Forbes USA 28 October 2013 (e-magazine full)

AMERICA’S BEST BUSINESS SCHOOLS • SILICON ALLEY’S FIRST BILLIONAIRE

-PRENE
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THE

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SMALL CAPS
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REVENGE OF
WEB 1.0

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OCTOBER 28 • 2013 EDITION

O
SMALL C

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TWITTER CEO
DICK COSTOLO
“BROADCASTERS HAVE
COME TO UNDERSTAND
THAT WE ARE A
FORCE MULTIPLIER.”

HOW TWITTER
WILL SAVE TV

(AND TV WILL SAVE TWITTER)
THE HYPED IPO LACKS A REAL BUSINESS MODEL.
THE TELEVISION NETWORKS BLEED VIEWERS.
INSIDE THEIR PLAN TO MAKE BILLIONS TOGETHER.



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contents — octoBeR 28, 2013

VoLUMe 192 nUMBeR 6

70 | king of The Second Screen
It’s prime time for Twitter CEO Dick Costolo.

108 | STarTuP School
An M.B.A. program for budding
entrepreneurs, not I-bankers.

15 | FACT & COmmEnT
by STeve forbeS

Senators: Don’t be easy on the next Fed head.

LEADERBOARD
20 | THE STATE OF BAnkinG
Pay is the only thing that grows in
good times and bad.

23 | SCORECARD
Zuckerberg wins again; Hayne unravels.

26 | CASH AnD CARRIE

Less blood is better for Stephen King movies.
Plus: FORBES Makeover

28 | EvERyTHinG’S JUST FinE
Banks rationalize their bad behavior.
Plus: Up-and-Comers

32 | ACTivE COnvERSATiOn

Bad-boy billionaire Stewart Rahr and the 399 other
members of The Forbes 400.

cover PhoTograPh by eric MilleTTe for forbeS
6 | FORBES OCTOBER 28, 2013


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contents — octoBeR 28, 2013

THOUGHT LEADERS

82 | SurvivorS—and ThriverS
Three distant memories from the
1990s bubble light up our list of
America’s Best Small Companies.

34 | CURREnT EvEnTS
by Paul johnSon

Obama versus Putin:
Can Obama muster the right stuf?

36 | CApiTAL FLOwS
by naThan leWiS

A stable dollar delivers economic stimulus.

40 | innOvATiOn RULES
by rich karlgaard

Tara’s lesson: Smart leaders copy.

STRATEGiES
42 | DETROiT’S HAppy

HOmE wRECkER

The Pulte family made billions building homes.
Now Bill Pulte is tearing them down.
by joann Muller

46 | THE ApOTHECARy

Three key questions for ObamaCare’s rollout.
by avik roy

98 | Who needS The iPhone?
Even without Apple, InvenSense’s
gyroscope business is pointing
straight up.

TECHnOLOGy
48 | A piCTURE’S wORTH
A BiLLiOn DOLLARS

Jon Oringer turned a side project
into a $2.5 billion photo phenomenon.
by STeven berToni

54 | CHinA’S BLACk BOx

The Chinese answer to Apple TV
is full of pirated content.
by SiMon MonTlake

56 | OnE ADDRESS BOOk
TO RULE THEm ALL

Privacy experts are a little freaked out
about a startup’s self-updating
contact book.

92 | Say cheeSe
Annie’s has the right ingredients
for organic growth.

by adaM Tanner

42 | deMoliTion
Man
A home builder
turns to the
wrecking ball.
26 | Murder
doeSn’T Pay
The Stephen King
Rule: fewer bodies,
more money.

invESTinG
60 | DAy TRADinG GABELLi
ETFs may soon be emerging from
their index fund ghetto.
by ari i. Weinberg

64 | pORTFOLiO STRATEGy
by ken fiSher

Betting against Bernanke.

66 | SmALL STOCkS
by jiM oberWeiS

America’s best small stocks.

68 | yEAR-EnD CHECkUp
by WilliaM baldWin

A Roth conversion formula.

8 | FORBES OCTOBER 28, 2013



contents — octoBeR 28, 2013

BEST SmALL COmpAniES

48 | caMera Man
Oh, snap! Shutterstock’s
Jon Oringer is Gotham’s
frst tech billionaire.

82 | DARwin’S DiGiTAL DARLinGS

Some Web dinosaurs have surged back onto our list
of America’s Best Small Companies.
by naTalie robehMed

92 | miLD inDiGESTiOn

Annie’s has discovered the double-edged
phenom of innovation: new products fuel growth
and nasty competition.
by Meghan caSSerly

98 | THE CHipS ARE Up

A year after a management shakeup InvenSense is
out for a piece of Apple’s business.
by karSTen STrauSS

FEATURES
70 | CAn TwiTTER SAvE Tv? (AnD CAn
Tv SAvE TwiTTER?)

On the eve of its fervently hyped IPO, the
micromessaging service has a radical plan to nab
the ad dollars it needs to thrive: help TV networks
survive the digital media revolution.
by jeff bercovici

102 | THAT SinkinG FEELinG

Carnival has brought a new CEO on board, but

investors are headed for the lifeboats.
by caleb Melby

60 | deSigner fundS
ETFs from your favorite
mutual fund stars.

BEST BUSinESS SCHOOLS
108 | EnTREpREnEUR BOOT CAmp
Austin’s tiny Acton School has one goal: turning
battle-ready graduates into startup successes.
by Michael noer

Plus: The 25 Best Business Schools
BrandVoice
by SaMSung elecTronicS aMerica

Transforming STEm Education One
Community at a Time. 111

116 | TAkEOvER UnivERSiTy

102 | S.o.S.
Carnival’s new skipper may be on a
cruise to nowhere.

A wildly popular Stanford class encourages M.B.A.s
to take control of a real business.
by george anderS

LiFE
122 | THE vinEyARD COLLECTOR
TPG cofounder Bill Price has a plan:
produce wine you can’t buy.
by richard nalley

128 | THOUGHTS
On entrepreneurs.

122 | The good
earTh
Kistler Vineyards stars
in a private equity
prince’s second act.

10 | FORBES OCTOBER 28, 2013


Can you risk less by
reinventing more?
Three out of four new products never make it to market, which makes
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jurisdictions worldwide. A current list of IBM trademarks is available on the Web at www.ibm.com/legal/copytrade.shtml. © International Business Machines Corporation 2013.

FORBES

IN BRIEF

EDITOR-In-CHIEF

Steve Forbes
CHIEF PRODUCT OFFICER
Lewis D’Vorkin
FORbEs MagazInE
EDITOR
Randall Lane
ExECUTIvE EDITOR
Michael Noer
aRT & DEsIgn DIRECTOR
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vP, InvEsTIng EDITOR
Matt Schifrin
ManagIng EDITORs
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sEnIOR vP, PRODUCT DEvElOPMEnT anD vIDEO
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ExECUTIvE PRODUCER
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Tim W. Ferguson FORbEs asIa

Kerry A. Dolan, Connie Guglielmo, Kashmir Hill sIlICOn vallEy
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Nina La France sEnIOR vP, COnsUMER MaRkETIng & bUsInEss DEvElOPMEnT
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Will Adamopoulos CEO/asIa FORbEs MEDIa
PREsIDEnT & PUblIsHER FORbEs asIa
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Moira Forbes PREsIDEnT, FORbEsWOMan
MariaRosa Cartolano gEnERal COUnsEl
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Mia Carbonell sEnIOR vP, CORPORaTE COMMUnICaTIOns
FOUnDED In 1917
B.C. Forbes, Editor-in-Chief (1917-54)
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James W. Michaels, Editor (1961-99)

William Baldwin, Editor (1999-2010)

Innovations Behind
Our Rising Numbers
by lEWIs D’vORkIn

It’s just a number, but it’s a big one. Last month Forbes.com
hit a record 51 million unique monthly readers as measured
by Omniture, a widely used industry reporting tool. ComScore, another measuring service, puts our worldwide audience at 26 million. By either count the number of monthly
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50
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New mobile site goes live in HTML5,
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JULY 2011
Real-time stats
dashboard for
contributors
launches

30
NOV. 2010
BrandVoice
launches with
initial partner,
SAP

OCTOBER 28, 2013 — vOlumE 192 NumBER 6
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12 | FORBES OCTOBER 28, 2013

SEPT. 2013
Intelligent
scrolling

40
streams

MAY 2010
Forbes acquires
True/Slant

2010

JAN. 2013
FORBES
magazine app
launches
JUNE 2012
New home page,
following functionality;
1000 contributors publish
8200 posts/month

2011
2012
2013
MONTHLY UNIqUE VISITORS (IN MILLIONS)

20

10

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FORBES

FACT & COMMENT — STEVE FORBES
“With all thy getting, get understanding”

SEnaTORS: dOn’T BE EaSy
On ThE nExT FEd hEad
BY STEVE FORBES, EDITOR-IN-CHIEF

When President Obama
takes time out from stonewalling
congressional Republicans over
the continuing budget resolution
and raising the debt ceiling to pick
a nominee for the next Federal
Reserve chairman, the U.S. Senate
should be prepared to ask that candidate hard, critical questions and
to reject the person if satisfactory
answers aren’t forthcoming.
To “stimulate” the economy our
central bank, at the direction of Ben Bernanke,
has undertaken unprecedented actions that
have immensely harmed credit markets, thereby
retarding recovery. They have the potential to
infict even greater damage on us and the world
than the 2008–09 crisis. Without congressional
authority the Fed has assumed enormous economic powers. Even worse, despite the Fed’s
manifest failures before and after the economic
crisis, Congress has granted it other powers that
threaten our economic future. The Fed houses
the Consumer Financial Protection Bureau,
which wields almost unbridled authority over
banks and fnance companies regarding mortgages, credit cards and other lending activities, and gives it whatever funds it wants. The
bureau has no real accountability to Congress,

which is why it can hire like crazy at a time of
supposed federal budget tightness and lay out a
reported $95 million in “ofce renovations.”
Senators, whose job it is to confrm or reject
the President’s nominee, will be highly reluctant
to do anything other than go through the motions
in the aftermath of the current circus. Republicans in particular won’t want to be accused of
“playing politics” with such a critical, sensitive
post. But this is the time for statesmanship.

Monetary policy is that peculiar
subject that intimidates most people.
It’s not because of its complexity; the
basics are simple. And, though it may
be impossible to believe these days,
there are plenty of people in Congress who can master arcane, difcult
matters. But, strangely, the psychology of monetary policy strikes anxiety
and trepidation into the hearts of
most. However, given the crucial
importance of the Fed right now, this
fear must be overcome for the sake of the country.
The nominee must be grilled hard regarding
how he/she plans to unwind the Fed’s promiscuous bond buying. The central bank’s recent
botched attempt at “tapering” demonstrates
how difcult this will be. Much of Wall Street is
addicted to the process, as stock and bond gyrations during the “tapering” fasco attest. When it
comes to bond prices, unwinding is going to be
rough. Markets try to anticipate the future, and if
traders and investors think more normal interest
rates are coming down the road, they will mark

the value of bonds down now, not gradually.
Never before in history has an important
central bank done what ours has done: loaded up
on long-term government bonds and mortgages
by borrowing short-term money from banks.
Bernanke & Co. have bought hundreds of billions
of Treasury bonds at premiums from par. That is,
they are paying, say, $1,200 for a bond that was issued at $1,000—which is what happens when you
suppress long-term interest rates. Noted economist and FORBES columnist David Malpass calculates that these premiums now exceed $200 billion
and should be added to our nation’s debt.
This raises other obvious questions for Obama’s
pick: Why shouldn’t these excesses be part of the

OCTOBER 28, 2013 FORBES

| 15


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ADDING
BUTTONS
ISN'T
INNOVATION,
REMOVING
THEM
IS

FORBES

debt, and who gave the Fed the authority to add to the national debt without
congressional approval? The debt
ceiling was exceeded before our Treasury Department acknowledged it.
Quantitative easing upended
American credit markets, just as
rent control does with local housing
markets. QE limited the availability
of credit for nonfavored borrowers.
Under QE the federal government
fnances defcits without tears.
Washington pays barely any interest
on its new borrowings, and, thanks
to the Fed, it can borrow as much
as it wants until the debt limit is
reached—at which point Congress
always raises the ceiling.
Big companies also have easy access to credit, one reason that their
balance sheets have never been stronger. The housing market has benefted
from massive, ongoing purchases
of hundreds of billions of dollars
in mortgage-backed securities. But
smaller, job-creating businesses have
sufered because of limited access to
credit. Only recently has there been
a better fow of credit to this crucial
part of our economy, thanks, in part,
to a wonderful American characteristic—when something is blocked,

entrepreneurs fnd ways to get around
it. Numerous nonbank sources for
credit to smaller businesses, including
equity funds, are starting to fll the gap.
Who gave the Federal Reserve the
authority to allocate credit?
Another important question: Why
has one-third of the Fed’s bond-buying
since the downturn remained at the
Fed instead of being put to work in
the economy? This strange pattern
has been evident for several years.
Why hasn’t the central bank addressed this matter? One big factor is
that regulators pressured banks not
to lend except to the federal government. This was done to improve
bank balance sheets. But this caution
clearly went too far.
Now that we have this massive
overhang, what’s to prevent a return
18 | FORBES

OCTOBER 28, 2013

to 1970s-style infation?
In 2008 the Fed was given permission to pay interest on reserves. Did
this help block the fow of credit to
smaller businesses? Has the Fed conducted any studies regarding this? If
not, why not?
What real-world evidence is there
that quantitative easing here and

Vice Chairwoman of the Federal reserve
Janet Yellen, who likes an ultraweak dollar, is
favored to succeed Ben Bernanke.

elsewhere has actually stimulated
economic growth? Never before in
U.S. history has there been such a
punk recovery after a sharp downturn—and that includes the Great
Depression. A severe contraction
has always been followed by a sharp
upturn. The question then becomes
whether the upswing can be sustained. In the 1930s it could not.
When the Fed tapers again what’s
to prevent a repeat of the 1997–98 Asia
crisis? We got a taste of what could
happen with the brief tapering this
year. The anticipation of higher rates in
the U.S. led to an outfow of funds from
such emerging and middle-income
countries as Brazil, India and Indonesia
and to attacks on their currencies.
This is a vitally important issue.
Too often central banks don’t know
how to defend their currencies. The
frst thing a government must do is
announce unequivocally that it will
defend its money. Next it must raise
interest rates to underscore that
intent. Then it must aggressively buy

its currency in foreign exchange markets with its reserves, usually dollars
(other currencies, such as the euro

and yen, as well as gold, make up the
rest of a country’s reserves). Done
right, this last step will decisively end
any assault on the integrity of the
currency. However, where a central
bank too often falters is in reducing
the size of its monetary base, which
is made up of the currency in circulation and domestic bank reserves.
Here’s what happens. A central
bank buys its currency with dollars—
which is good—but it then promptly
puts that money back into its domestic economy by, most likely, buying its
government debt. What the central
bank took away with one hand has
been given back with the other; the
monetary base remains unchanged.
All that’s happened is that the central
bank has reduced its reserves—and
done it for nothing. Economists call
the process “sterilization.”
This self-defeating exercise happens time and time again. Look at
Thailand in 1997, when the economic
crisis in Asia began. Bangkok had
ample reserves, almost $40 billion. At
the time its currency, the baht, was
fxed to the dollar at roughly 25 bahts
to the dollar. When the baht began to

weaken, the Bank of Thailand should
have reduced its monetary base by
using dollars to buy bahts in foreign
exchange markets. Thailand had
enough dollars to buy its entire monetary base twice over. Instead it engaged in sterilization. It ran down its
reserves and then let the baht “foat,”
which sent it into a free fall.
One country that didn’t fall into
the sterilization trap during the
fnancial crisis of 2008–09 was Russia. When the ruble came under
assault the Bank of Russia initially
responded the conventional sterilization way. Then in early 2009, after an
op-ed piece by monetary expert and
FORBES columnist Nathan Lewis
appeared in Pravda, Russia reversed
course, reducing its monetary base.
Result: The ruble strengthened, the
speculators were routed and the crisis
ended with the ruble triumphant. F

Andrew HArrer/BloomBerg

FACT & COMMENT — STEVE FORBES


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LEADERBOARD

KEEPING SCORE ON WEALTH & POWER

2.150 M

2.046 MIL EMPLOYEES
$60,883 SALARY/EMPLOYEE

1.41
ROAA%

1.3
1.33

INDUSTRY ATLAS

THE STATE
OF BANKING

$65,608

2.097 M
$60,724

THANKS TO the government, U.S. banks are
back on a solid footing. Return-on-averageassets, shown in the center of each bubble,
and stock prices have rebounded impressively
since the depth of the financial crisis. But trillions in stimulus spending has done little to
revive banks’ core mission—lending money—
with the ratio of loans to deposits still falling.
The only thing that has consistently grown, in
good times and bad, is bankers’ pay, represented by the ever-expanding colored circles.

$12 Trillion

10

1,200%

100%
SNL U.S. BANK AND
THRIFT INDEX
TOTAL RETURN

GROWTH OF LOANS
AND DEPOSITS IN
U.S. BANKS AND THRIFTS

1,000

80

8

800
60

6

4

600
40

Loans (left scale)
Deposits (left scale)
Loans/deposits (right scale)

400
20

2

2003

’05

’07

’09

’11

’13

200

2003

’05

’07

’09

’11

’13

SOURCE: SNL FINANCIAL.

2003

20 | FORBES OCTOBER 28, 2013

2004

2005

2006

1.5
COMPENSATION PER
BANK EMPLOYEE

2.205 M

+90K
1.37

80–90K
$91,694

70–80K

$68,987

60–70K

1.2

2.213 M

$87,893
1.11

$72,282
1.02
$84,217

.94

0.9

.91
2.097 M
2.108 M
$80,971

2.089 M

2.108 M

.65

0.6

2.150 M

0.3

$72,434
.13

$79,767

2009
2007

2008

2010

-.10

0
2011

2.061 M

2012

2013
OCTOBER 28, 2013 FORBES | 21


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LEADERBOARD

$53 MILLION

The civil penalty Ty Warner must pay
in his federal tax-evasion case.

SCoRECARD

WINNERS

Mark
Zuckerberg

Jef
Bezos

Phil
Knight

scorecard by scoTT decarLo; new biLLionaires by aLex morreLL
ZUCKerberg: ANDrew hArrer/bloomberg; beZoS: t.J. KirKpAtriCK/bloomberg; AriSoN: JohN pArrA/getty imAgeS; hAyNe: george wiDmAN/Ap; wArNer: ChriS hoNDroS/getty imAgeS

+$4.7 billion

+$2.6 billion

+$1.3 billion

Net worth:
$23.5 billioN

Net worth:
$29.8 billioN

Net worth:
$17.7 billioN

As wall Street’s infatuation
with Facebook continues
and the stock keeps rising,
Zuckerberg makes his
fourth straight appearance
as a big gainer.

Amazon trades at an
alltime high as it introduces
three new Kindle Fire
models, while its founder
ofcially takes control of
the Washington Post.

Nike’s stock soars after
the company posts
impressive quarterly
earnings and is made
part of the Dow Jones
industrial average.

nEW billionAiRE

LOSERS

Micky
Arison

INSYS’
JOHN KAPOOR

Richard
Hayne

Ty
Warner

–$560 million

–$180 million

Guilty

Net worth:
$5.3 billioN

Net worth:
$1.6 billioN

Net worth:
$2.7 billioN

his holdings in Carnival,

the world’s largest cruise
company, tank with lower
quarterly earnings and
weak bookings—see “that
Sinking Feeling,” p. 102.

Urban outftters, which
he cofounded in 1970,
falls 10% in a day after the
company reports weak
sales and fails to meet
analysts’ forecasts.

the beanie babies founder
faces up to fve years in
prison after pleading guilty
to federal tax evasion for
hiding millions of dollars in
a Swiss bank account.

stock of his pharmaceutical company,
Insys Therapeutics, has quintupled since
its May IPO, catapulting him to billionaireship at 70. Insys produces drugs to alleviate
cancer patients’ symptoms; he’s its founder
and executive chairman, and his stake is
now worth more than $600 million. He also
owns more than $400 million of drugmaker
Akorn. The frst member of his family to go
to college, he arrived in America from India
in 1964. His career took of when he joined

LyphoMed, a struggling pharma company, in
1978, worked his way up to general manager,
turned the business around and sold his
share of it in 1990 to net $100 million. He has
been a serial entrepreneur ever since. “This
is the country you can do it in. Nowhere
else,” he tells FORBES.

FigUreS reFleCt the ChANge iN VAlUe oF pUbliCly trADeD holDiNgS From AUg. 23 to oCt. 2.
SourceS: InteractIve Data vIa FactSet reSearch SyStemS; ForbeS.

october 28, 2013 ForbeS | 23