let shoppers know about it. To complete the makeover, Macy’s reduced its reliance on midprice clothing brands like Levi’s and Dockers.
Mr. Lundgren tried to create a new kind of national department store that would no longer compete head-to-head with lower-priced competitors like J. C. Penney and Kohl’s. But the changes amounted to “too much, too fast,” Mr. Lundgren acknowledged in an interview. It turns out that men, in particular, are creatures of shopping habit. They want to go to the local department store and find the Dockers where they have always been.
Mr. Lundgren said that abruptly curtailing discounts like coupons was Macy’s biggest misstep, contributing to four consecutive months of falling store sales this spring. Macy’s stock has dropped more than 40 percent since it bought the May stores. Mr. Lundgren said his plan “will take longer than we had planned or expected,” adding that “the strategy is crystal clear, and I know we are on the right track.”
Despite their dowdy image, coupons remain a huge business. In 2006, companies issued 279 billion of them, or roughly 1,000 per person, up 13 percent in four years, according to NCH Marketing Services in Deerfield, Ill.
They remain, above all, a psychological tool, granting shoppers the seemingly illicit — and gratifying — right to snag a bargain. (Never mind that stores typically set prices high and budget for the “discounts.”)
“If you have ever watched a person at a cash register with a handful of coupons, you can see they are so proud,” said Jan S. Slater, a professor of advertising at the University of Illinois. “They love taking their coupons out, counting them, showing them off, watching as the tab on the cash register falls.”
But retailers dislike coupons, which train shoppers to wait for deep discounts, making it harder to sell full-price merchandise. Moreover, Mr. Lundgren said, “in our research, customers told us, ‘It’s complicated and confusing and I don’t what the exact price is.’”
So Macy’s, which still sends coupons by mail to loyal charge card users, said it issued about 30 percent fewer coupons for the general public at the former May stores in spring 2007 than in the previous spring.
An analysis by a professor at Stetson University College of Law in Florida, Mark D. Bauer, suggests the pullback may have been more extensive; he counted a 63 percent drop in Washington, at the former Hecht’s chain, and 59 percent in Cleveland, at the former Kaufmann’s.
Macy’s had reason to think it could pull off the cuts. Before the merger, it had trimmed coupons at its own stores by about 25 percent. But that reduction was gradual, taking five years. After the sudden cuts at former May stores, customers did not congratulate the chain for simplifying their shopping; they groused about seemingly higher prices.
Nancy Lauffenberger, 39, a medical administrator outside Chicago, said she counted on the 20-percent-off coupons from Marshall Field’s, which allowed her, a working mother, to splurge on luxuries like a $625 leather coat.
“For me, it was a very expensive coat,” she said, “but with the coupon, it was a great price.” These days, Ms. Lauffenberger shops more at stores like Kohl’s.
Macy’s tried to head off the problem. In Chicago, sales clerks explained to customers that they would save more using their new Macy’s charge cards, which can be programmed for discounts. “The shoppers didn’t believe it,” said Frank J. Guzzetta, who runs the former Marshall Field’s stores. “They wanted their coupons back.”
So Macy’s is dropping plans for deeper coupon cuts this fall, though executives will still hand out fewer than chains like Marshall Field’s did before the merger. And Macy’s is undoing some other changes — ordering more Levi’s and Dockers, for instance.
Lisa Ellis, 41, a bank employee in Euclid, Ohio, said she largely gave up on Macy’s after it bought Kaufmann’s. “But if Macy’s used more coupons,” she said, “I’d go back.”
Karen Ann Cullotta and Christopher Maag contributed reporting for this article.

Software That Fills a Cellphone Gap (NYTimes, 09/23/07)

September 23, 2007
Prototype
Software That Fills a Cellphone Gap
By MICHAEL FITZGERALD
VANU BOSE is the son of a fabled engineer, but he garnered no mercy when he presented his big idea at a technical conference in 1996. Mr. Bose’s graduate work at M.I.T. involved using software to handle the radio function in a cellular phone. He remembers that after he successfully demonstrated his technology, an audience member stood up and dismissed it with: “Congratulations! You’ve just invented the world’s most expensive cellphone.”
Mr. Bose, a personable man, shrugged off the criticism. He expected that over time, the increasing processing speed of chips would make such phones much cheaper.
But he didn’t want to make the phones. He wanted to remake the wireless base station, the guts of the world’s cellular networks, by changing them from complex systems that incorporate hardware, software and the electronics needed for wireless communications into systems run primarily with software.
Most of us don’t think of our cellphones as radios, but they are. Any wireless device uses a radio. Figuring out a way to operate the radio with software has obvious potential advantages: for one, it’s easier and cheaper to upgrade software than it is to send field technicians to cellular towers to add components. And a software-based radio — the industry calls it software-defined radio — could handle multiple cellular signals at the same time, the way a computer can run a browser, a word processor and a spreadsheet all at once.
So, in theory, letting cellular companies accommodate new spectrum or technologies by doing software upgrades could expand coverage and services while possibly reducing what we pay for them.
That promise prompted Mr. Bose to start a company in 1998, while he was still in graduate school. He called it Vanu Inc. (The family surname was already in use: his father, Amar, had founded the Bose Corporation in 1964.)
The company bumped along primarily on military contracts for developing software-based radio devices. (The armed forces typically use different kinds of radios but need them all to talk to one another, which has prompted two large research projects, Speakeasy and the current Joint Tactical Radio System.) Then, as cheap semiconductor technology caught up with the needs of his software, he was able to pursue commercial markets. He now has several customers for the company’s AnyWave wireless base stations for cellphone networks.
Mr. Bose is not the first to pursue converting radios to software. The idea had been developed in the late 1980s, and Joseph Mitola, an engineer now at the Mitre Corporation, a research organization, is credited with being the first to discuss an effective software radio architecture, at a conference in 1991.
Well-established companies like Motorola and Ericsson now use elements of software-defined radio for their base stations. But Mr. Bose was the first to come to market with software that could handle multiple networks with the same equipment.
Software radio appears to offer an elegant solution to what has been a vexing problem: how to have a single handset, like a cellphone, communicate across multiple networks.
For instance, the G.S.M. standard, for global system for mobile communications, is used broadly in Europe, and most notably in the United States by AT&T. But it does not work with phones built for the C.D.M.A. standard, for code division multiple access, that is used in the United States by Verizon and others and is popular in South Korea.
So, as a Verizon cellphone user, when I spent several weeks in England this summer, I was instructed to rent a phone from Vodafone. It took several attempts over several days to get my calls to forward from my Verizon number, and I paid for two phones for the better part of a month.
Mr. Bose’s software makes it possible for the network to switch modes automatically. While the AnyWave Base Station still includes components like wireless transmitters and receivers, the company ultimately would like to focus on selling its software to other businesses that build base stations.
That would position Vanu to become “the Microsoft of the wireless base station industry,” said Bruce Sachs, a general partner at Charles River Ventures, which recently put money into an $8 million funding round for Vanu.
Mr. Sachs says that the market for base stations is worth billions of dollars by itself and that as cellular operators upgrade over time to technologies like WiMax or H.S.D.P.A., for high-speed downlink packet access, wireless markets worldwide will be open to Vanu.
There is also potential for markets that are just emerging, like that for “femto cells.” (In mathematics, a femto is a quadrillionth.) The cells will plug into a power outlet and bolster cellular coverage for a home or business. But that is in the future: Ian Cox, an analyst at ABI Research, projects that the market for software-based radio won’t start to boom until 2012.
THE present is more modest, and it rests in rural markets like De Leon, Tex., home of Mid-Tex Cellular, Vanu’s first commercial customer. Toney Prather, the chief executive of Mid-Tex, said he was intrigued by the technology because the company makes a good deal of its money from roaming charges for people who aren’t already its customers, and Vanu would give him a way to add more networks without having to add expensive base stations.
He first used Vanu’s software to upgrade his existing network to G.S.M., and in the next few weeks he intends to add C.D.M.A.
Rural cellularization may not sound like much, but Mr. Bose is a follower of Clayton M. Christensen, the management guru, who also happens to serve on Vanu’s board. Mr. Christensen told him that the best place to start a new business is where there isn’t yet an established market. So Vanu is starting a project, its largest yet, in Alaska, and is involved with I.B.M, on a demonstration for a project to bring villages in India onto the cellular network.
No longer, then, is Vanu Bose building the world’s most expensive cellphone. In fact, he may help make the cellphone possible everywhere.
Michael Fitzgerald is a Boston-area writer on business, technology and culture. E-mail: mfitz@nytimes.com.

Company Will Monitor Phone Calls to Tailor Ads (NYTimes, 09/24/07)

September 24, 2007
Advertising
Company Will Monitor Phone Calls to Tailor Ads
By LOUISE STORY
Companies like Google scan their e-mail users’ in-boxes to deliver ads related to those messages. Will people be as willing to let a company listen in on their phone conversations to do the same?
Pudding Media, a start-up based in San Jose, Calif., is introducing an Internet phone service today that will be supported by advertising related to what people are talking about in their calls. The Web-based phone service is similar to Skype’s online service — consumers plug a headset and a microphone into their computers, dial any phone number and chat away. But unlike Internet phone services that charge by the length of the calls, Pudding Media offers calling without any toll charges.
The trade-off is that Pudding Media is eavesdropping on phone calls in order to display ads on the screen that are related to the conversation. Voice recognition software monitors the calls, selects ads based on what it hears and pushes the ads to the subscriber’s computer screen while he or she is still talking.
A conversation about movies, for example, will elicit movie reviews and ads for new films that the caller will see during the conversation. Pudding Media is working on a way to e-mail the ads and other content to the person on the other end of the call, or to show it on that person’s cellphone screen.
“We saw that when people are speaking on the phone, typically they were doing something else,” said Ariel Maislos, chief executive of Pudding Media. “They had a lot of other action, either doodling or surfing or something else like that. So we said, ‘Let’s use that’ and actually present them with things that are relevant to the conversation while it’s happening.”
The company’s model, of course, raises questions about the line between target advertising and violation of privacy. Consumer-brand companies are increasingly trying to use data about people to deliver different ads to them based on their demographics and behavior online.
Pudding Media executives said that scanning the words used in phone calls was not substantially different from what Google does with e-mail.
Still, even some advertising executives were wary of the concept.
“We can never obtain too much information from the targets, and I would love to get my hands on that information,” said Jonathan Sackett, chief digital officer for Arnold Worldwide, a unit of the advertising company Havas. “Still, it makes me caution myself and caution all of us as marketers. We really have to look at the situation, because we’re getting more intrusive with each passing technology.”
Mr. Maislos said that Pudding Media had considered the privacy question carefully. The company is not keeping recordings or logs of the content of any phone calls, he said, so advertisements only relate to current calls, not past ones, and will only arrive during the call itself.
Besides, Mr. Maislos said, he thought that young people, the group his company is focusing on with the call service, are less concerned with maintaining privacy than older people are.
“The trade-off of getting personalized content versus privacy is a concept that is accepted in the world,” he said.
Mr. Maislos founded Pudding Media with his brother, Ruben. Each had spent several years doing intelligence work for the Israeli military. Before Pudding Media, Ariel Maislos ran a broadband company called Passave, which he sold in May 2006 to PMC-Sierra, a maker of computer chips for telecommunications equipment, for $300 million. Richard Purcell, a former chief privacy officer at Microsoft, is an adviser to Pudding Media, Ariel Maislos said.
To give the ads greater accuracy, Pudding Media asks users for their sex, age range, native language and ZIP code when they sign up. For now, the company is running ads that are sold by a third-party network, but Pudding Media plans to also sell its own ads in a few months.
Advertisers pay based on how often a user click on their ads, and a spokeswoman said the rates were similar to the cost-per-click prices in Google’s AdSense network. Pudding Media plans to add other payment models, like charging for each ad impression or by the number of calls an ad generates to the advertiser.
As the company’s software listens in on conversations, it filters out explicit words in determining which ads to select, so that content and ads will not be shown with those inappropriate words. Pudding Media would not elaborate, beyond saying that these were “keywords with profanity and things you wouldn’t want a 13-year-old to hear.”
While the calling service only works through computers for now, Mr. Maislos said he saw the potential to use it with cellphones. The company is offering the technology to cellphone carriers to allow their customers to enjoy free calls in exchange for simultaneously watching contextually relevant ads on their screens. Callers can try Pudding Media at www.thepudding.com, dialing any number in North America. Because the service has so far been in a quiet beta test, the company would not say how many people have tried it so far.
Pudding Media is also trying to sell the technology to Web publishers and media companies that would like to offer readers free calls and content related to those calls. A news site, for example, could show only its own articles and ads to people as they talked to friends.
Mr. Maislos said that during tests he noticed that the content had a tendency to determine conversations.
“The conversation was actually changing based on what was on the screen,” he said. “Our ability to influence the conversation was remarkable.”

Guessing Murdoch’s Strategy for The Journal (NYTimes, 8/1/07)

August 1, 2007
News Analysis
Guessing Murdoch’s Strategy for The Journal
By RICHARD SIKLOS
So now what?
Since the News Corporation’s offer for Dow Jones & Company was made public three months ago, Rupert Murdoch’s business career, character and motives have been dissected in an effort to predict what he might do as the owner of The Wall Street Journal.
Despite how long Mr. Murdoch has wanted The Journal, he may not have a set playbook, according to interviews and more recent conversations with several people in Mr. Murdoch’s camp, who spoke on the condition they not be identified.
“There’s a very low probability that there’s a grand plan,” said one person close to Mr. Murdoch.
But based on his history, there is little doubt that Mr. Murdoch will directly aim at luring both readers and advertising away from The New York Times and The Financial Times, The Journal’s closest rivals. His strategy will probably include aggressively undercutting advertising and investing heavily in editorial content — particularly in Washington and international news — absorbing losses at first to win the longer-term war.
At its most ambitious, Mr. Murdoch’s vision for Dow Jones would establish The Journal as the rival to The Times in setting the daily news agenda of the country.
The vision has a business corollary: by broadening The Journal’s influence beyond pure business readers, Mr. Murdoch wants to reposition it as not just the world’s leading financial newspaper, but the world’s leading business journalism source for consumers.
The paper has already tried this with softer service features and its Saturday edition. Reorienting the newspaper further for consumers would fit with two other aspirations Mr. Murdoch has. One is to build his nascent Fox Business Network, which begins in 30 million United States homes this October, into a viable contender with Bloomberg Television and CNBC, which have much larger subscriber bases both at home and abroad.
The Journal already has a deal to provide news content exclusively to CNBC, an agreement that the News Corporation discovered is ironclad until 2012. Any move to tie The Journal to the new Fox business channel will require disentanglement. In the meantime, the business channel, which is scheduled to begin operation on Oct. 15 under the direction of the Fox News chief executive and chairman, Roger Ailes, is being readied on the presumption that it is a stand-alone business.
Mr. Murdoch’s second and overarching vision is to resurrect the newspaper industry by integrating print and video online and building brands around the world.
Part of that involves tapping into Dow Jones’s Web properties — it owns not just The Journal but also the investing weekly Barron’s, Dow Jones Newswires and the consumer-focused Web service MarketWatch.com — to create an online platform for all of the company’s newsgathering operations around the world. Another part would be using the company’s Fox and Sky News video outlets as sources of video content on the new sites.
Mr. Murdoch has shown in the past that he is willing to experiment, even knock over some sacred cows. In an interview with The Times earlier this year, Mr. Murdoch mused aloud about The Journal, saying, for instance, that he did not have time to read longer articles during the week and might like to swap out the paper’s Pursuits section on Saturdays with a glossy magazine. More recently, he told Time magazine that he was not sure about the offbeat front-page stories known internally as “A-Heds” that are a plum for reporters to write.
A more immediate change might be felt on the Web side, where The Journal has stood out among newspapers by commanding more than 900,000 paid subscribers.
Executives at the News Corporation are keen to explore whether more of that content ought to be offered free online to increase the audience and attract advertising, while keeping subscribers by offering more premium services. A more open WSJ.com would be able to attract more advertising, but also potentially distribute that advertising across the News Corporation’s online footprint.
Mr. Murdoch’s purchase could mean more immediate changes on the business side of Dow Jones. When he repurchased The New York Post in 1993, he focused on raising the paper’s circulation by cutting the cover price of the paper several times and handing out copies free.
“If he hadn’t come in, there wouldn’t have been a New York Post,” said Jerry Fragetti, senior vice president for media and operations at Newspaper National Network, who worked as chief financial officer of The Post in the 1980s and as an executive for the News Corporation in the early 1990s.
Mr. Murdoch believed that expanding the readership would allow him to take away advertisers from The New York Times and The Daily News. (He fought hard for readers on the news side, as well, turning the paper into a gossipy must-read for people on Wall Street, in fashion and in the media business.)
And as The Post grew in circulation, Mr. Murdoch did not always increase the price of ads in the paper, say advertising executives who bought newspaper ads in the 1990s.
Advertising executives say The Post pursues ad sales as aggressively as Mr. Murdoch has pursued a purchase of Dow Jones. The Post’s advertising department started offering more creative packaging of ads, like opportunities for advertisers in the paper to also be involved in events and promotions, and featured in fliers in the paper, said Peter Gardiner, chief media officer at Deutsch, an advertising agency that is part of the Interpublic Group of Companies.
The paper’s advertising team is still known to be one of the more persistent in the newspaper business.
“The DNA of the people they hire tends to be a little higher octane in terms of aggressiveness and energy,” said Jason E. Klein, president and chief executive of Newspaper National Network, which sells ads on behalf of a variety of newspapers across the country.
“They’re kind of standouts in terms of how hungry they are, which I think for some people is actually quite refreshing,” Mr. Klein said.
Several ad executives said it might be appealing to have a one-stop place to buy ads in The Wall Street Journal, its Web site and the News Corporation’s television network about business.
“I want to go nuts on that channel,” Mr. Gardiner of Deutsch said.
Mr. Murdoch absorbed heavy start-up costs when he introduced the Fox News Channel in 1996, entering a market where critics said there was no room for a new entrant. While his rivals complain that Mr. Murdoch has succeeded through flash, tone and slant, today the network is profitable and has overtaken CNN in the ratings.
When it comes to his newspapers, he can be especially deep-pocketed and patient, running up considerable losses for years so long as other branches of his media empire are churning out enough profits.
The Australian, a national newspaper that Mr. Murdoch founded in 1964, took more than two decades to record its first profit. The Times of London is expected by News Corporation executives to make a profit next year, its first since it was acquired in 1982. The New York Post has also lost money since the company acquired it for the second time in 1993.
Over all, despite the losses at these high-profile titles, the company’s 110 newspapers, anchored by Mr. Murdoch’s money-spinning tabloids in Britain and Australia, produced solid profit margins of nearly 14 percent in the nine months that ended March 31, far higher than The Journal’s margins in the low single digits.
With both The Times of London and The Post, Mr. Murdoch engaged in long cover price wars with their chief competitors, The Daily Telegraph in London and The Daily News in New York, which helped increase the sales of both Murdoch titles markedly. Mr. Murdoch has not said whether he would try to change the price of The Journal, which recently increased its newsstand price, as did The New York Times and The Financial Times.
And while changes atop Dow Jones may not be imminent, they would not be surprising. People close to Mr. Murdoch have speculated that he will find a senior role at Dow Jones for Robert Thomson, the current editor of The Times of London. Mr. Thomson has been an adviser in the pursuit of The Journal.
Also, it has been bruited by some within the News Corporation that buying Dow Jones could set the stage for the eventual move of Mr. Murdoch’s son James to the United States to oversee the company’s print, television and online network businesses, with Mr. Ailes playing a senior role.
Both Mr. Thomson and James Murdoch, who is the chief executive of BSkyB in London, have said they had no immediate plans to leave their current posts.
At The Journal, Mr. Murdoch has agreed to a series of measures intended to protect the paper’s editorial independence from corporate interference, something the media billionaire has been known to engage in over the years at other newspapers he owns. Top editorial executives cannot be removed or added without the approval of a new oversight board, but Mr. Murdoch can make changes on the business side.
For now, he has voiced his support for the new managing editor, Marcus W. Brauchli, and said he does not plan to replace the chief executive, Richard F. Zannino, or the publisher, L. Gordon Crovitz. One person close to Mr. Murdoch said it was his style to see how things worked out before making any judgments.
One major marker is going to be how Mr. Zannino approaches The Journal brand internationally. The company has scaled back its European and Asian editions in recent years and they did not figure prominently in the growth plan Mr. Zannino put in place when he became chief executive last year. Mr. Murdoch, however, is keen to turn up the heat on The Financial Times.
“He will give the management there the confidence to put up some of the plans they had in the past and didn’t have resources for and see how they run,” the person close to Mr. Murdoch said.
Louise Story contributed reporting.

At Wal-Mart, a Back Door Into Banking(NYTimes, 6/21/07)

June 21, 2007
At Wal-Mart, a Back Door Into Banking
By MICHAEL BARBARO and ERIC DASH
Wal-Mart failed to get approval for a bank. But the giant discount chain is effectively building one anyway.
Wal-Mart said yesterday that it would rapidly expand the financial services offered in its vast network of stores, extending the reach of its retailing empire into its shoppers’ wallets and the traditional turf of the American banking industry.
Over the next year, the company plans to introduce a prepaid debit card, intended for low-income consumers, and install money centers — which currently offer check cashing, bill paying and money order services — into at least 1,000 stores, up from 225 now.
The moves are seen as a precursor to even wider offerings, like mortgages and home equity loans, which could turn Wal-Mart into a significant force in the banking world. Jane J. Thompson, the president of Wal-Mart financial services, called the prepaid cards and money center services “foundational products” that the retailer would build upon. “Our concept is to go up the credit ladder of financial services,” she said in an interview.
The introduction of such services is something of an end run around the federal government, which was considering Wal-Mart’s application to open a bank last year when the retailer withdrew its bid. The new products, like the prepaid debit card, will be offered through third-party partners, allowing Wal-Mart to sell banklike services without a government license.
Given Wal-Mart’s penchant for squeezing costs out of every business it enters — from changing oil to dispensing prescription drugs — the move is expected to jolt the financial services industry.
With plans for 875 new money centers by the end of 2008, Wal-Mart’s presence would be roughly equivalent to Citibank’s in the United States, and its daily foot traffic would dwarf that of most credit unions, check-cashing outlets and convenience stores. While it may not immediately threaten those businesses, Wal-Mart’s pricing power and proximity may give it an advantage in serving the tens of millions of consumers who do not have a checking account or are unlikely to set foot in a bank.
At the same time, the moves could help bolster the retailer’s sagging sales by giving low-income customers, who represent much of its business, another reason to shop at its stores. “The logic behind a lot of these services is to increase traffic and do it in a way that puts money in people’s hands,” said Andrew Dresner, a payments industry consultant at Oliver Wyman Financial Services. “You give them a couple hundred dollars,” when they cash their paycheck, “and they will buy other things.”
But the services themselves will also aid Wal-Mart’s bottom line. Ms. Thompson said that Wal-Mart’s financial services products provide “healthy margins,” and that she expects the overall business to grow 30 to 40 percent over the next year.
Much of what Wal-Mart announced yesterday will be directed at consumers who do not use banks. Wal-Mart says, for example, that 20 percent of its customers — about 27 million people — do not have checking accounts. The so-called Wal-Mart Money Card, to be issued with GE Money, a division of General Electric, would allow customers to transfer their paychecks directly onto their cards and make purchases at any retailer that accepts Visa cards. It will also allow them to check their balances online or on mobile phone, pay certain bills or withdraw cash from A.T.M.’s.
The prepaid card will initially cost $8.95, and comes with a $4.95 monthly maintenance fee. Cash can be loaded on the card free by cashing a payroll or government check at Wal-Mart or having the money directly deposited; otherwise, cardholders must pay $4.64 to reload it.
Those without a bank account can “finally take advantage of more mainstream financial services,” Ms. Thompson said. It also could position the retailer to offer new services, like an interest-bearing savings feature that Ms. Thompson said Wal-Mart was considering.
Analysts said there was ample evidence that Wal-Mart would lower the costs of banking in the United States. The chain has already cut the cost of cashing checks by 50 percent, and its financial services saved customers $245 million last year, according to company executives.
Wal-Mart has never hidden its banking ambitions, but it has arguably masked them from time to time. In 2005, Wal-Mart said it would seek permission to open a bank in Utah that would process credit and debit card transactions for its 4,000 American stores. At the time, it vowed that it would never use the bank to enter the consumer financial services business.
Nevertheless, opposition to its plans, which required the approval of federal regulators, swelled. Dozens of banking and corporate watchdog groups testified at hearings outside Washington.
In mid-March, Wal-Mart abruptly abandoned those plans. Instead, company executives said they would begin aggressively rolling out new financial products through third-party partners. Wal-Mart already offers a Discover credit card (through a similar partnership with General Electric) and money transfer services (through a partnership with MoneyGram.) Now, many in the financial industry say that mortgages and other types of consumer loans may be next.
Although Wal-Mart would still be barred from collecting customer deposits, the new services would effectively allow the retailer to offer its customers a small suite of financial products — just like a credit union or small local bank.
Of course, opposition may well re-emerge. Ronald K. Ence, vice president for Congressional relations at the Independent Community Bankers of America, a trade group, said Wal-Mart’s intentions suggest that the company misled the public when it said repeatedly that it did not plan to enter the consumer banking business.
“Clearly this was their intention all along,” he said. “The proof is in the pudding.”

Online Sales Lose Steam (NYTimes, 6/17/07)

June 17, 2007
Online Sales Lose Steam
By MATT RICHTEL and BOB TEDESCHI
SAN FRANCISCO, June 16 — Has online retailing entered the Dot Calm era?
Since the inception of the Web, online commerce has enjoyed hypergrowth, with annual sales increasing more than 25 percent over all, and far more rapidly in many categories. But in the last year, growth has slowed sharply in major sectors like books, tickets and office supplies.
Growth in online sales has also dropped dramatically in diverse categories like health and beauty products, computer peripherals and pet supplies. Analysts say it is a turning point and growth will continue to slow through the decade.
The reaction to the trend is apparent at Dell, which many had regarded as having mastered the science of selling computers online, but is now putting its PCs in Wal-Mart stores. Expedia has almost tripled the number of travel ticketing kiosks it puts in hotel lobbies and other places that attract tourists.
The slowdown is a result of several forces. Sales on the Internet are expected to reach $116 billion this year, or 5 percent of all retail sales, making it harder to maintain the same high growth rates. At the same time, consumers seem to be experiencing Internet fatigue and are changing their buying habits.
John Johnson, 53, who sells medical products to drug stores and lives in San Francisco, finds that retailers have livened up their stores to be more alluring.
“They’re working a lot harder,” he said as he shopped at Book Passage in downtown San Francisco. “They’re not as stuffy. The lighting is better. You don’t get someone behind the counter who’s been there 40 years. They’re younger and hipper and much more with it.”
He and his wife, Liz Hauer, 51, a Macy’s executive, also shop online, but mostly for gifts or items that need to be shipped. They said they found that the experience could be tedious at times. “Online, it’s much more of a task,” she said. Still, Internet commerce is growing at a pace that traditional merchants would envy. But online sales are not growing as fast as they were even 18 months ago.
Forrester Research, a market research company, projects that online book sales will rise 11 percent this year, compared with nearly 40 percent last year. Apparel sales, which increased 61 percent last year, are expected to slow to 21 percent. And sales of pet supplies are on pace to rise 30 percent this year after climbing 81 percent last year.
Growth rates for online sales are slowing down in numerous other segments as well, including appliances, sporting goods, auto parts, computer peripherals, and even music and videos. Forrester says that sales growth is pulling back in 18 of the 24 categories it measures.
Jupiter Research, another market research firm, says the growth rate has peaked. It projects that overall online sales growth will slow to 9 percent a year by the end of the decade from as much as 25 percent in 2004.
Early financial results from e-commerce companies bear out the trend. EBay reported that revenue from Web site sales increased by just 1 percent in the first three months of this year compared with the same period last year. Bookings from Expedia’s North American Web sites rose by only 1 percent in the first quarter of this year. And Dell said that revenue in the Americas — United States, Canada and Latin America — for the three months ended May 4 was $8.9 billion, or nearly unchanged from the same period last year.
“There’s a recognition that some customers like a more interactive experience,” said Alex Gruzen, senior vice president for consumer products at Dell. “They like shopping and they want to go retail.”
The turning point comes as most adult Americans, and many of their children, are already shopping online.
Analysts project that by 2011, online sales will account for nearly 7 percent of overall retail sales, though categories like computer hardware and software generate more than 40 percent of their sales on the Internet.
There are other factors at work as well, including a push by companies like Apple, Starbucks and the big shopping malls to make the in-store experience more compelling.
Nancy F. Koehn, a professor at Harvard Business School who studies retailing and consumer habits, said that the leveling off of e-commerce reflected the practical and psychological limitations of shopping online. She said that as physical stores have made the in-person buying experience more pleasurable, online stores have continued to give shoppers a blasé experience. In addition, online shopping, because it involves a computer, feels like work.
“It’s not like you go onto Amazon and think: ‘I’m a little depressed. I’ll go onto this site and get transported,’ ” she said, noting that online shopping is more a chore than an escape.
But Ms. Koehn and others say that online shopping is running into practical problems, too. For one, Ms. Koehn noted, online sellers have been steadily raising their shipping fees to bolster profits or make up for their low prices.
In response, a so-called clicks-and-bricks hybrid model is emerging, said Dan Whaley, the founder of GetThere, which became one of the largest Internet travel businesses after it was acquired by Sabre Holdings.
The bookseller Borders, for example, recently revamped its Web site to allow users to reserve books online and pick them up in the store. Similar services were started by companies like Best Buy and Sears. Other retailers are working to follow suit.
“You don’t realize how powerful of a phenomenon this new strategy has become,” Mr. Whaley said. “Nearly every big box retailer is opening it up.”
Barnes & Noble recently upgraded its site to include online book clubs, reader forums and interviews with authors. The company hopes the changes will make the online world feel more like the offline one, said Marie J. Toulantis, the chief executive of BarnesandNoble.com. “We emulate the in-store experience by having a book club online,” she said.
The retailers that have started in-store pickup programs, like Sears and REI, have found that customers who choose the hybrid model are more likely to buy additional products when they pick up their items, said Patti Freeman Evans, an analyst at Jupiter Research.
Consumers are generally not committed to one form of buying over the other. Maggie Hake, 21, a recent college graduate heading to Africa in the fall to join the Peace Corps, said that when she needs to buy something for her Macintosh computer, she prefers visiting a store. “I trust it more,” she said. “I want to be sure there’s a person there if something goes wrong.”
Ms. Hake, who lives in Kentfield, Calif., just north of San Francisco, does like shopping online for certain things, particularly shoes, which are hard to find in her size. “I’ve got big feet — size 12.5 in women’s,” she said. “I also buy textbooks online. They’re cheaper.”
John Morgan, an economics professor from the Haas School of Business at the University of California, Berkeley, said he expected online commerce to continue to increase, partly because it remains less than 1 percent of the overall economy. “There’s still a lot of head room for people to grow,” he said.
Matt Richtel reported from San Francisco. Bob Tedeschi reported from Guilford, Conn.

Online Sales Lose Steam (NYTimes, 6/17/07)

June 17, 2007
Online Sales Lose Steam
By MATT RICHTEL and BOB TEDESCHI
SAN FRANCISCO, June 16 — Has online retailing entered the Dot Calm era?
Since the inception of the Web, online commerce has enjoyed hypergrowth, with annual sales increasing more than 25 percent over all, and far more rapidly in many categories. But in the last year, growth has slowed sharply in major sectors like books, tickets and office supplies.
Growth in online sales has also dropped dramatically in diverse categories like health and beauty products, computer peripherals and pet supplies. Analysts say it is a turning point and growth will continue to slow through the decade.
The reaction to the trend is apparent at Dell, which many had regarded as having mastered the science of selling computers online, but is now putting its PCs in Wal-Mart stores. Expedia has almost tripled the number of travel ticketing kiosks it puts in hotel lobbies and other places that attract tourists.
The slowdown is a result of several forces. Sales on the Internet are expected to reach $116 billion this year, or 5 percent of all retail sales, making it harder to maintain the same high growth rates. At the same time, consumers seem to be experiencing Internet fatigue and are changing their buying habits.
John Johnson, 53, who sells medical products to drug stores and lives in San Francisco, finds that retailers have livened up their stores to be more alluring.
“They’re working a lot harder,” he said as he shopped at Book Passage in downtown San Francisco. “They’re not as stuffy. The lighting is better. You don’t get someone behind the counter who’s been there 40 years. They’re younger and hipper and much more with it.”
He and his wife, Liz Hauer, 51, a Macy’s executive, also shop online, but mostly for gifts or items that need to be shipped. They said they found that the experience could be tedious at times. “Online, it’s much more of a task,” she said. Still, Internet commerce is growing at a pace that traditional merchants would envy. But online sales are not growing as fast as they were even 18 months ago.
Forrester Research, a market research company, projects that online book sales will rise 11 percent this year, compared with nearly 40 percent last year. Apparel sales, which increased 61 percent last year, are expected to slow to 21 percent. And sales of pet supplies are on pace to rise 30 percent this year after climbing 81 percent last year.
Growth rates for online sales are slowing down in numerous other segments as well, including appliances, sporting goods, auto parts, computer peripherals, and even music and videos. Forrester says that sales growth is pulling back in 18 of the 24 categories it measures.
Jupiter Research, another market research firm, says the growth rate has peaked. It projects that overall online sales growth will slow to 9 percent a year by the end of the decade from as much as 25 percent in 2004.
Early financial results from e-commerce companies bear out the trend. EBay reported that revenue from Web site sales increased by just 1 percent in the first three months of this year compared with the same period last year. Bookings from Expedia’s North American Web sites rose by only 1 percent in the first quarter of this year. And Dell said that revenue in the Americas — United States, Canada and Latin America — for the three months ended May 4 was $8.9 billion, or nearly unchanged from the same period last year.
“There’s a recognition that some customers like a more interactive experience,” said Alex Gruzen, senior vice president for consumer products at Dell. “They like shopping and they want to go retail.”
The turning point comes as most adult Americans, and many of their children, are already shopping online.
Analysts project that by 2011, online sales will account for nearly 7 percent of overall retail sales, though categories like computer hardware and software generate more than 40 percent of their sales on the Internet.
There are other factors at work as well, including a push by companies like Apple, Starbucks and the big shopping malls to make the in-store experience more compelling.
Nancy F. Koehn, a professor at Harvard Business School who studies retailing and consumer habits, said that the leveling off of e-commerce reflected the practical and psychological limitations of shopping online. She said that as physical stores have made the in-person buying experience more pleasurable, online stores have continued to give shoppers a blasé experience. In addition, online shopping, because it involves a computer, feels like work.
“It’s not like you go onto Amazon and think: ‘I’m a little depressed. I’ll go onto this site and get transported,’ ” she said, noting that online shopping is more a chore than an escape.
But Ms. Koehn and others say that online shopping is running into practical problems, too. For one, Ms. Koehn noted, online sellers have been steadily raising their shipping fees to bolster profits or make up for their low prices.
In response, a so-called clicks-and-bricks hybrid model is emerging, said Dan Whaley, the founder of GetThere, which became one of the largest Internet travel businesses after it was acquired by Sabre Holdings.
The bookseller Borders, for example, recently revamped its Web site to allow users to reserve books online and pick them up in the store. Similar services were started by companies like Best Buy and Sears. Other retailers are working to follow suit.
“You don’t realize how powerful of a phenomenon this new strategy has become,” Mr. Whaley said. “Nearly every big box retailer is opening it up.”
Barnes & Noble recently upgraded its site to include online book clubs, reader forums and interviews with authors. The company hopes the changes will make the online world feel more like the offline one, said Marie J. Toulantis, the chief executive of BarnesandNoble.com. “We emulate the in-store experience by having a book club online,” she said.
The retailers that have started in-store pickup programs, like Sears and REI, have found that customers who choose the hybrid model are more likely to buy additional products when they pick up their items, said Patti Freeman Evans, an analyst at Jupiter Research.
Consumers are generally not committed to one form of buying over the other. Maggie Hake, 21, a recent college graduate heading to Africa in the fall to join the Peace Corps, said that when she needs to buy something for her Macintosh computer, she prefers visiting a store. “I trust it more,” she said. “I want to be sure there’s a person there if something goes wrong.”
Ms. Hake, who lives in Kentfield, Calif., just north of San Francisco, does like shopping online for certain things, particularly shoes, which are hard to find in her size. “I’ve got big feet — size 12.5 in women’s,” she said. “I also buy textbooks online. They’re cheaper.”
John Morgan, an economics professor from the Haas School of Business at the University of California, Berkeley, said he expected online commerce to continue to increase, partly because it remains less than 1 percent of the overall economy. “There’s still a lot of head room for people to grow,” he said.
Matt Richtel reported from San Francisco. Bob Tedeschi reported from Guilford, Conn.