NBA-related Web Sites Are Most Popular Overseas

The latest data on sports web sites from comScore show that Internet sites associated with the National Basketball Association get far more traffic from outside of North America than do sites connected to Major League Baseball, the National Football League or the National Hockey League.

That's no surprise, says Scott R. Rosner, associate director of the Wharton Sports Business Initiative, who noted that basketball's international popularity has been growing overseas since the US.all-professional "Dream Team" went to the Barcelona Olympics in 1992. "That was the tipping point, the 'Dream Team' captured the imagination of the international basketball playing community." Basketball's overseas fan base has grown even more as China has taken up the sport with a passion, especially since Chinese basketball superstar Yao Ming joined the NBA's Houston Rockets in 2002. Even the late Chairman Mao Zedong praised basketball as the most democratic of team sports, according to Rosner.

Rosner was no less surprised that NHL sites were more popular among upper-income Americans compared to the sites of other major pro sports. According to comScore, 36% of U.S. visitors to hockey sites had incomes of $100,000 or more, compared to 32.7% for baseball, 28.3% for football, 27.7% for basketball and 24.7% for all Internet sites.

"Hockey is a very expensive sport to play," Rosner said. "The equipment is expensive, the ice-time is expensive."

Mandating Insurance Coverage Is About Morality, not States' Rights, says Wharton Professor

The New York Times tells us that in more than a dozen statehouses across the country, lawmakers are pressing for state constitutional amendments to outlaw a key element of the health care plans under discussion in Washington -- the requirement that nearly everyone buy health insurance or pay a penalty.

These lawmakers frame their argument as a battle over the rights of states vs. the reach of federal power. Opponents of the measures, including some constitutional scholars, tell The Times that the proposals are mostly symbolic, intended to send a message of political protest, and have little chance of succeeding in court over the long run. Still, those opponents acknowledge that the measures could create legal entanglements that would be expensive and could cause delays to health care changes. The measures could also be a rallying point for opponents in the increasingly tense debate.

Meanwhile, Wharton health care management professor Mark V. Pauly sees the debate in yet another context. Getting more Americans into the ranks of the insured “is a moral argument,” Pauly insists. “People should be insured so they do not under-consume effective health care, something we all care about because we care about our fellow human beings.”

About 25% to 50% of uninsured Americans could probably "afford" health insurance by shifting their personal spending priorities, Pauly and others have estimated. Of course, "afford," as Pauly notes, is not "an objective technical term." Many of those people would have to make difficult and painful choices in order to fit health insurance into their budgets.

So, how to motivate them? "I think an effective federal mandate is the best way," says Pauly. "The Baucus plan [now being considered by the Senate Finance Committee, chaired by Sen. Max Baucus of Montana] is very timid, however; the penalties are very low relative to the cost of coverage. You should charge a penalty for being uninsured that equals the cost of basic coverage -- and offer the subsidies that allow you to make that cost affordable (in your judgment) for those who have lower incomes."

The dilemma, Pauly adds, "is that Congress is not willing to raise taxes enough to pay for subsidies to make coverage affordable, so it is getting cold feet about mandates. An alternative to a mandate, if you really do have philosophical scruples, is to require those who are not insured to have an earmarked account available to pay for medical care so that they cannot be a burden on others if they get sick. People need to save more anyway and take precautions to protect themselves. Who could object to this?"

More from Knowledge@Wharton:

Another Hurdle to Health Care Reform: Too Few General Practice Doctors

One Way to Lower Health Costs: Pay People to Be Healthy

Information Technology: Not a Cure for the High Cost of Health Care

Abbott’s Acquisition Spree: Is Less More?

Solvay, the Belgian conglomerate that makes drugs, chemicals and plastics, announced on Monday that it plans to sell its pharmaceutical business for $6.6 billion to Abbott Laboratories, located near Chicago. Abbott, whose 2008 revenues were nearly $29 billion, is more than twice the size of the Belgian firm whose sales last year were $13 billion. Still, according a Reuters report, the deal allows Abbott to “bolster its flagging prescription drug business by giving it a number of new medicines in late stages of testing.”

More immediately, notes The New York Times, Abbott Laboratories will “take sole possession of the TriCor cholesterol pill, which it was sharing with Solvay and [which] had more than $1.3 billion in sales for Abbott last year. Abbott will also acquire sole rights to Trilipix, a new cholesterol treatment approved by the Food and Drug Administration last December and marketed as TriCor’s successor.”

Solvay’s sale of its drug unit comes as no surprise. The Wall Street Journal writes that the company had announced in April that it was “reviewing options” for its pharmaceutical business as “research, development, production and approval of new drugs becomes more complicated and expensive.” Christian Jourquin, Solvay’s CEO, says the company plans to concentrate on its chemicals and plastics operations, which have been hit harder by the global slowdown than pharmaceuticals. In fact, last year, growth in drug sales helped Solvay offset declines in other lines of business.

Abbott lately has been on an acquisition spree; the Solvay transaction is the largest among its recent deals. In January, the company took over Advanced Medical Optics for $2.8 billion and earlier this month it bought Visiogen for $400 million, according to the Times. Abbott this year also took over Evalve, a cardiovascular technology company, and the nutrition business of Wockhardt in India.

Still, these deals pale in contrast with this year’s mega mergers in the pharmaceutical industry: Pfizer’s purchase of Wyeth for $68 billion in January; Merck’s $41 billion deal for Schering Plough and Roche’s Genentech deal for $47 billion, both in March. Harbir Singh, a professor of management strategy at Wharton and vice dean of global initiatives, says many of these large mergers in the pharmaceutical industry have been prompted by the desire “to fill gaps in product pipelines or products that are complementary.”

How effective has this strategy proved for large pharma companies? According to Singh, the results have been mixed. “The pipeline issues the pharma companies face are symptoms of the challenge of earning consistent returns through the drug development process,” he explains. “These mergers can be fraught with difficulties because you are buying a whole company, though you are essentially interested in a few individual products in its pipeline.”

An alternative approach, according to Singh, would involve identifying the potential drugs themselves and negotiating an agreement covering these “focused assets.” Such transactions are much more complicated because the seller may not be interested in selling just these drugs. “This is a longer-term, less newsworthy approach,” Singh says. “Many of these deals are done privately and under the radar screen.”

Singh points out that the narrow-focused, low-key approach can yield a financial advantage. When one pharma giant buys another for billions of dollars, future profits from the drug pipeline are already captured by the selling price. This increases the financial pressure on the merged entity and makes it more challenging for it to succeed. “I don’t say that large mergers never work,” says Singh. “But they do have unintended consequences.”

When Times Are Tough, Change Your Model

During a downturn, senior managers often put their companies under the microscope to identify where to cut or control costs that are dragging down the bottom line. Zeroing in on the minutiae of spending, however, may not be the best way to help a company's flagging performance. A better option: Look at the firm through a wide-angle lens.

“Take a very hard look at how you do business,” says Wharton management professor Raphael Amit. In a new paper, “Business Model Innovation: Creating Value in Times of Change,” Amit and Christoph Zott, a professor of entrepreneurship at IESE Business School, suggest that making a business model more innovative is key to a company’s long-term success. “We are saying that this is an alternative to cost cutting,” notes Amit. “Rather than cutting costs to preserve your bottom line, you can increase your top and bottom lines by finding new and novel ways to do business.”

Scrutinizing a business model should be "a starting point to see how you could serve your customers in a different way without having to produce a new product or service, the development cost of which is much, much greater,” Amit says. “There are … costs associated with changing the business model in an existing organization, but usually they are substantially less than the costs associated with a long-term R&D project.”

However, changing a business model is difficult for several reasons, says Zott. “First, it requires holistic thinking, which is not easy. It is much easier to optimize parts of a business -- for example, marketing or accounting processes -- than to improve all aspects of the business.” Second, he notes, “change is often resisted within an organization. It is difficult to modify or abolish deeply ingrained habits." Finally, it requires "courage, foresight and entrepreneurial initiative to do business in a different way from how it has been done before. These are rare skills within most organizations.”

Companies that have been pushing the boundaries of their business models are few and far between. Apple is one high-profile example: For most of its history, it focused on producing hardware, primarily personal computers. When the company created the iPod and music downloads through iTunes, however, it became the first electronics company to include music distribution as part of its business model. As the two professors note in their paper, “Rather than growing by bringing a new hardware product to the market, Apple radically transformed its business model to include an ongoing relationship with its hardware customers (similar to the ‘razor and blade’ model of companies such as Gillette). In this way, Apple expanded the locus of its innovation from the product space to the business model.”

Businesses often focus too much on strategy at the expense of business model analysis, notes Amit. A purpose of the paper “is to alert managers and entrepreneurs alike that they need to think deeply and thoroughly about their business model -- namely the business template, how they do business -- in addition to thinking about the strategy.”

To read more about business model innovation, see “Injecting New Life into Old Business Models” in the current issue of Universia Knowledge@Wharton.

France's President Wants You to Be Happy

In the occasionally perverse world of the dismal science – economics – time spent sitting in traffic jams counts as a positive economic activity. Why? It boosts GDP because it increases gasoline consumption.

If that seems somehow wrongheaded given the uncounted downsides of traffic jams -- lost driver productivity, non-renewable resource waste, wear and tear on cars and damage to the environment -- then you might see why some economists want to rethink how we measure economic progress. And that rethinking extends to measuring positive contributions too, such as good health care, extended vacations and other things that make people happy.

Now this idea of including human wellbeing -- and even happiness -- in economic models may be moving from theory to practice in France, where the government has enlisted the help of Nobel Prize laureates Joseph Stiglitz and Amartya Sen, among others, to draw up a report analyzing how economic performance and social progress are measured.

The results are now in and the first conclusions drawn. “For a long time, there has been a problem with the way we calculate and use economic indicators, especially gross domestic product,” explained France's president, Nicolas Sarkozy, on September 14 when the report was unveiled. “For years, statistics have shown stronger and stronger economic growth,” yet they were hiding the ugly truth that “this growth, by endangering the future of the planet, destroys more than it creates.... Throughout the world, people believe that they are being lied to, that the figures are false and even worse, that they are being manipulated. Nothing is more destructive for a democracy.” The French president also took a swipe at “the religion of statistics,” and described our reliance on them as “a way to avoid ever talking about inequalities.”

The authors of the report believe that while GDP “is not erroneous,” it nevertheless is being used "in an erroneous way,” especially as a measurement of economic wellbeing.

“The great problem now is how to take giant steps toward [building] an economy of intangibles if our indicators only measure tangible goods – and do so in a deficient way,” says David Murillo, professor of social sciences and researcher at the ESADE Business School’s Institute of Social Innovation.

What would happen if the study’s recommendations were adopted by France -- or by other countries? Read more in the latest issue of Universia Knowledge@WWharton.

Dell: Making the Move from Selling PCs to Selling Services

Dell’s announcement earlier this week that it planned to buy Perot Systems, a provider of information technology services, raises questions as to just how effective this move will be in getting Dell away from its reliance on lower-margin personal computer sales.

Both Hewlett-Packard and IBM have already moved into the service area, “recognizing that profit margins and opportunities for growth in selling products are limited,” says Wharton operations and information management professor Morris A. Cohen. “Product sales are very much driven by the business cycle, so you have a variation in sales volume” depending on the health of the economy. “When you sell services -- including after-sales service, customer support and so forth -- the business tends to be more stable. Companies that have moved into expanding their service offerings, especially during this recent downturn, have discovered that it acts as a buffer and provides a stable high-margin source of revenue.”

A significant challenge for Dell is that the two pillars of its business model -- supply chain efficiency and direct build-to-order sales -- don't provide the advantage they once did. In addition, Dell hasn't historically targeted its products to consumers -- a segment that has generated most of the growth and innovation in the technology industry in recent years. Finally, Dell failed to invest in services the same way that IBM and other competitors did. “The decision to acquire Perot Systems is a recognition that the company has to move into services. They are trying to do this quickly by acquiring a company that does only services,” says Cohen.

The downside to this move, he adds, is that Dell “does not have a very good reputation for delivering service.... To be a service-oriented company as opposed to a manufacturing company is a very different mindset. The big question is whether Dell will be able to integrate Perot and leverage this acquisition, or whether this will just be something off to the side that won’t be fully absorbed.” On the other hand, he says, “Perot Systems has been around for a long time and has successfully carved out market share, which they have been able to protect. With Dell in the mix now, [the combined company] will be a more formidable competitor.”

Dell, based in Round Rock, Tex., expects the $3.9 billion deal to be completed in January 2010. Perot Systems, based in Plano, Tex., and founded in 1988 by H. Ross Perot, serves clients mainly in the health care and government industries, followed by manufacturing, banking and insurance.

For earlier Knowledge@Wharton articles on Dell, See:

Can Dell's Turnaround Strategy Keep HP at Bay?

Michael Dell: Still Betting on the Future of Online Commerce and Supply Chain Efficiencies

'Dude, You Need a CEO': The Return of Michael Dell

Alternative Energy: China’s Next Big Investment Opportunity?

China is the world’s second-largest consumer of energy after the United States, and it shows no sign of slowing down. According to a report presented by the China Greentech Initiative at the World Economic Forum meeting in Dalian on September 10, China is responsible for 16% of the world’s energy consumption, is the second-biggest consumer of crude oil and is the largest consumer of coal. Between 70% and 80% of its energy supply comes from burning coal, and although coal is a major contributor of greenhouse gases, China plans to increase its coal-fired power generation capacity by the equivalent of two 500-megawatt plants a week to meet the country's burgeoning energy requirements.

But while such figures throw many environmentalists into despair, others see promising opportunities. New laws, regulations and fiscal measures are encouraging the development of alternative energy sources. So, too, is a wave of fresh investments from domestic and international companies, including a number of deals announced in recent months. For example, on August 20, GE Drivetrain Technologies, a unit of GE Transportation, and Chongqing XinXing Fengneng Investment Co. in central China announced a joint venture to produce gears for wind turbines. And in early September, U.S.-based First Solar signed a memorandum of understanding to build a two-gigawatt solar plant in Ordos City in Inner Mongolia, which will be followed by several more plant openings over the next 10 years.
 
China’s giant state-owned energy companies are not sitting on the sidelines during all this activity. In mid-August, China Electricity International announced plans to invest RMB 120 million in a joint venture to develop wind projects in Inner Mongolia, while the other four state-owned players -- GD Power Development, China Huaneng Group, Datang International Power Generation and China Power Investment -- have also received approval to invest in Inner Mongolia.

A particular area of interest is wind energy. Among the reasons why, says Jeff Jiang, managing director of U.S.-based Renaissance Carbon Investment, is that it may be the most clean energy resource currently available. What's more, unlike hydropower, wind power plants do not have to be near water or valuable arable land. Its main challenge, however, is transmitting the power from remote parts of China, such as Inner Mongolia and Xinjiang province, to areas where energy is needed most.
 
China’s wind power market has grown quickly, with installed capacity doubling annually over the last four years. Today, China ranks fourth in the world after the United States, Germany and Spain in terms of installed wind capacity, and it accounts for 10% of the world’s total.

To read more about the growth of alternative energy in China, see the current issue of China Knowledge@Wharton.

A Big Investment for Big Ambitions

Geely Automobile, a Chinese car maker, soon may be getting more fuel in its tank. Several publications, including the Wall Street Journal, reported over the weekend that a Goldman Sachs private equity fund is discussing an investment of $250 million in the company.

An announcement to this effect is expected soon, according to a Reuters report. It is also likely that Geely could use this influx of capital to bid for Ford’s Volvo unit. The Swedish auto firm has been on the block for some $2 billion. Geely, despite being China’s largest private auto maker, has annual sales of $625 million; it has previously said it would issue convertible bonds and partner with a Chinese state-owned enterprise to bid for Volvo.

Why would Geely want Volvo in its garage, so to speak? The reason is the company has long harbored global ambitions, but its efforts have been stymied by the perception that Chinese auto makers face quality challenges in markets such as the U.S. A former fridge maker that started producing cars in 1998, Geely presented its vehicles at the Frankfurt Motor Show in 2005 and at the Detroit auto show in 2006. The company intended to launch its vehicles in the U.S. in 2008 – to coincide with the Beijing Olympics – but was unable to do so because they failed crash and emissions tests. Still, Geely vehicles are sold in countries such as Russia and Ukraine, and the company has announced plans to set up plants in Africa and Latin America. Li Shufu, Geely’s founder and chairman, has reportedly said that by 2015, Geely would sell 1.3 million vehicles outside China. He is often described in media reports as “China’s Henry Ford.”

Commenting on the desire of Chinese auto executives to expand in global markets, Wharton management professor John Paul MacDuffie told Knowledge@Wharton in a previous interview that in the past, Japanese and Korean auto firms had to work equally hard to overcome the view that their products were of poor quality. "There was a long period of retrenchment and rebuilding after leaving that bad impression," he said. "The Chinese companies will have to be wary of repeating that. If anything, American consumer standards for quality have only gotten higher."

Marshall Meyer, a Wharton management professor whose research focuses on China, admits that Chinese auto firms are eager to enter global markets and compete with the Japanese and Korean car makers. “There’s no reason to believe they won’t; the question is when,” he told China Knowledge@Wharton in an interview.

With Goldman Sachs’s investment, Geely will have more resources for global expansion – especially if the Volvo deal goes through. While it won’t overtake Toyota, Honda or Hyundai anytime soon, it could certainly give its Asian rivals a run for their money.

More from China Knowledge@Wharton:

Can China Gear Up to Sell Its Cars to U.S. Consumers? Quality is Key

Overstepping Its Bounds? The Fed’s Attempt to Curb Risky Business

The latest salvo against excessive compensation is a plan by the Federal Reserve to review salary and bonus proposals at thousands of banks across the U.S., according to a report in The Wall Street Journal.

The proposal, still at a preliminary stage, is sure to generate controversy, in part because it “injects government regulators deep into compensation decisions traditionally reserved for the banks’ corporate boards and executives,” the Journal article notes.

While the proposal does not need congressional approval, it will no doubt set off an intense debate between Republicans, who are typically against significant government intrusion into the private sector, and Democrats, who are keenly aware of taxpayers’ disgust at huge compensation packages awarded to executives in companies that received government bailouts.

“What’s interesting about this is that high levels of cash do not in themselves increase risk taking. If anything, this reduces risk taking because with cash and equity, especially equity, you have some incentive to worry about the downside risk,” says Kent Smetters, Wharton professor of insurance and risk management. “The shortcoming of options is they give a one-sided payoff. You don’t lose anything if the gamble doesn’t work.”

Stock options, he adds, were originally “designed to try and align incentives more. But they have gone too far. One reason is the 1993 law that capped the deductibility of cash compensation at $1 million. The cap didn’t apply to options. That’s why, in the mid to late 1990s and after, you saw an explosion of stock options, which encourages risk taking.” A better approach for the Fed, Smetters suggests, “would be to reverse the 1993 law. Then well-informed boards would have more incentive to use equity rather than options, and that would reduce a lot of risk-taking.”

According to the Journal, the Fed’s proposal – which will keep an especially close eye on the country’s 25 largest banks -- is expected to encourage firms to use clawbacks as a way to rescind the compensation of employees who engage in overly risky practices. The Fed “could also demand that more pay be offered through restricted stock or other forms of long-term compensation designed not to reward short-term performance.”

For other articles on executive compensation, see:

Incentives for the Long Run: An Executive Compensation Plan That Looks Beyond the Next Quarter

Outrage over Outsized Executive Compensation: Who Should Fix It and How?

Do Not Expect Significantly Worse Trade Relations over Latest U.S.-Chinese Trade Actions

China was quick to respond to the U.S. move placing tariffs on imports of Chinese-made tires by whipping up an investigation into whether the U.S. is dumping car parts and poultry into Chinese markets. That has raised the anxiety level about further protectionist measures – or even a trade war -- that could disrupt a fragile world economy.

But the latest actions, by themselves, are unlikely to lead to significantly worse trade relations, Wharton experts say. Is the situation serious? Yes, but for now it looks more like a brush fire that is not likely to spread to a forest fire, says Wharton management professor Stephen J. Kobrin. “It is serious in the fact that [President] Obama is responding to union pressure in imposing tariffs on Chinese tires.”

The good news is that both sides are talking about proceeding through the World Trade Organization. The “nightmare scenario that comes to mind immediately for many in these situations is what happened in the 1930s, when the world economy fell apart and put up protectionist walls that we did not recover from until the 1960s,” Kobrin adds. So, while one could argue that the risk of greater protectionism has increased by recent actions, the situation is being “kept in hand -- and the two sides are playing by the rules of the road. In the 1930s they were not.”

Wharton finance professor Franklin Allen agrees the trade dust up is not likely to spin out of control. “I don’t think this is a positive development. However, I don’t think it is a very significant negative one, either. What is at stake is small relative to the financial relationship. I think both sides are warning the other. Hopefully, it will not get out of hand.”

For its part, the U.S. looks unlikely to gain much. The three large U.S. automakers, particularly GM, ship major auto parts (such as engines and transmissions) to China for assembly, says Wharton management professor Marshall W. Meyer. “Today GM is on a roll in China.” But China is saying, in effect, that if the U.S. imposes tariffs on tires to protect rubber workers’ jobs, it could cost the UAW jobs because China would retaliate with trade barriers against U.S. car parts, Meyer says. “Tit for tat.”

Both sides, he adds, "are desperately interested in keeping jobs -- maybe China, where 23 million peasant workers are out of work, more so than the U.S.”

Still, some questions remain, Meyer says: “What happened to the SED (strategic economic dialogue)? Weren’t both sides trying to work out these issues quietly?"

More from Knowledge@Wharton:

Trade Wars: Will Protectionism Win out over Recovery?

From ‘Flash’ to ‘Monetization’

When Knowledge@Wharton spoke with Adobe Systems' then CEO Bruce Chizen several years ago about the motivation behind the company's acquisition of Macromedia, he gave a single word answer: "Flash." In last night's Q3 earnings call, current Adobe CEO Shantanu Narayen wasn't quite so pithy in outlining the reasons behind Adobe's current plans to acquire web analytics company Omniture. Had he given a single word answer, however, it would probably have been: "Monetization."

Known for its content creation software, Adobe hopes the proposed $1.8 billion acquisition of Omniture will address the final phase of the content life cycle: tracking, analyzing and (perhaps most importantly) generating revenue. In doing so, the company hopes to create, in Narayen words, an "end-to-end platform to transform digital media and advertising." Narayen also stated that the acquisition of Omniture will help to diversify Adobe's revenue base.

In response to a question about whether the company would find it more difficult to absorb an enterprise services company like Omniture than it did Macromedia, a more similar shrink-wrapped software company, Narayen stated: "In many ways we think that [the integration of Omniture] will actually be easier because it's additive."

It's a big move for the company, one that extends Adobe's attempt to expand from a vendor of shrink-wrapped software to a provider of enterprise applications -- something both Bruce Chizen and Shantanu Narayen emphasized in previous interviews with Knowledge@Wharton.

Be Prepared to Get Bossed Around

In an interview last week with India Knowledge@Wharton, Atul Jain, the founder and CEO of TEOCO, talked about the company he started 15 years ago and offered his thoughts about what it takes to run a successful enterprise. With global headquarters in Fairfax, Va., TEOCO’s core business is cost management for telecom carriers.

On the advice front, for example, Jain says that “every entrepreneur needs to understand why he or she is getting into business. What is the purpose and what are the values? If an entrepreneur wants to start a business with making money as the primary driver, I would advise against it. I have seen a lot of people get into business with that as the primary goal. It doesn't work as well as if you have a passion.”

In addition, he says, people sometimes “tell me, ‘I want to be my own boss.’ I tell them that when you become an entrepreneur, nothing could be further from the truth. Every single employee is your boss because if they leave, you have nobody to do your work. Every single client is your boss because they tell you what to do. When you work for a company, you typically have one, maybe two bosses. When you're an entrepreneur, everybody wants to tell you what to do. Your employees will tell you what to do, your clients will tell you what to do, even your vendors will tell you what to do.”

Jain’s reasons for going into business were clear from the start, he says. He wanted “to prove to the world that nice guys don't have to finish last, that you can build a successful business on a set of values and principles. We defined TEOCO's core purpose as advancing principled entrepreneurship.... Our four values are alignment with employees, clients and community; integrity, honesty and respect; acting with courage; and drive for progress through a sense of ownership. We try to live up to our core purpose every day. It's a tremendous guiding light for me.”

Finally, he says, “Have courage.... It takes a tremendous amount of courage to go into business and it takes a tremendous amount of courage to stay in business. It takes a tremendous amount of courage to stay true to your values because people will challenge them and ask you to compromise them to create a successful business.”

In the full India Knowledge@Wharton interview, Jain talks about how he built up his company, the impact of the recession on his business, the role his Indian roots played in his experience and the story behind the TEOCO name, among other topics.

For other recent Knowledge@Wharton network interviews with entrepreneurs, see:

Advice from Entrepreneur Sabeer Bhatia: 'Provide the Same Value at a Cheaper Price'

Ten Commandments from Entrepreneurial 'Evangelist' Guy Kawasaki

Entrepreneur Elon Musk: Why It's Important to Pinch Pennies on the Road to Riches

In Defense of Insurance Companies

When President Obama spoke to Congress last week about his agenda for health care reform, he stated that many citizens who sign up and pay for private health insurance find their insurance dropped once they become sick or are unable to keep up with the cost of the premiums.

Not so fast, says Scott Harrington, Wharton professor of health care management, in an opinion piece today in The Wall Street Journal. “The President’s examples of people ‘dropped’ by their insurance companies involve the [cancellation] of policies based on misrepresentation or concealment of information in applications for coverage,” he writes. In other words, people lie about their health or withhold relevant health information when applying for coverage.

Harrington points out that it is standard practice for insurers, when they are setting prices for premiums, to rely on information provided by consumers rather than undertake the costly process of trying to verify each person’s health status. Instead, he notes in his piece, companies “engage in a certain degree of ... auditing” after policies have been issued, “including when expensive treatment is sought soon after a policy is issued.”

If there are indeed cases where insurers are wrongly terminating coverage, state and federal governments have a number of options that would allow them to “target abuses without adopting the President’s agenda for federal control of health insurance, or the creation of a government health insurer,” according to Harrington, who also criticized as inaccurate or misleading a number of anecdotes that Obama used to make his case during last week’s speech.

For more opinions on President Obama’s health care reform agenda, see the following articles:

http://knowledge.wharton.upenn.edu/article.cfm?articleid=2181

http://knowledge.wharton.upenn.edu/article.cfm?articleid=2297

Steve Jobs' Surprise Appearance Was the Highlight of an Otherwise Uneventful Apple Event

He may have appeared "thin and gaunt," according to the Financial Times (video), but the fact that Steve Jobs appeared at all was a celebratory moment for Apple stakeholders of all kinds who gathered yesterday at an iPod product announcement event in San Francisco. There had been speculation ahead of the event that Apple might announce some new headline products, such as a catalogue of Beatles recordings for the iPod, or even a new tablet computer, the FT noted. Instead there were upgrades of current products: new iTunes software and a new line of iPod Nano music players with video cameras. But there was Jobs, in his first public appearance since his liver transplant five months ago.

“Apple users and investors think the world of Steve Jobs and the world of Apple products, and that he was here today is a statement that he is back in charge,” Gene Munster, an analyst at Piper Jaffray, told The New York Times. “The wizard of Oz is back in Oz.”

The Wall Street Journal noted that investor reaction to the new products was "lukewarm" as Apple's stock lost about 1% on Nasdaq, "This happens every year," Charlie Wolf, a Needham analyst, told The Journal. "The rumor sites go crazy, the stock goes up, the event occurs and the stock goes down." But Wolf added that the stock might have fallen further if Jobs hadn't appeared.

For more from Knowledge@Wharton about Apple and its charismatic leader, see:

Job-less: Steve Jobs's Succession Plan Should Be a Top Priority for Apple

Steve Wozniak on Apple, Steve Jobs and the Value of a Good Prank

Steve Jobs' Most Recent Vision for the Future: A World without DRM

The Succession Question at Tech Firms: When's the Right Time to Go?

As Interest-only Home Loans Come Due, Some Borrowers See Just One Option: Walk Away

Of course they seemed risky, but like so many "creative financing" options during the housing boom that went bust in 2007, the idea of an "interest only" mortgage made sense -- so long as housing values climbed. Now, according to a report in The New York Times, many interest-only mortgages will soon become unaffordable as homeowners have to actually start paying the principal -- which could drive up monthly payments by as much as 75%. Such borrowers can't afford to sell, because they owe far more than the value of their home. One San Diego borrower told The Times: "I’m praying for another boom. Otherwise, we’ll have to walk.”

Still, this is hardly the first time that interest-only mortgages have been recognized as a disaster waiting to happen. In a September 2005 Knowledge@Wharton article titled, "Could Risky Mortgage Lending Practices Prick the Housing Bubble?" Wharton real estate professor Susan M. Wachter warned that interest-only and other types of subprime loans were contributing to soaring housing prices and setting the stage for a potentially rough pullback that could make the next recession far more severe than it otherwise would be. "Undoubtedly,” she said, “these new instruments bring us into uncharted territory.

That territory came to be known as the subprime crisis.