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Quest Means Business
Nokia Sues Apple over iPhone; China Q3 GDP 8.3 Percent; Ballmer Talks Windows 7 Launch
Aired October 22, 2009 - 14:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
MAX FOSTER, CNN INTERNATIONAL ANCHOR: Nokia bites into Apple, suing over the iPhone.
The dragon is breathing fire, China's growth, (INAUDIBLE) open the exit.
And it's payback time, the White House cracks down on executive salaries.
I'm Max Foster, in for Richard Quest, and this is QUEST MEANS BUSINESS.
Good evening. The battle to dominate the mobile phone market is heading to the courts. Nokia, the world's largest handset maker is suing Apple, the maker of the iPhone. Nokia says Apple has infringed 10 different wireless patents and that it has not been compensated for use of its technology.
Nokia says it has invested billions on research and development and that Apple has been getting a free ride. While, Nokia is still the number one in the smart phone market, faces a severe squeeze, Apple has just had its most profitable quarter ever. Jim Boulden joins me now.
What exactly is Nokia accusing them of?
JIM BOULDEN, CNN INTERNATIONAL CORRESPONDENT: Well, over the last two years, Nokia has been negotiating with Apple to see whether or not Apple would pay for a licensing agreement for these 10 patents that Nokia has.
Now 40 other companies do pay a licensing agreement for these things that Nokia says obviously that they've patented. Apple has not. So one assumes that something happened in the last few days or weeks where talks broke down or Apple just flatly refused to pay.
Now Apple won't saying anything. They said they won't comment on pending legislation -- pending lawsuits. But, you know, this is very clear that Nokia has decided if you're not going to pay these licensing agreements, we're going to sue you for the money because look how phenomenal the iPhone has been.
And you're right, Nokia is number one right now in smart phones, 45 percent of the market, but that market share is slipping and they had a very bad second quarter.
FOSTER: What exactly are they accused of stealing, though, an idea, a technology, what is it?
BOULDEN: There are very specific technologies in security, encryption, and wireless. We're talking about the ability to use these kind of phones in many different ways. Obviously Nokia is a market leader and obviously Nokia is a technology leader in this kind of area.
They've had a lot of trouble with other companies -- well, there was a big dispute with Qualcomm out of the U.S. That was finally settled. So Nokia has been looking for these companies to pay these fees, these rights. But obviously Apple being very successful, a cynic would say, look, Nokia hasn't been able to do the iPhone.
It hasn't been able to be successful, even though it has music downloads, even though it has apps, even though it has a touchscreen phone. So a cynic would say, look, they're just trying to get the money because they know they're never going to be able to take on the iPhone.
FOSTER: If they do win, and it's not just a threat, they could be taking away some fundamental technology in the iPhone though, which wouldn't be able to function in the way it does without that technology, is that right?
BOULDEN: Well, you would have to think at the end of the day, the iPhone is not going to go away. This is not going to close it down. So what would happen in the end? You're very likely to see a settlement...
FOSTER: A deal.
BOULDEN: A deal. Which is what we've seen happen with Nokia before.
FOSTER: OK. And in terms of our previous experience, has Nokia sort of pushed this all the way or is it just a warning?
BOULDEN: It was a very nasty battle with Qualcomm. I mean, it was getting the point where there was talk about whether or not certain things might get pulled from the market. And that agreement was settled in the end.
Of course, then companies don't tell you what the agreement is, you just know that these things have been settled. In this case, it will be very interesting to see, because, you know, Apple sues people all the time, and so it's kind of turning tide on Apple this time. So we'll have to see how far they want to take it.
FOSTER: OK. Stick there, because we're coming back to you in a moment.
Apple's leading competitor is pulling out all of the stops to keep its market share. One day before reporting quarterly earnings, Microsoft unveiled its latest salvo, which is the operating system, Windows 7. It has already broken pre-order records at the online retailer, Amazon.
Jim, the big question here is, will it meet expectations? Because it had a disaster the last time it tried to do this. A lot of pressure, right?
BOULDEN: It's a lot of pressure, but the previews have been very positive indeed. And obviously Microsoft was not going to get it wrong again, which they got it wrong with Vista. And so -- but this is not just critical for Microsoft, this is also critical for the PC makers, because they want you to buy a brand new PC in time for Christmas.
(BEGIN VIDEOTAPE)
BOULDEN (voice-over): After generally positive reviews, Microsoft is counting on consumers upgrading en masse to its newest operating system, Windows 7. The company has spent years trying to find out what users want.
JULIE LARSON-GREEN, MICROSOFT: So together with the team, we sifted through all kinds of data to try to discover what people are doing on their PCs, what the sequences of events that you're doing, how many wireless networks you connect to, and all of that information helped inform the things that we are -- did in Windows 7.
BOULDEN: So why is 7 so important to Microsoft? Its last major OS upgrade, from XP to Vista in 2007, was not well-received. Vista was certainly a visual enhancement, but there were complaints about the upgrading process, plus security. And many programs and peripherals that ran fine in XP did not run fine in Vista.
Some companies actually reinstalled XP. And Microsoft was forced to keep supporting that OS launched back in 2001, while fixing many of Vista's problems. So this time around, Microsoft has to convince Vista and XP users to upgrade, or perhaps more important for the entire industry, to buy new computers during the holiday season.
What do potential users say?
UNIDENTIFIED MALE: Probably wait a little bit, yes, yes, just to see. We'll let them work all of the bugs out and then figure it out after that.
UNIDENTIFIED MALE: But yes, if Windows 7 will be there, so we'll do it, definitely.
UNIDENTIFIED FEMALE: So you'll definitely be making the switch?
UNIDENTIFIED MALE: Definitely making the switch.
UNIDENTIFIED MALE: It does everything I need to do at home at the moment, so why spend the money?
BOULDEN: 7 is critical for software vendors like Corel as well. It's utilizing 7's newest enhancement, the first computer OS with touchscreen technology.
DAN WEISBECK, COREL: So you'd interact with a book naturally by turning the page. And so what touch allows us to do is, you know, you don't have to learn to go -- drop down a file and go for that page or click on arrows. Now you can instantly just use your finger to turn the page of a photo book.
BOULDEN: Microsoft's operating systems already run on more than 90 percent of all PCs. But Apple is eager to show its still in the game. Its newest OS for Macs, Snow Leopard, came out last month and costs a fraction of Windows 7, which will retail from $120 to more than $200.
While Microsoft's dominance may not be on the line, the company is looking to maintain its reputation. Despite everything else Microsoft does, it's the operating system that defines the software giant.
(END VIDEOTAPE)
FOSTER: OK. Jim, thank you very much for that. We'll be speaking to the chief executive of Microsoft a little bit -- a little later in the show. So wait to hear what he has to say.
BOULDEN: Very interesting.
FOSTER: Thanks, Jim.
Now let's check on how the stocks are doing on Wall Street. Investors are focusing on the latest jobs numbers and corporate earnings, of course. There we have the latest figures for you, over the 10,000 mark still, at least today.
Now stocks around the world ended the day firmly down. Investors are worried about what will happen if Beijing does pull back some of its stimulus money. In Europe, disappointment over Ericsson's latest results didn't help.
Here in London, a broad sell-off dragged the FTSE 100 down nearly 1 percent. Banks and energy stocks were among the biggest losers. Steel- makers ArcelorMittal and Salzgitter also did badly in Paris and in Frankfurt. It follows a downbeat session in Asia as well. Worries about the Chinese economic policy hit investors hit investors in Seoul pretty hard. And the Hang Seng ended the day around half a percent lower in Hong Kong.
Now let's get you up-to-date with the news headlines. Fionnuala Sweeney joins us now from the newsroom.
Hi, Fionnuala.
FIONNUALA SWEENEY, CNN INTERNATIONAL ANCHOR: Hi, Max.
Pakistan's military offensive against the Taliban is ramping up in south Waziristan. The army says troops are fighting for control of Kotkai, the home of Taliban chief Hakimullah Mehsud. Tens of thousands have fled the fighting, raising concerns about a refugee crisis ahead of winter. Meanwhile, insurgents have launched another retaliatory attack in Islamabad. Gunmen opened fire on a military vehicle, killing an army brigadier and a soldier.
A grim milestone for Ciudad Juarez, statistics show the Mexican border city is now ground zero for the country's drug war with killings soaring past the 2,000 mark for the year. Meanwhile the U.S. Justice Department has announced 300 additional drug arrests in part four of a four-year operation, it says that has now put nearly 1,200 people behind bars.
Already battered by two typhoons in recent weeks, the people of the Philippines are bracing for a third, Typhoon Lupit is expected to make landfall in the northern Philippines Friday morning. The nation is already battling an outbreak of disease caused by stagnant flood waters left over from the previous storm.
Anti-fascist protesters briefly broke into the BBC Television Centre in London ahead of an appearance by a far right politician on a popular debate show. Police ejected some 25 protesters from the building, hundreds remain outside. British National Party leader Nick Griffin is set to appear on "Question Time" in about three-and-a-half hours.
And those are the headlines. We'll have more on those stories in about an hour and 20 minutes. That's "WORLD ONE" at 8:30 p.m. London time. Max, back to you in the studio.
FOSTER: Fionnuala, thank you.
Now when we come back, it was the hottest news in town, and these people were desperate to get their hands on it. No celebrity (INAUDIBLE) scandal involved here, just a few vital statistics. We'll tell you what they were in just a moment.
(COMMERCIAL BREAK)
FOSTER: Now absolute jubilation in Beijing as China's supercharged economic slips into a higher gear. The Asian powerhouse is growing at its fastest rate now in a year. And it's leading the rest of the world out of its deep slump, it seems.
Here are some of those magic numbers. There you go. China expands in the third quarter at a growth rate of 8.9 percent, on target for a magic (ph) 8 percent for the whole of 2009. The economy has expanded 7.7 percent in the past nine months alone. Industrial production up 13 percent annually.
Now despite that, trade is actually down, it's down 16.5 percent in that third quarter. Looking at how those GDP numbers actually break down, well, consumption, or household spending, adds 4 percent. Investment is worth 7.3 percent.
Well, how has China done it? This is a question so many people are asking, if trade is actually down. Well, actually, it comes down to that huge stimulus package, $586 billion worth of stimulus in China, $1.27 trillion in new loans. That makes up for a decline in those exports I was talking about. And the speculation is that that stimulus could actually be withdrawn.
And that has concerned a lot of the investors in Asia, as a result the dollar has risen, and that's because they're looking at the dollar really as a safe haven, investors. Now Linda Yueh joins us now from Oxford University.
Thank you so much for joining us. You follow these events very closely, is it fascinating to you that the economy has survived so well? That we are getting these positive figures so quickly?
LINDA YUEH, ECONOMICS FELLOW, OXFORD UNIVERSITY: It is impressive, isn't it? I think at the start of the year many would have doubted that China could achieve 8 percent growth in a year where the world economy is expected to contract by 1 percent for the first time in 60 years.
But they've done it, as you say, because they have substituted the lack of private spending with government spending.
FOSTER: And that's the huge problem now, isn't it, for the authorities? Because it's actually one senior banker in Beijing suggesting that actually we could be facing another bubble because of what is going on there. But they don't want to withdraw the stimulus too soon. So what on earth do they do in this situation?
YUEH: Well, what the Chinese do is gradually begin to move in the direction of trying to contain what they're calling overheating. So I think there is a real danger that when you spend something like 15 percent of GDP, you are going to get inflation.
And on top of that, the Chinese have financed this spending by having the state-owned banking system unleash credit worth over $1.2 trillion. That's over a third of GDP and money swimming around the system. So if you look at their money growth, M2, that is almost at 30 percent, which is extremely high.
So this probably will translate into inflation, but they cannot rein it back too soon because 8.9 percent for this quarter, 7.7 percent for nine months, means you still have three months to go to reach that 8 percent they're really keen on.
FOSTER: It's very tough to gauge this, isn't it? But from your judgment, how would you judge it as in, if it keeps throwing money at the problem, at what point does it become an inflationary concern, a bubble growing in the economy, which they then can't control?
YUEH: I think the Chinese are dangerously close. So there are two main classes of bubbles in China: real estate and stocks. Because capital is trapped there. So that means that the government has pumped in all of this money and the -- if you look at what has happened to the stock market, it's up 60 percent since the start of the year. House prices are also up.
So when they're seeing what this means, they are talking now about worrying about inflation, because they see this, along with the signs of fixed asset investments racing ahead at 30 percent year-on-year, and they're thinking, on the horizon, when we recover, we'll have to deal with inflation.
And that is going to be a huge problem, probably later this year if not early next year.
FOSTER: So when we have the banks producing huge profits and giving bonuses back to their staff, we have the Chinese economy possibly on the edge of another bubble, are we arguing that the global economy is on the way out now completely?
YUEH: I think these are two huge sources, actually, of potential fragility. So it could go well. Banks may well weather this and be recapitalized and better regulated. China could weather this. They could sterilize all of this money inflows from abroad and domestically.
But I think the downside risks are very much there and the key things to watch out for is how much global capital flows are moderated, both going into China and out of China. Because we know these capital flows searching yields via a globalized capital market is one of the causes of a financial crisis. We know that lesson very well now.
FOSTER: A lot of the writing around this China story today has been that China is dragging the rest of the world out of recession. Is that true?
YUEH: It's true to a limited extent. As the world's third-largest economy, if it grows well, that certainly will benefit those people who sell into China. So commodity exporters in, say, Africa, Australia, some manufacturing partners in Asia will benefit, and even some exportive (ph) services from the United States and Western Europe.
But the reason I say it's limited is that it is not the United States. They have closed markets. That means it's not easy to sell into China and benefit from their boom. But not impossible. So it's good news for us, but unfortunately they will not drag us out of this recession like the Americans would if they were growing at a comparable rate.
FOSTER: So we're waiting for them to turn the corner.
YUEH: Always.
(LAUGHTER)
FOSTER: Linda Yueh, thank you so much, indeed.
Well, China is turning to its own people to keep the economy running as well, hoping the stimulus spending will get those consumers to open up their wallets. So how does a foreign company connect to a billion-plus potential customers?
Our Asia business editor Eunice Yoon has that story.
(BEGIN VIDEOTAPE)
EUNICE YOON, CNN INTERNATIONAL ASIA BUSINESS EDITOR (voice-over): Hit the stores in China and it often feels like Christmas shopping, every day, every night, 1.3 billion people live here, most can't afford to buy the latest luxury bag, gadget, or custom-made shirt. But many of them would like to.
(on camera): Chinese consumers are more optimistic than many people in the rest of the world. And with the government here encouraging consumers to shop more, companies worldwide are trying to break in.
(voice-over): One company that understand the Chinese drive is U.S. auto giant General Motors. The Chinese are expected to buy more than 10 million vehicles this year, putting China on the path to become the world's biggest auto market.
JOSEPH LIU, EXECUTIVE VICE PRESIDENT, SHANGHAI GM: In China, we want the customer walking in our showroom...
YOON: GM marketer Joseph Liu says to navigate through China successfully, you need a local partner. GM works with Chinese car-maker SAIC.
LIU: We have a lot of local talent from the partner. So they know the market, and they help us on the distribution side. And they bring a common relationship, which is extremely important in China.
YOON: Liu says relationships, or the age-old notion here of guanxi, take years to develop. So best for newcomers to base executives here.
LIU: You have to stay here full-time, OK? You cannot be visiting here one week and go home and come here another week, particularly for the first few years to establish business in China, it's a very high demand.
YOON: China marketing expert Chris Reitermann says too many retailers get dazzled by the numbers.
CHRIS REITERMANN, PRESIDENT, OGILVYONE: China is way too complex to just nail it down to one big number. You know, there are many different segments, there are different regions, different ethnic groups, different cultures.
YOON: He says because of the Internet, the Chinese consumer is savvier than ever. So it's important to do your homework.
REITERMANN: The mistake that people often make is that they think if you incorporate Chinese culture, that means you have to, you know, put dragons and lions in your ads. But that's really not what it's about. I think it's sensitive -- you have to be sensitive to understand what drives Chinese consumers.
YOON: With so many companies, both foreign and local, looking to crack this market, Reitermann says competition is getting even more fierce. But no matter the product, he says, it pays to make customers here feel like they've arrived.
REITERMANN: Chinese consumers experience a growth like we couldn't even imagine. People want to get there. They want to get there very fast.
YOON: And a lot of companies are lining up to lead the way.
Eunice Yoon, CNN, Shanghai.
(END VIDEOTAPE)
FOSTER: And for one company, it's all about staying in the lead, as Microsoft plays its latest trump card, we'll talk to the company's CEO about Windows 7, and giving Google a run for its money.
(COMMERCIAL BREAK)
FOSTER: So far so good for Windows 7, as we told you earlier in the show, it has been a bumper first day for Microsoft's new operating system. So, consumers seem happy so far, but what about the man running the show? Well CNNMoney's Poppy Harlow has been talking to Microsoft's CEO, Steve Ballmer, as she joins me now live.
There is so much pressure on him right now, isn't there, Poppy?
POPPY HARLOW, CNNMONEY.COM: Yes. So much pressure right now because Windows Vista, out a few years ago, was pretty much -- at least not a success, if not just a failure for Microsoft. So this was a launch of Windows 7 that just took place in New York City. I was just there, just got back to the studio from it.
And to tell you the truth, Max, it went off really without a hitch. Microsoft CEO Steve Ballmer seemed very excited, very energetic about this launch. But I asked him, was it the failures of Windows Vista that ultimately helped lead to the success so far of Windows 7, which is getting really rave reviews thus far. Here is how he answered that question.
(BEGIN VIDEO CLIP)
STEVE BALLMER, CEO, MICROSOFT: I love the reaction that we've seen so far to Windows 7. Of course, the proof comes when customers are out there really buying it, using it.
HARLOW: Right? Right?
BALLMER: And although we've had 8 million beta testers and we hope that both for our XP base and now the hundreds of millions of Windows Vista users, we hope that Windows 7 and Windows 7 PCs are interesting.
Windows 7, I think, the team really started out to say, we're going to be more grounded in customer feed back and partner feedback, people who make software and hardware and devices, than we ever have before. And I think that shows in the market reception.
(END VIDEO CLIP)
HARLOW: All right. But when you look at Microsoft, this is a company that still makes billions and billions of dollars, at the same time, for the first time in 23 years last quarter, Max, Microsoft sales fell. They have to push their sales higher in the midst of a recession with -- when companies and individuals around the world are cutting their spending.
So I asked him straight out, how much is Microsoft going to spend to make Windows 7 a hit? Here's what he said.
(BEGIN VIDEO CLIP)
BALLMER: We're going to continue -- we amped up, starting about seven or eight months ago, and said we're really going to put a serious marketing effort behind Windows and Windows PCs, and we're going to continue that push through the holiday season and beyond.
(END VIDEO CLIP)
HARLOW: All right. So I pushed him for an exact number. He wouldn't give it to me, but he said, Microsoft, Max, is going to spend hundreds of millions of dollars pushing Windows 7 around the world. And it's going to be a while though before we see what the actual consumer reaction is to the product -- Max.
FOSTER: (INAUDIBLE) isn't it, Microsoft? It has got Google with its operating system. So how does it play in the competitive environment?
HARLOW: That's a great question. What you see more and more -- it's so fun to watch Google and Microsoft battle head to head. What you see is Google jumping into the operating system world with Chrome, which it's going to launch. It has got the browser and then its operating system, which it is going to launch, probably next year.
And then you have Microsoft jumping into the search world with Bing, which is actually doing pretty well against Google, nowhere near beating Google in search, but it is a competitive force. So I asked him how does his company -- how does Microsoft -- which is a pretty traditional company when you look at tech land, how does it succeed in the future in the days of mobile devices and also cloud computing?
Here's what he said.
(BEGIN VIDEO CLIP)
BALLMER: If you look at it today, there are two aspects to the cloud. There is Web sites, search, Facebook, Windows Live, but then there is really the growing back plane of the cloud where you're just trying to integrate people's lives across these devices.
And I would say in that area, everybody is kind of just at the frontier and it's kind of an open game. And in the area of search particularly, we're trying to do a lot of innovation in our Bing search engine and hopefully give the market leader a little run for their money.
(END VIDEO CLIP)
HARLOW: You see him smiling there. The market leader, Google, of course. I asked him, all right, will you beat Google? He kind of smiled and paused and said, well, we're certainly going to try, Max. So it's an interesting interview to hear his perspective. You can see the full interview with Steve Ballmer, the CEO of Microsoft, it's right on our homepage there, cnnmoney.com.
But we're yet to see if this is a success. But early indication it's going to be more successful than Windows Vista -- Max.
FOSTER: Looking good so far. Poppy, thank you so much, indeed.
Well, many businesses are welcoming Windows 7 with open arms, and none more so than those who may profit directly from a new system. I asked the head of small and medium business at Dell, Steve Felice, if success for Microsoft could be catching.
(BEGIN VIDEOTAPE)
STEVE FELICE, PRESIDENT, SMALL AND MEDIUM BUSINESS, DELL: It is a very important launch. And we are really happy with the product. I've been using it myself for about a month, and it's definitely an improvement.
There is a number of factors going on here though. Many companies skipped Vista and so they've been using XP, which is now an eight-year-old operating system. So clearly in need of upgrade. When you combine that with the fact that many companies in this down economy have deferred purchases of hardware, it really sets up for a product refresh cycle.
FOSTER: But it does put a lot of pressure on this new software package, though, doesn't it? Because so many people are holding out for it, it has to live up to expectations. And as you say, you've had a preview of it, does it really?
FELICE: Absolutely. I think companies are going to be -- and individual customers are going to be very happy with this product. It's faster. It's more intuitive. It has a lot of great features. I think it's going to be very successful.
FOSTER: And one big advantage for you, it's actually a bit of nightmare to install, because you have to clear your whole drive, don't you? So a lot people are basically just going to buy a new computer instead.
FELICE: I think there will be a reason to do that. And also I would link that to the fact that people have held on to computers for quite a long time. And there are two major things happening right now. There is the maintenance cost of maintaining an older computer. It's actually more cost-effective to just buy another one.
And you also have things like power consumption. The newer technology has much lower power consumption. And I think that's a very topical subject for a lot of people.
FOSTER: And in terms of within the industry, you had as much of a nightmare, really, with Vista, as Microsoft did. You had to deal with all of the backlash from that and all of the problems you had with it. As Microsoft has been under a lot pressure to make that really does not happen again, how are you making sure that doesn't happen again?
FELICE: Microsoft was very collaborative in Windows 7, they worked with Dell closely for quite a while to make sure that this roll-out was successful. We feel very comfortable that they were careful in considering customer needs.
And, again, I think it's going to be successful and I think it's going to be a good thing for Dell.
FOSTER: And you're focused on small- and medium-sized businesses, of course, they may wait a bit longer to upgrade, I guess. They're going to see how it works and fit it into their schedule. So it's not going to be immediate for them.
FELICE: Well, probably not. And we also still have, you know, the recovery going on. So many small businesses are still strapped for credit. And so we're seeing more of an easing out. And an increase in purchases are happening on a sequential basis.
But I think most companies have scheduled roll-outs, and I don't think they'll change their schedule, I think they'll just take this more into consideration as they try to upgrade their hardware in the normal course.
FOSTER: And if I could broaden the debate to talk about the global economy, all businesses have suffered in a similar way. How are you viewing the next few months? Are things really picking up? Are you really confident?
FELICE: I'm increasingly confident because we are seeing sequential improvement. And, you know, there are some things that maybe could turn that the other way. But right now the signs are looking fairly good. I would feel better, though, if we saw credit ease up for small businesses.
It is still very tight and these businesses are very innovative and creative and they usually need some form of financing to keep their ideas going. So that would make me feel better. But we are seeing good trends.
(END VIDEOTAPE)
FOSTER: Steve Felice, global head of small to medium business at Dell, speaking to me a little earlier today.
Now when we come back, it's down to the wire for the Q-25. Seventeen balloons in the pot, eight balloons to go. We'll give you the verdict on six (ph) of the Q-25 companies, including McDonald's, Delta, and AT&T.
Stay with CNN.
(COMMERCIAL BREAK)
FOSTER: Welcome back.
I'm Max Foster in for Richard Quest and this is QUEST MEANS BUSINESS here on CNN.
Now, if someone on Wall Street didn't return your phone call today, don't take it personally. Investors have been inundated with earnings news this session. More than 50 companies in the S&P 500 have reported, as have six companies in our exclusive Q25 Index. The Q25 is our attempt to help you make sense of earnings season. We're assigning green or red balloons to 25 leading companies. If our QMBT (INAUDIBLE) earnings report, we give it a green balloon. Weak reports get a red balloon.
Let's go over to today's earnings reports, then, from 3M and Merck.
Well, 3M reported better than expected profits and sales declined 5.5 percent and cost cutting helped results, too. But the company is raising its profit outlook and says trends are looking up. So we're going to give them a green, of course.
As for Merck, third quarter profits tripled. Revenues also rose. And there is optimism over the company's soon to be completed merger with Schering-Plough, as well. So we're also going to give them a green.
Let's bring in Maggie Lake for a look at the rest of out Q25 companies, because from here, Maggie, it gets a bit more complicated or interesting.
Let's take AT&T. Brilliant figures from them, customer figures. So I'm assuming it's a green.
What's your outcome?
MAGGIE LAKE, CNN CORRESPONDENT: Yes, absolutely. I mean they're -- they're really impressing people and really exceeding expectations. I think they signed up the most new customers they ever have as -- as a company. So we -- we've got to give them a green.
Here's my worry, though. That all of that is coming from the iPhone. They have an exclusive -- they are the exclusive carrier for the iPhone here in the U.S. if they lose that exclusivity, then you've really got to wonder what's going to happen to profits.
So just a little bit of warning and it's something to watch for the future. But right now, they're definitely firing on all cylinders thanks to that iPhone.
FOSTER: Maggie, there's three greens going in there.
Now, we're going to look at Delta, because this is grim news for Delta.
Is there anything positive in there for them?
I mean, it's got to be a red, right?
LAKE: It's got to be a red. I mean this is just a dismal looking report. And the thing to worry about is that they're keeping those fares really low. They're being aggressive on prices, which, of course, takes away from their profit margin. And yet they're still having to cut capacity. It's not even helping to maintain. And, you know, they can't really blame it on the economy because some of their competitors, like JetBlue, are doing better. So this is a company problem. They get a red.
FOSTER: OK. And take us on to the other red, as well, because this is also interesting. This is something you're -- you're pretty clear cut on. This is a red, a clear red and nothing but a red.
LAKE: Yes, and this is UPS. So they're sticking with the air for a while, but in a different way. UPS also disappointing. And, you know, a lot of people pay attention to this one because it's seen as a bellwether for the economy, right?
When things are going well, people shift stuff.
Well, let's take a look at that. Earnings down 43 percent. It was disappointing in terms of expectations.
Here's the thing that really bothered me, though. In terms of their ground business, all those brown trucks you see in the commercials, they're losing ground -- losing market -- no pun intended -- losing market share to FedEx, their competitor. And that is the bulk of their business. So that is not good.
A tiny, tiny bright spot -- international business picking up. And that's a high profit area for them -- a high profit margin area. So that's good.
But overall, this is a red. They -- this was not a good report.
FOSTER: We see more reds then, Maggie.
One more company to go. It is McDonald's. Let's reveal the color. It's green. I mean that won't surprise people, because it's been green for a long time.
But how long can this continue?
LAKE: That's the question a lot of people are asking, Max. But, hey, I mean you've got to hand it to McDonald's, you know, in the recession, a dollar menu, a pound menu wherever you are, you know, that trade down, as people really went conservative, tried to cut costs, helped them out so much. Almost a 6 percent earning rise. They're seeing growth internationally. They're really well poised for international growth, which should help offset any of the uneven nature of this recovery.
But here's something I found interesting, and this is what really sealed it for a green for me. Everybody thinks of them as the cheap play. Actually, especially in your neck of the woods, in Europe, they did well on their higher margin business. And you were joking to me, saying what could that possibly be?
But some of those sort of higher priced burgers, the angus burger, some of their sort of fancier foods, if you will, they actually sold well in Europe. So that maybe bodes well for them being able to continue even as the recession and that trade down eases. But the growth has been so good, the expectations are so high, can they continue to meet them?
That's maybe the -- the little bit of a yellow flag there. But they are a green flag.
FOSTER: OK, Maggie, there we are. There -- those are two vases full of these balloons. It's interesting stuff, isn't it, because actually, they're pretty much neck and neck -- the reds slightly ahead, but it's pretty well balanced.
LAKE: It is and we were -- we were a little worried, because as we supposedly head into recovery, the reds were sort of ahead for a while. But it does look like they're a little more evenly balanced. And I'll tell you something else, Max, the greens -- a lot of them are really convincingly green. So the people who are winning and doing well are doing materially better.
But as we can see, still a little bit of a rough play for some -- some companies out there.
FOSTER: (INAUDIBLE) but it's pretty close.
Maggie, thank you so much yet again.
Now, Washington is launching nothing short of a compensation crank down on the largest financial institutions in the United States. The Federal Reserve is proposing new guidelines on pay practices and it's launching a review of the nation's 28 largest banks to keep them in line. Authorities want to prevent bankers' wallets from becoming so fat that they take the kind of investment risks that we saw lead up to the global financial meltdown.
Now, a day earlier, the Obama administration's pay czar announced plans for drastic cuts at the very highest level for seven bailed out firms.
Christine Romans told CNN earlier how painful those cuts are going to be.
(BEGIN VIDEOTAPE)
CHRISTINE ROMANS, CO-HOST, "YOUR $$$$$": It will be about cut in half for total compensation and -- and the cash part of this out -- the bonus -- the cash part of the compensation will be down about 90 percent, on average. And it will be worse, it looks like, at AIG, by all accounts. AIG the people in the financial products division, they'll be capped at maybe $200,000. Just think of it, from $2 million last year, $200,000 this year.
Why?
Well, this is big cuts coming because this is the -- the bailout hall of shame, quite frankly. These are the seven firms that have had this "exceptional assistance" from the American taxpayer, meaning they wouldn't be alive if it weren't for huge infusions of cash -- taxpayer money. And they are still -- still basically on -- on the government dime here.
The idea to change the pay culture also not to reward or pay out with taxpayer dollars big multi-million dollar pay. I mean the politics of that, as you know, Maggie, the politics have just been really -- you know, really ugly of this.
The companies, of course, expected it. They've been -- they've been passing -- handing over documents and passing over contracts. They are -- fall squarely in the -- in the -- in the sights of Ken Feinberg, the special master for compensation, as he's called at the Treasury Department. He was appointed by the White House earlier this year. And he is best known, maybe, as the person who was responsible for doling out the September 11th Victims Fund, compensating the victims of September 11th. So he's somebody who knows how to sit down with the dollars and cents and figure out how it all works out.
One person I spoke to, Maggie, recently who works for one of these exceptionally bailed out banks said that by all accounts, he was all business, asking for all kinds of different documentation and that they felt like that he had a good sense of balancing, I think, trying to retain -- really be able to retain and hire good people, to try to resurrect these companies.
(END VIDEOTAPE)
FOSTER: Well, President Obama has been speaking whilst we've been on air about executive pay. I'm going to bring you a couple of the comments he's been giving to the press. As you see, he's just wrapped up his comments. But he said it offends values when executives at big firms pay themselves huge bonuses, whilst depending on tax. He said he urged Congress to move forward on financial reform that will prevent crises.
Now, it's amazing what you find when you clear out the basement, especially if you're -- yours is a home to one of the world's finest collections of wine. Deep beneath the streets of Paris, we discovered wine with a vintage of more than two centuries. And it's about to go on sale, if you're interested.
(COMMERCIAL BREAK)
FOSTER: Welcome back.
Investors here in Europe were feeling the winter chill this session. All the major indices closed in the red, with banks and energy stocks among the weakest performances. Oil slipped below its Wednesday high. HSBC fell nearly 2 percent in London, while Commerce Bank dropped 2.5 percent in Paris.
And investors were also reacting to some disappointing earnings. Shares in wireless equipment maker Ericsson slumped more than 6 percent in Stockholm. That's after the company reported third quarter profits slipped 71 percent, to $118 million, missing analysts' forecasts. Sales for the quarter fell nearly 6 percent.
Ericsson says the decline is due to tough market conditions, leading to a sharp drop in demand. It's not the first company to say that.
Well, the global financial crisis has certainly caught up with Ericsson.
I asked the company's president and CEO, Carl-Henric Svanberg, if investors are right to be disappointed with these earnings.
(BEGIN VIDEO CLIP)
CARL-HENRIC SVANBERG, PRESIDENT AND CEO, ERICSSON: If you look at them a bit more carefully, they're -- we are on -- on -- where we were last year. We're doing a result of $5.5 billion in Ericsson's business. Then we have the joint ventures, of course, that -- that have a loss, which is significantly lower than in the second quarter. And then we are taking more restructuring charges, which is -- which is a positive, because we can improve our efficiency even further.
I think on the top line, we are probably where -- where the more insightful analysts were. Some -- some, I think, on -- on the seasonality and the currency effects.
FOSTER: Nevertheless, I guess you'll accept that these are pretty grim results.
Will things get better from here or are things going to get worse?
SVANBERG: Well, I -- I think if -- if we talk -- if we start with the -- with the market as such, that is a bit of a blended picture, because we have in the -- in the mature markets, in the -- in the Western world, we see a -- a very quick pickup over normal growth and everybody is using their iPhones or Blackberries or whatever it is -- or connected laptops. And that is growing faster than I think most expected a few years ago. And we have major rollouts in Japan and in America, in China.
On the other hand, emerging markets are more affected now, as we anticipated and talked about several quarters ago, because of the declining economy and -- and some credit constraints. And that gives this blended picture.
But, again, I mean we -- we started restructuring of costs on an -- already two years ago. So we're holding our margins fine in the Ericsson business.
FOSTER: Some suggestions, though, that because of the problems you're facing, you're going to have to extend that cost cutting program.
Can you confirm that for us and, in which case, how long is it going to go on for and what -- what are you aiming at?
SVANBERG: Well, what -- what we did was that we -- we took a billion dollars in 2008 and that is completed. We said, also, in 2009, that we would do another billion U.S. dollars in -- in 2009, up until the mid of 2010.
But we are also saying today that within that program, as we sort of peel off the onion here, we are -- we are discovering, also, more opportunities. These -- these -- we are accelerating these cost reductions because of the tougher economy. But -- but they are basically because we are turning into an I.T. technology platforms where we can use more hardware in -- and the same hardware in different products more similar -- the same software platforms, fewer software platforms. That makes us a more efficient company.
FOSTER: You're suggesting that the -- the world economy is one of the main reasons or the main reason why you're suffering right now. But it's not as simple as that, is it?
It's competition, as well, new competitors, relatively new competitors are doing things more cheaply than you. So this is a competition issue as much as a global economy issue.
SVANBERG: Well, what you're seeing right now is a mix of the global economy in the emerging markets and the shift from -- from 2D to 3D.
The competitive environment has always been very tough. And -- and -- and it has changed the landscape a lot. Seven years ago, when I started, there were Western (ph) competitors and we were one of them. Today, we are the clear leader. And in the meantime, we've seen the rise of Chinese competition. And they have grown very quickly, quite strong.
But don't forget that we have the majority of -- of our costs (INAUDIBLE) in low cost countries. So the cost difference isn't all that - - all that big.
(END VIDEOTAPE)
FOSTER: A very positive Carl-Henric Svanberg there, CEO of Ericsson, speaking to me a little earlier on.
Now, Guillermo is at the Weather Center.
He's monitoring weather events for you.
What's going on today -- Guillermo?
GUILLERMO ARDUINO, CNN METEOROLOGIST: I wanted to talk about Europe, Max, because in the southern parts of Europe, in the central mat (ph), is where we see this storm that actually is complicating a little bit the situation in Southern France. But it's going to get worse as it moves into Italy. So that's basically what I'm going to be talking about, what I'll be seeing throughout the night. And, also, what kind of severe weather expert we can see.
Flooding, because it's actually very intense. The winds that come along with this, details in a second, and the chance of tornadoes. So we have to see this.
Of course, if you are traveling or if you have any plans driving around this area, there's going to be treacherous. So careful, careful, careful because it's going to be bad. Don't drink.
Now, to the north, we also see the winds, especially into the North Sea. We don't have the severe weather postings over there. Most of them, naturally, are in southern parts of Italy here and into Croatia and Bosnia- Herzegovina and into Albania, as well. And then it gets a little bit better, but it's still bad in northern parts of Italy.
Rome is posting some delays, probably for -- we are expecting delays in Fumicino (ph) in the morning hours tomorrow, Friday, because of the bad weather.
Barcelona still affected with the winds, but I promise you, if you're watching from Barcelona, is it going to start improving a lot in that area. It's going to shift now into Italy, as I said. The same in Dublin, improving conditions if we compare that with before.
Now, this is the details. As the low pressure approaches from the Atlantic Ocean, we are going to see the winds there increase, especially in Scotland. But it's going to be a little bit of an improvement in England in general, especially in Northern England. But then the winds come back.
The same in northern parts of France here. We have Calais for -- for example, the ships going to Dover, the ferries, all stand there, the same thing. So here it's going to be a little bit bad. Needless to say, in the south, we still have the chance of severe storms and that severe wind storms that accompany this.
The bad weather is also affecting Central Germany and in the south. Temperatures are gradually going down in Germany and in Sweden, but not in London. You see 16 degrees the high. We're still in good shape over there, so conditions are improving a little bit, at least in terms of temperatures.
Stay with us.
QUEST MEANS BUSINESS continues after this.
(COMMERCIAL BREAK)
FOSTER: Now it's your chance to own a bit of history in a bottle. A venerable Paris restaurant is clearing out its cellar. It's going to sell off 18,000 bottles of wine and spirits, some of them more than two centuries old.
Jim Bittermann has been into the vaults to investigate.
(BEGIN VIDEOTAPE)
JIM BITTERMANN, CNN CORRESPONDENT: It is one of the oldest and most celebrated restaurants in Paris. And while some food writers visiting the La Tour d'Argent in recent years have not always been so kind, no one would ever criticize two things -- the incredible view from the main dining room across the River Seine to Notre Dame and the even more breathtaking view, at least for wine connoisseurs, down in the basement.
Nearly a half million bottles of wine and spirits that date back more than two centuries. There is, down here, a cognac from before the French Revolution.
DAVID RIDGWAY, CHIEF WINE STEWARD: 1788.
BITTERMANN: And a bottle of champagne from the first shipment to break through the British blockade of the American states in 1815.
The wine list at the La Tour d'Argent runs to 400 pages and details a wine selection which is considered, arguably, the best in France and perhaps in Europe. But now, at least some bottles will be up for sale.
RIDGWAY: There's a moment in time when you have to say enough is enough.
BITTERMANN: David Ridgway, the man in charge of the cellars, has picked 18,000 bottles to be put up for auction.
RIDGWAY: Obviously, it's a bit of a shame to see them go. But at the same time, we're not consuming them, so they've -- they've got to be drunk. That's the finality of any wine, is to be drunk. It's not just to be looked at.
BITTERMANN (on camera): Looking into this wine cellar is a little bit like looking into the pages of a history book. Throughout wars and revolutions, as kings and emperors and presidents have come and gone, the wine has endured. As the chief wine steward here puts it, in an era when things aren't really built to last, it's not so bad to live with something that has been.
(voice-over): The owner of the restaurant, whose family has run the La Tour d'Argent for nearly a century, emphasizes that the sale will not affect the wine selection, since no single vintage will be sold entirely.
ANDREW TERRAIL, DIRECTOR, L.A. TOUR D'ARGENT: The important thing is to have it as a reference. So we want to keep maybe 12, 18 or 24 of this reference. This is more than enough for us and we can keep on buying.
BITTERMANN: That, say the wine experts, is especially important for the restaurants.
OLIVIER THIENOT, DIRECTOR, ECOLE DU VIN: The La Tour d'Argent salon was a really symbol for the wine (INAUDIBLE). The (INAUDIBLE) now is more a symbol for (INAUDIBLE) wine reserves.
BITTERMANN: Old school or not, because the wines here have been kept under the best conditions over the centuries, the restaurant hopes to make at least a million euros -- a million-and-a-half dollars -- from the sale - - liquidity it will use to modernize its other liquid assets.
Jim Bittermann, CNN, beneath the streets of Paris.
(END VIDEOTAPE)
FOSTER: Well, coming up, an American restaurant that has withstood the test of time. In our World At Work series, we visit the eatery that many consider the birthplace of the Philly cheese steak.
(COMMERCIAL BREAK)
FOSTER: Now, you'll know here on QUEST MEANS BUSINESS, we're giving time to all the different ways that you earn and spend your money. It's your world at work and today we want to showcase it.
Today, we've got a glimpse of a classic American job. It's outlasted recession after recession.
Photojournalist Rod Greola (ph) serves up a well known culinary tradition in the City of Philadelphia. It's the famous Philly cheese steak.
(BEGIN VIDEOTAPE)
UNIDENTIFIED MALE: Onions or no onions?
JOE VENTO, OWNER, GENO'S: Me and the guy across the street, we are the originals.
UNIDENTIFIED MALE: Oh, I'll take onions.
(INAUDIBLE)
VENTO: Everybody else, they're all imitators.
FRANK OLIVIERI, OWNER, PAT'S: I don't know, how much are steaks today?
Steak is $7.50, tax included and cheese steak is $8.
The meat comes in, it's cooked, it's sold, it's out the window. It takes approximately six seconds per sandwich to make. If it takes any longer than that, I pull the person off the grill, because they're too slow.
UNIDENTIFIED MALE: (INAUDIBLE) a little wait now.
VENTO: (INAUDIBLE) fry it all day long.
UNIDENTIFIED MALE: Stay here for the sandwich.
VENTO: Otherwise you could never move a crowd.
UNIDENTIFIED MALE: There you go.
OLIVIERI: This is specifically to order which my competition across the street has adopted now.
VENTO: There's no wit here.
UNIDENTIFIED MALE: Take it or leave, sir.
OLIVIERI: If you want a cheese steak with onions, you say cheese wit.
UNIDENTIFIED MALE: With provolone.
OLIVIERI: Wit -- you drop the H. Or a cheese without.
VENTO: Yes, there's no wit.
Wit what?
We generally here don't talk that way.
UNIDENTIFIED MALE: You've got to pummel it a little. (INAUDIBLE) you roll it.
VENTO: It's a back and forth which started like who invented the cheese steak. He says he did, I said I did.
OLIVIERI: We had an employee in the 40s who got tired of eating steak sandwiches every day and put a little cheese on the sandwich and invented the cheese steak.
VENTO: I give him credit with the whiz. But in this neighborhood -- and I've been (INAUDIBLE) -- I can honestly say I invented the cheese steak here.
OLIVIERI: The ownership hasn't changed since 1930s. And then I have managers who are here over 20 and 30 years.
VENTO: I'm as hungry today as I was 43 years ago, when I started the business. It's easy to get to the top. Staying up here is hard. And I just won't allow anybody or anything to beat me, not as long as I'm breathing.
UNIDENTIFIED MALE: OK, $16.
VENTO: Well, that's what I have my son for. I'm giving him to keep my legacy going.
UNIDENTIFIED MALE: $8.
UNIDENTIFIED MALE: Perfect.
VENTO: This is like the Wild West. You know, everything has got (INAUDIBLE). You know, you've got one six shooter, I've got two. I'm going to outgun you any day. And that's why nobody could beat me.
OLIVIERI: They broke the mold when they made Joe.
VENTO: They did, sir. Thank you.
OLIVIERI: He's the man. I love Joe. He's the man because, you know, he was the man. Nobody ever beat him.
VENTO: I've got to thank him, really, because if it wasn't for him, I wouldn't be where I'm at today.
UNIDENTIFIED MALE: No.
(END VIDEOTAPE)
FOSTER: And they keep going and going.
This is QUEST MEANS BUSINESS.
I'm Max Foster in London in for Richard Quest.
Christiane Amanpour is next after the headlines from the I-Desk.
END
