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. ~ent~·~ ...:::on for volatility 36 i? The dangers of Faecbook 37 > Video for the small screen-and any other sized screen, too 38U I~~~octor on your wrist 38 "·Innovator: Todd Rider has a kill switch for viruses 40 QJ Edited by Barrett W. Sheridan .

e h ology Apple's Supply-Chain Secret? Hoard Lasers ~ The iPhone maker spends lavishly on all stages of the manufacturing process

••."Operations expertise is as big an asset for Apple as grQduct innovation": --'--' -- ...-,~.--.---~- --- > <;.

About five years ago, Apple '~-'toa massive competitive advantage for design gurujony lve Apple: Operations. This is the world of decided he wanted a new manufacturing, procurement, and 10-

feature for the next MacBook: gisticsin which the new chief executive a small dot of green light above officer,Tim Cook, excelled, earning him

the screen, shining through the trust of Stevejobs. Accordingto more '~~!!!IJII•••.the computer's aluminum than a dozen interviews with former.-> •.. casing to indicate when employees, executiyes.at-snpplfers,' --

)!~,'<:C!I!ler5!was on. J'he._. _._and.managemerif~'perts-familiarwit:lr' problem? It's physically the company's operations, Apple has __»< impossible.to shine light built a dosed ecosystem wh~jt--¢Xerts are.often in the single digits, is "exactly

'through metal. control over nearly every-pieceof the what people said when Applegot into lve called in a team supply chain, from-designto retail store. cell phones," says Munster.

of manufacturing and Because o£it:SVolume~andits occasional Apple began innovating on the nitty- materials experts to figure ruthlessness-Apple gets big discounts on gritty details of supply-chain manage- out how to make the irn- __ -parts, manufacturing capacity, and air ment almost immediately upon Steve possible possible, accord- freight. "Operations expertise is as big jobs's return in 1997. At the time, most

ing to a former employ- an asset for Ayple as product innovation computer manufacturers transported ~" ee familiar with or marketing," says MikeFawkes,the products by sea, a far cheaper option

the development former-supply-chainchief at Hewlett- than air freight. To ensure that the com- who requested Packard and now a venture capitalist pany's new, translucent blue iMacs

anonymity to avoid with VantagePoint Capital Partners. would be widely available at Christmas irking Apple. The ."They've taken operational excellenceto the followingyear, jobs paid $50 mil-

team discovered It- a level never seen before." lion to buy up all the available holiday could use a customized This operational edge is what enables air freight space, saysjohn Martin, a

laser to poke holes in the Apple to handle massiveproduct launch- logistics executive who worked with aluminum small enough to be es without having to maintainlarge",prof- Jobs to arrange the flights. The move ..~/~

nearly invisible to the human eye but it-sappinginventories. It's allowed a com- handicapped rivals such as Compaq.that big enough to let light through. pany often criticized for high prices to later wanted to book air transporpshm-

.Applyingthat solution at massive sell its iPad at a price that very few rivals larly, when iPod sales took off-if 2001, volume was'a-different-matter.-Apple_can.beat" whtle.stlll.eaminga.zspercent- . - Apple.realized.it.could.packso mauy_ ,--, needed lasers, and lots of them. The, __ margin on the device, according to the of the diminutive music pilly-" - team of experts found a U.S.company" estimates of Piper jaffray analyst Gene ers on planes that itbecame that made laser equipment for micro- Munster.AndItfheiatestI1J!.Ilors are to economical to shiP them di- chip manufacturing which, after some. be believed, Apple's operatiorl3J.-~er::.._' rectly from Chinese facto- tweaking, could do the job. Each ma- tise is likelypart of what givesthe com- "ries to consum- chine typicallygoes for about $250,000. pany enough confidence to enter the ers' doors. Wl1err:;'/""" Apple convinced the seller to sign an ex- notoriously cutthroat television market an HP staffer clusivityagreement and has since bought by 2013 with a TVset that would tightly bought one and hundreds of them to make holes for the integrate with existingApple software received it a few days green lights that now shine on the com- likeiTunes. The widespread skepticism later, tracking its progress pany's MacB~okAirs,Trackpads, and over Apple's ability to compete in.sy.ch around the world through Ap- wireless keyboards. a price-sensitive market, wher:,e111argins pie's website, "It was an 'Oh s-'

Mostof Apple'Scus- .- moment," recalls Fawkes. tamers have probably never That mentality-spend exorbitantly given that green light a second wherever necessary, and reap the .'-,"?-, thought, but its creation speaks benefits from greater volume in the ~'J

It ; 2

I i November 7 - November 13, 2011

Bloomberg Businessweek

I ----------------------------------------------I Technology I . I long run-is institutionalized throughout , Apple's supply chain, and begins at the

design stage. Ive and his engineers some- times spend months living out of hotel rooms in order to be close to suppliers and manufacturers, helping to tweak the industrial processes that translate prototypes into mass-produced devices. For new designs such as the MacBook's unibody shell, cut from a single piece of aluminum, Apple's designers work with suppliers to create new tooling equip- ment. The decision to focus on a few product lines, and to do little in the way of customization, is a huge advantage. "They have a very unified strategy, and every part of their business is aligned around that strategy," says Matthew

1

Davis, a supply-chain analyst with Gart- ner who has ranked Apple as the world's

I best supply chain for the last four years.

When it's time to go into production, Apple wields a big weapon: More than $80 billion in cash and investments. The company says it plans to nearly double capital expenditures on its supply chain in the next year, to $7.1billion, while committing another _$2.4billion in pre- payments to key suppliers. The tactic ensures availability and low prices for Apple-and sometimes limits the options for everyone else. Before the release of the iPhone 4 in Iune 2010, rivals such

as HTCcouldn't buy as many screens as they needed because manufacturers were busy filling Apple orders, according to a former manager at HTC.To manu- facture the iPad 2, Apple bought so many high-end drills to.make the device's in- ternal casing that other companies' wait time for the machines stretched from six weeks to six months, according to a man- ager at the drillmaker.

Life as an Apple supplier is lucrative because of the high volumes but painful because of the strings attached. When Apple asks for a price quote for parts such as touchscreens, it demands a de- tailed accounting of how the manufactur- er arrived at the quote, including its es- timates for material and labor costs, and its own projected profit. Apple requires many key suppliers to keep two weeks of inventory within a mile of Apple'S assem- bly plants in Asia, and sometimes doesn't

IPOs

Groupon's Roller Coaster As of press time, the daily-deal site planned to go public on Nov. 4 at a valuation as high as $11.4billion. It's been a rocky two years for the startup. +Douglas MacMillan

$25b 3/2011

Bankers discuss an IPO valuing Groupon at

as much as $25 billion

Market valuation

:1 ~IIJ 11/2009,I Groupon is valued at '1 $250 million, after a II venture capital round,

$1 2.5b by Accel

II 2007Andrew Mason starts 1

1 1,1, ( Grouponwith a

$1 million check from Ii Eric Lefkofsky

II: $0 I ''i''""1''''1'''I'''''I'~'I''''!''''!''"~~...,..'!''''!''''!'''9'''''I'~'I'''I''''1''''''r''T''''!''''i_r DATA, BLOOMBERGfill " Ii ,,111"111111"11"1"1111 2008 2009 2010 2011

! -.-~ -- -------------------

11/2011 After questions about

its finances, Groupon 'settles on a lower IPO range

12/2010 The board narrowly

. rejects a $6 billion ~ offer from Google ~

pay until as long as 90 days after it use" part, according to an executive who ha consulted for Apple and would not spe on the record for fear of compromising the relationship.

Not every supplier gives in. An ex- ecutive who works with a major parts manufacturer says that Apple's bargaiJ ing tactics tend to exert downward pre sure on prices, leading to lower profits and margins. After months of negotia- tions, the company declined a $1billio payment from Apple that would have required the supplier to commit much of its manufacturing capacity to Cuper tino's products. The executive familiar

/ ' with these talks, who asked not to be named because the discussions were not public, says that while deals featur ing $1billion in cash up front are basic ly unheard of, his company didn't war to be too dependent on Apple-and didn't want to help it deflate 'prices.

Apple's control reaches its crescend in the leadup to one ofits famed produ unveilings, a tightly orchestrated pro- cess that has been refined over years of Mac, iPod, iPhone, and iPad debuts. Fo weeks in advance of the announcemern factories work overtime to build hun- .dreds of thousands of devices. To track efficiency and ensure pre-launch secre- cy, Apple places electronic monitors in some boxes of parts that allow observ- ers in Cupertino to track them through Chinese factories, an effort meant to dir courage leaks. At least once, the compa ny shipped products in tomato boxes tc avoid detection, says the consultant wh has worked with Apple. When the iPad 2 debuted, the finished devices were packed in plain boxes and Apple emplo ees monitored every handoff point-loa ing dock, airport, truck depot, and dis- tribution center-to make sure each uni was accounted for.

Apple'S retail stores give it a final op- erational advantage. Once a product go on sale, the company can track demanc by the store and by the hour, and adjust production forecasts daily. If it become clear a given part will run out, teams an deployed and given approval to spend millions of dollars on extra equipmen : get around the bottleneck.

Apple's enormous profits-its gross margins were 40 percent last quar- ter, compared with 10 to 20 percent for most other hardware companies-are in large part due to this focus on opera-

November 7 - November 13, 2011 Bloomberg Businessweek

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tions, which is sure to remain a prior- ity under Cook. The new CEOis known to give colleagues copies of Competing Against Time, a book about using supply chains as a strategic weapon in business. According to Martin, the logistics execu- tive, Cook uses a catchphrase to hammer home the need for efficiency: "Nobody wants to buy sour mille" -Adam Satariano and Peter Burrows

The bottom line Apple plans to double spending on its supply chain. to $7.1 billion, continuing its focus on streamlining and controlling manufacturing.

Domain Names

Friend Me On Faecbook

~ Scammy websites capitalizing on misspellings are on the rise

~ Top sites contend with "more than a thousand typosquatting domains"

Any company that achieves a sizable online presence faces the threat of typosquatters. They're the ones who buy up domain names spelled simi- larly to those of real companies and take advantage off at-fingered users. In October, the National Arbitration Forum dismissed a complaint filed by Google seeking control of three typosquatting sites, goggle.com, goggle.net, and goggle.org. The arbitra- tion panel said it lacked jurisdiction. The sites, registered to a Barbados- based businessman named David Csumrik- that's not a typo-divert users to a visitor survey that promises a chance to win prizes such as iPads. According to several watchdog groups, it's a scam: Victims don't win any prizes, and their e-mail addresses are blitzed with spam. Csumrik did not respond to repeated requests for comment.

.Small typing errors are causing out- size problems for companies. A 2010 study conducted by FairWinds Part- ners, a Washington (D.C.)-based In- ternet consulting firm, estimates that typosquatting costs the 250 most-traf- ficked websites $285 million annually in lost sales and other expenses. "Typo- squatting is rampant," says Benjamin

faeebeok I

G. Edelman, an assistant professor at Harvard Business School who has re- searched the topic. "It's not unusual for a top website to be targeted by more th a thousand typosquatting domains."

Typosquatting has been around since the dawn of the Internet, bu del- man says the practice has increa d with the proliferation of online a net- works, which make it easier fi~qUat- ters to earn money off their ill otten traffic. Companies can defen against attacks by registering anyav . able typo domains themselves or by ta . g legal action, but tracking down th owners of typo domains is difficult a d time- consuming. Sites can also su mit a com- plaint to lCANN,the nonpro t that over- sees domain names, but hav to prove that squatters are using their ame in "bad faith."

In recent months, Google fi d com- plaints with ICANNagainst two ites in the Philippines that took adv tage of YouTube's popularity to play the same type of survey scam used by the Goggle sites. In Iuly, Facebook filed a law- suit in California against more than 100 alleged typosquatters that the social network site contends are infringing on the com- pany's trademarks, using domain names such as facebobk.com, facemook.com, and faecbook.com.

Weather Underground, an Ann Arbor, Mich., online weather forecast- ing service, is litigating against four companies that registered more than

three dozen domain names that are close misspellings ofits wunderground.com URL. "Typosquatting

harms trademark owners by confus- ing consumers, and that's especial- ly important to businesses that exist mostly online like ourselves;' says Chris Schwerzler, director of Weather: Un- derground. The potential damage goes beyond mere confusion. Researchers at San Diego-based secu- rity firm Websense re- ported that more than 62 percent of the active domain names based on common misspellings of Facebook (and not owned by Facebook) led to scams or malicious sites.

824850 Unique U.S. visitors , " .• to Goggle.com in Sept. 2011

7205 Unique visitors to , newyorker.com in Sept. 2011

Typosquatting is a cheap way to get a lot of traffic. According to Com- pete.com, Goggle.com received 824,850 unique U.S.visitors in September-more than many top blogs, including Lifehack- er, Boingboing, and DailyKos.

Google is in the unusual position of being both a victim and a benefi- ciary of typosquatting. Through its AdSense program, the search com-

pany splits the revenue from ads with third-par- ty sites that agree to dis- play them. Harvard's Edelman, who served as co-counsel in an unsuc-

cessful class action seeking to hold Google liable for benefiting from typo- squatting, estimates that the search giant brings in $500 million annually from advertisements on typosquatters' sites. Google declined to comment, but the company does offer what its official policy calls "a limited investigation of reasonable complaints."

Typosquatting also potentially puts corporate secrets at risk. When a squat- ter registers a domain name, he can easily harvest any e-mails erroneously sent to that name. If an advertiser trying to reach his sales contact at Google mistypes and fires off a message to someone "@goggle.com," for in- stance, the Goggle site's owner receives the message. Godai Group, a San Fran- cisco-based information security firm, recently conducted a test to see what

kind of informa- tion typo-squat- ters can access. The researchers set up phony domains

based on the names of the 500 larg- est U.S. companies by revenue, "'~~~- but omitting the period between