Your Ad Goes Here

THE Internet search engine is an indispensable tool of modern life and an advertising gold mine for Google, the favorite first stop on the Web.

But searching accounts for only about 5 percent of the time people spend online; the other 95 percent is spent on the wider Web, where a different advertising landscape looms. Instead of the short text ads that appear on a Google results page after a search, visitors often find display ads that are the Internet’s equivalents of glossy magazine ads or television commercials. These are typically the province of brand advertisers like Cadillac and Coke.

Until recently, however, it was impossible to tell whether these ads were in fact reaching their target audiences because no one had applied the computing tools and powerful mathematical analytics that were needed to link online display ads to specific markets. But that is changing, and a number of small companies are standing at the forefront of this transformation.

Indeed, many in the industry regard display advertising that can reach specific audiences as the next big online opportunity — the postsearch wave, the Internet ad market 2.0.

“The promise is to be able to measure the reach and effectiveness of brand advertising as never before,” said Rich LeFurgy, a principal at Archer Advisors, a digital-advertising consultant. “If that happens, it will really accelerate the migration of brand advertisers online.”

The big Web portals like Yahoo, AOL and Microsoft are working on it, trying to tease out which display ads should be shown and to whom. Last month, when Google paid $3.1 billion for DoubleClick, which specializes in software for display ads and has close relationships with Web publishers and advertisers, it declared that display ads would be crucial to its future strategy.

But besides the giant portals, there are scores of small, innovative companies — typically venture-backed start-ups — that are behind the revolution on Madison Avenue.

Industry analysts estimate that there are about 200 such companies. Many call themselves ad networks, while others are referred to as ad exchanges or optimization services. The roster includes Revenue Science, Tacoda, Tribal Fusion, Rapt, AdECN and x+1. In one way or another, they are all trying to bring more effectiveness to the online display ad market.

“There is so much money pouring into online advertising that there is a lot of opportunity for newer players,” said Emily Riley, an analyst at Jupiter Research.

These players are actually hybrids, possessing varying degrees of media smarts. They often operate thousands of miles apart, with the ad experts in New York and the quantitative analysts, or quants, as they are called, on the West Coast. Together, they are changing the nature of display advertising on the Web.

In the old days of the dot-com era, online ads were simple billboards plastered onto a Web site in the hope that visitors would notice them if not exactly read them. But faster and cheaper computing and sophisticated software algorithms are making advertising more intelligent and measurable. The quants have become a force in the advertising industry, much as they became a force on Wall Street starting in the 1970s and 80s.

The process of delivering relevant search-based ads is comparatively easy — a typed search term sets off related text ads, which appear next to the results, exposing consumers to sundry, generally relevant, advertisers.

Brand advertising, however, starts higher up on the marketing food chain; it is meant to foster brand and product awareness as well as purchases. The goal is to deliver select audiences — of thousands, even millions — to mass marketers.

The new science of online display advertising involves a potent mix of behavioral targeting, social networking algorithms, predictive economics, pricing optimization and other mathematical strategies.

These geeky tools are used to address the marketer’s quandary, well articulated by John Wanamaker, the 19th-century Philadelphia merchant who said that half the money he spent on advertising was wasted, but he didn’t know which half.

“We’re trying to not only tell which half of ads don’t work, but we’re not going to buy that half,” said Toby Gabriner, chief executive of x + 1, an ad optimization service in New York.

The ideal, Mr. Gabriner said, is to advertise only to prime customers. “Imagine an environment where the company that makes dentures and denture products only advertises to people who don’t have teeth,” he said.

The most common technique for identifying an audience is called behavioral targeting, which tracks, analyzes and predicts online behavior based on where you (actually your browser software) have gone before on the Internet. The ad targeters cull vast quantities of Web-viewing behavior and other data, like the speed of your Internet connection, the time of day you visited a site, whether it was done from work or home and even associated ZIP codes.

These defined audience clusters consist of people who share characteristics based on their behavior on the Internet, not personal information like names, ages, home addresses or telephone numbers. So, for example, a person who recently visited sports and auto Web sites and read global warming articles on news sites would most likely turn out to be an 18- to 45-year-old male. An algorithm would then determine that he would be a good candidate for an ad about Toyota’s hybrid-electric Prius. Advertisers are willing to pay much higher rates to reach such screened audiences.

“The technology finds the best virtual person for an advertiser and that person’s behavioral friends — in the thousands or millions,” said Bill Gossman, chief executive of Revenue Science, a behavioral targeting company in New York whose payroll has doubled to 70 employees in the last year.

The ads are not personalized electronic marketing, however, a prospect that was popularized in the movie “Minority Report,” in which virtual advertisements on the street addressed potential customers by name. But targeting companies do place small software programs, called cookies, on people’s personal computers to monitor their movements on the Web, making privacy advocates uneasy.

Tacoda is an ad network that specializes in behavioral targeting. Its network has 125 million individuals (PCs with the Tacoda cookie). Its software tags are also on 4,000 Web sites; and it collects nine billion data items a day. For every dollar it collects from an advertiser, Tacoda keeps 40 cents, gives 40 cents, as a broker, to the Web publisher displaying the ad and distributes 20 cents to the sites providing targeted data.

Tacoda, which is based in New York, works closely with Web sites at several large media companies, including ABC, NBC, The Wall Street Journal and The New York Times, as well as consumer-product companies and ad agencies. Computing and esoteric mathematics play a role in advertising on the Internet, but so do brand managers, publishing salespeople and ad strategists, said Curt Viebranz, chief executive of Tacoda and a former Time Warner executive. “There’s a lot here that transcends algorithms,” he said.

But automated efficiency is the online advantage. Right Media, for example, wanted to bring the supereffectiveness of the stock market to online display advertising.

The company was founded in 2003 by Mike Walrath, a former fitness manager at a New York Sports Club in Stamford, Conn., who went to work for DoubleClick in 1999. He experienced the dot-com boom and bust of the Internet ad business at DoubleClick, which he called his business school. He started Right Media with many contacts, as well as the belief that the online ad business was riddled with inefficiency.

The company’s first office was a reconverted supply closet at x+1, the optimization service. Right Media provided services for Web advertisers, like AOL, by poring through their data to determine where their ads were most effective. Working on Excel spreadsheets, Mr. Walrath and a few employees performed endless calculations, manual labor by today’s standards.

“It was me and a couple of quants in a windowless room and a willingness to stay up all night,” he said.

In 2005, Mr. Walrath opened the Right Media Exchange, in which advertisers and publishers buy and sell online ad placements in real time through auctions, with Right Media’s optimization technology predicting where the ads will work best. The exchange built gradually but really took off in the last year, handling tens of thousands of auctions in fractions of a second.

Its employment has more than doubled in the last year to 220, to include computer scientists and ad veterans. Last year, its customers transacted $150 million in deals on the exchange, and the company collected an average fee of 7.5 percent, or about $11 million for the year. Mr. Walrath predicted that the volume would more than triple this year.

Right Media’s rapid growth attracted Yahoo, which paid $40 million for a 20 percent stake last fall. Two weeks ago, Yahoo agreed to pay $680 million for the other 80 percent. An industry consultant put Mr. Walrath’s share at about $200 million. (Mr. Walrath, 32, would not confirm this.)

In an interview recently, he said: “Are we pleased? Absolutely. But we haven’t accomplished what we set out to do, which is to bring more efficiency and rationality to these markets. I’ll be here for a long time.”

Joe Zawadzki was the person who let Mr. Walrath set up shop in the spare closet. At the time, Mr. Zawadzki was president of Poindexter Systems, which evolved into x+1.

In the early days, he said, he almost joined Mr. Walrath at Right Media, but decided against it. Mr. Zawadzki, 32, left x+1 last year.

He is planning another online-ad venture. While he is tight-lipped about it, he adds, “There’s still plenty of opportunity out there.”

AFP

RUSSIA is a strong, sovereign and prosperous country, surrounded by enemies and traitors who are bent on undermining its geopolitical power. Upstarts such as Estonia and Poland are trying to spoil Russia’s far more important relationships with proper European countries, such as Germany or France. The freshly-baked European Union (EU) members act on the instructions of America, a hypocritical and arrogant dictator of the world order, which pretends to be a democracy but in fact is closer to the Third Reich.

This, in short and perhaps a bit exaggerated, is the view of Europe from behind the Kremlin wall, intensified by the state media, and shared by many Russians. And it is with this view in mind that Vladimir Putin, Russia’s president, greets Condoleezza Rice, America’s secretary of state, on Monday May 14th. She, seven years ago, famously argued that Russia was a weak and incoherent country.

Russia’s sense of power has been enhanced over the weekend by Mr Putin’s brinkmanship in central Asia. To the irritation of the White House, Russia has apparently persuaded Kazakhstan and Turkmenistan to build a pipeline for the export of gas through, rather than around, Russia. If it actually goes ahead this would spoil American plans for a trans-Caspian pipeline which is seen as crucial for diversifying sources of energy to Europe.

Russia’s rhetorical hostility towards America is reaching levels unseen since the cold war ended. Indeed, even in the late Soviet period anti-American propaganda was less emotional and certainly less sincere than it is today. The question now is whether the noisy words will be translated into action. That may become a bit clearer at the end of Ms Rice’s two-day long visit to Moscow.

There is a fundamental difference in how Russia and America see each other. To Russia, America is more a domestic concern than a foreign one. Russia’s sense of self-esteem has long been inseparable from its relationship with America. A confrontation with the world’s most powerful country restores to Russians a sense of purpose and urgency which had been lost in the post-Soviet years. “America is a crucial part of Russian life and its self-consciousness. America consolidates Russia’s elite and prolongs their existence,” says Lilia Shevtsova of the Carnegie Moscow Centre.

America has no such obsession with Russia. Russia is an important consideration in the country’s foreign policy—no more and no less. In the words of one Russianist in Washington, DC, it is not Russian-American relations that shape world affairs, but world affairs that shape Russian-America relations. Russia matters to America mainly as a factor in other important policy areas such as Iran and Kosovo. As a veto-wielding member of the UN Security Council, Russia has the ability and, perhaps, the inclination to block important international decisions.

One immediate concern is Russia’s position on the independence of Kosovo. Russia vocally opposes a plan by Martti Ahtisaari, a former Finnish president, that would see Kosovo become independent under EU supervision. Russia's sympathies for Serbia, which opposes independence for Kosovo, could be enough to produce a veto from Moscow. So Ms Rice is trying, during this trip, to persuade Mr Putin that Russia should merely abstain on the Kosovo resolution when it comes before the UN.

The danger of Russia blocking the UN resolution is that it would make Kosovo’s move to independence more fraught. It would also help bring to the fore the fact that the EU is divided over Kosovo. For some time Russia has been trying to split the new and old members of the union. The latest arguments in Brussels suggest that it might be succeeding. Tension is high ahead of the Russia-EU bi-annual summit which starts on Friday May 18th. For example Lithuania, which is fed up with Russian bullying and the blockage of an oil refinery, proposes to block wide-ranging negotiations with the Kremlin, to the infuriation of Germany which holds the EU’s rotating presidency. Lithuania argues it is meaningless to talk about close ties with Russia and the EU must not hide behind diplomatic niceties. That suggests a rancorous summit is on the cards. The prospect for Mr Putin's meeting with Ms Rice does not appear to be much better.

AFP

FOR SALE: used Chrysler; one owner since 1998; was good runner but now in need of some attention; cost $36 billion; any reasonable offer considered. Call Stuttgart and ask for Dr Z.

Earlier this year when Dieter Zetsche, DaimlerChrysler’s boss, admitted that the company might sell its American arm, he would have been acutely aware of depreciation in the second-hand car market. With the bidding over on Monday May 14th, Daimler (as the German arm will now be called) has accepted an offer worth only $7.4 billion from Cerberus, a private-equity firm, for just over 80% of Chrysler. This values the American carmaker at roughly a quarter of what Daimler-Benz paid for it nine years ago.

Much of Cerberus's money will go to prop up Chrysler's operations and when all the costs of the deal are taken into account Daimler will have to pay $650m to get the American firm off its hands. But at last Daimler can drive away from the failed merger to concentrate on selling profitable, luxury cars. And although Cerberus has bought itself a carmaker with serious problems under the bonnet, the private-equity firm arrives with a reputation for wielding a big spanner.

America’s carmakers have been languishing as Asian firms prosper. This year Toyota it set to overhaul General Motors as the world’s leading car firm, and the proportion of cars that Detroit’s big three sell in America is still declining. But there are signs that all three of the firms are ready to make changes: they have each cut (or at least plan to do so) their workforces, through union-mollifying buy-outs; both Ford and GM have wrested some concessions on health care and pensions from their workers, helping to lower the long-term costs of making cars.

Chrysler responded to a rotten year in 2006 with plans to lay off 13,000 people, about 16% of the workforce. By 2009 the car firm expects to have cut planned production by about 400,000 vehicles a year (last year it sold 2.7m). Tom LaSorda, Chrysler’s boss and the architect of these cutbacks, will stay on. Cerberus stressed its support for his plans, but more audacious cuts both to jobs and benefits cannot be far off. Although Chrylser will come into its hands debt free, the private-equity firm will still have to cope with pensions and health-care liabilities that top $18 billion (another burden of which Daimler is glad to rid itself). Cerberus is expected to challenge the generous terms of employment won by car workers in the days when Detroit dominated the world and competitors were mere specks in the rear-view mirror.

Ron Gettelfinger, the boss of the United Auto Workers union, welcomed the news of Chrysler’s new owners, suggesting it was in the “best interests” of the company and its workers. But he had earlier made it clear that he would have rather seen Magna, a Canadian car-parts firm, become the new owner. Private-equity’s reputation (and its business model) calls both for financial re-engineering and for big cuts in costs, and Cerberus has shown toughness in previous deals. Mr Gettelfinger’s happy endorsement may indicate that the workers are not looking for confrontation, but the union’s four-year contract with Detroit’s carmakers is set for renewal later this year.

So far GM, Ford and DaimlerChrysler have all backed away from a showdown with the unions, fearing the costs of strikes and disruption to production. Cerberus might be more willing to push for deep cuts in the workforce, and less troubled by the threat of industrial unrest, as reforming the carmaker is the means by which the private-equity firm can make a profit. Cerberus is keen to stress that it has a “good record” with unions, although it is unclear whether that is the result of conquest or accommodation.

The challenge for Cerberus and Chrysler is to persuade workers that painful reforms, and the design and production of cars that consumers actually want to buy, will produce beneficial results for all involved. If that proves possible, Detroit’s other two car giants may also stand to benefit from private equity’s foray into the mainstream of American carmaking. The alternative, the continued decline of the long-term health of the American car industry, looks far less attractive.

STUTTGART, Germany May 14 — DaimlerChrysler confirmed today that it would sell a controlling interest in its struggling Chrysler Group to Cerberus Capital Management of New York, a private equity firm that specializes in restructuring troubled companies. The price being paid is $7.4 billion, mostly in the form of capital that Cerberus will put into Chrysler.

The deal unwinds a 1998 merger that was meant to create a trans-Atlantic automotive powerhouse.

The agreement will leave DaimlerChrysler, of Stuttgart, Germany, with a 19.9 percent stake in Chrysler. DaimlerChrysler will change its name to Daimler AG. It will be freed of a great amount of pension and health care liabilities in the new Chrysler company.

Cerberus will take an 80.1 percent stake in the new company, to be known as Chrysler Holding.

With the deal, Chrysler becomes the first of the big Detroit automakers to be privately owned. The prospect of private ownership had alarmed Chrysler’s labor unions, which had come out strongly against the sale of the company, fearful that an investor might try to break up the company or seek deep cuts in wages and benefits.

But Ron Gettelfinger, the president of the United Automobile Workers union, said today that the deal “was in the best interests of our U.A.W. members, the Chrysler Group and Daimler.”

Of the $7.4 billion, Cerberus agreed to invest $5 billion in the new Chrysler and $1.05 billion in Chrysler’s financial arm. The remaining $1.35 billion will go to DaimlerChrysler.

DaimlerChrysler’s share of the capital represents a remarkable comedown for a company that paid $36 billion to acquire Chrysler in 1998, in a landmark deal that was initially hailed as a blueprint for the future of the global auto industry.

As part of the complicated sale today, DaimlerChrysler has agreed to lend Chrysler Holding $400 million and will absorb $1.6 billion in costs, related to the ongoing restructuring program at Chrysler. All told, the company said, it will have a net cash outflow of $650 million from the transaction.

DaimlerChrysler, however, will transfer nearly $20 billion in pension and health care obligations for Chrysler’s workers to the new company. That will leave Daimler as a smaller, but financially stronger company.

Dieter Zetsche, the chief executive of DaimlerChrysler, said, “We’re confident that we’ve found the right solution that will create the greatest overall value — both for Daimler and Chrysler.”

The chairman of Cerberus, John W. Snow, said, “We would like to thank DaimlerChrysler for their good stewardship of this American icon over the last decade. We are aware that Chrysler faces significant challenges, but we are confident that they can and will be overcome.” Mr. Snow is the former United States treasury secretary.

The deal is expected to be finalized in the third quarter.

The sale would be a watershed for private equity companies, which have become audacious bidders for businesses as varied as retailers, steel companies and airlines in the last few years. But never before has one of them purchased a company as iconic as Chrysler, whose Dodge and Jeep brands are so embedded in the American culture that the company’s near-bankruptcy led to a federal bailout in 1979 that made Lee A. Iacocca, then its chief executive, a household name.

Daimler-Benz of Germany was an eager bidder for Chrysler nine years ago, attracted by its highly profitable lineup of Jeeps and minivans. The combination was originally portrayed as a merger of equals but ended up being a German takeover.

The merger has never resulted in the savings or market power that its creators envisioned, however, as the company struggled to put a mass market brand, Chrysler, together with Mercedes-Benz, a luxury company, while keeping both prosperous.

Chrysler’s fortunes have been on a constant roller-coaster ride, with profitable years followed by years of losses, including a $1.5 billion loss in 2006, when Chrysler fell to fourth place in the American market behind Toyota. (It had a 12.6 percent share of the domestic market in 2006, from a peak of 16 percent in 1999.) Meanwhile, Daimler’s parallel expansion into Asia ran aground because of troubles at its Japanese partner, Mitsubishi Motors. It thought Mitsubishi might serve as the third leg of its global stool when it purchased a stake in 1999. But Mitsubishi’s legal and financial troubles forced Daimler to take management control in 2002, and Daimler ended that alliance in 2004.

In February, DaimlerChrysler announced that it was keeping all of its options open for Chrysler, including a sale or finding a partner to run the company. At the same time, DaimlerChrysler announced a restructuring plan for Chrysler, the second such plan in the last seven years.

Under the latest turnaround, which calls for the company to cut 16 percent of its work force, or 13,000 jobs, Chrysler is not expected to be profitable again until 2009. DaimlerChrysler is scheduled to announce its first-quarter earnings on Tuesday.

Cerberus emerged as the leading bidder for Chrysler late last week, people involved in the transaction said.

Along with Cerberus, other interested bidders in Chrysler included Blackstone, which was exploring a purchase in conjunction with Centerbridge Partners.

Magna International, the Canadian auto parts company, and the Tracinda Corporation, the holding company owned by the billionaire Kirk Kerkorian , also said they had made bids for Chrysler.

Over the last few days, officials at Cerberus and DaimlerChrysler have been involved in detailed discussions, which have been shepherded by JPMorgan, DaimlerChrysler’s investment adviser.

“We’re confident that we have found the solution that will create the greatest overall value — both for Daimler and for Chrysler,” DaimlerChrysler chief executive Dieter Zetsche said this morning. He called the transaction “a new start” for both companies.

Participants in the talks said on Sunday night that union leaders had been informed of the discussions with Cerberus. DaimlerChrysler officials had pledged to discuss any possible sale with Mr. Gettelfinger before it took place, people with knowledge of the talks said.

Chrysler’s unions, including the U.A.W. and the Canadian Automobile Workers, had said they would prefer that Chrysler not be sold. Mr. Gettelfinger has a seat on the 20-member supervisory board at DaimlerChrysler, along with DaimlerChrysler’s unions in Germany.

A deal with Cerberus “puts an enormous amount of pressure on the union,” said David E. Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich.

The union thought private equity “would be the end of the world, and in some ways it probably would be,” Mr. Cole said. “The union is in a horrifying box right now. There’s got to be some real hardball that’s a part of this to get the rank and file to go along with it.”

But Mr. Gettelfinger’s support will go a long way to assuaging Chrysler workers. Indeed, Mr. Gettelfinger said his union was “pleased this decision has been made” because it meant Chrysler could focus completely on its own future.

Cerberus, whose automotive investment operations are headed by David W. Thursfield, a former executive with the Ford Motor Company, will keep Chrysler’s management in place, at least for now, people with knowledge of the discussions said.

“As a private company, Chrysler will be better positioned to focus on its long-term plan for recovery, rather than just short-term results,” said Chrysler’s chief executive, Thomas W. LaSorda.

Mr. LaSorda said no new job cuts were planned by the new owners.

Chrysler executives will leave the DaimlerChrysler management board, which will be reduced to six people.

Chrysler’s former president, Wolfgang Bernhard, who advised Cerberus, may receive a seat on the board of the new Chrysler or play some other role.

Mr. Bernhard visited Chrysler several times in the last few weeks, and has remained friendly with Mr. Zetsche, who ran Chrysler when Mr. Bernhard was president during the early 2000s.

A sale to Cerberus would mark the company’s latest investment in an automotive-related company. Last year, Cerberus, which owns the car-rental companies National and Alamo, led a consortium that purchased a 51 percent stake in the General Motors Acceptance Corporation, the financing arm of General Motors.

Cerberus also reached a tentative agreement to purchase a controlling interest in the Delphi Corporation, an auto parts supplier that used to be owned by G.M. and is operating in bankruptcy. But that transaction stalled, after Delphi and G.M. were unable to agree on contract terms with the U.A.W.

As private equity firms have appeared more often in the headlines, they have also attracted scrutiny. Along with the unions, government officials have expressed increasing concern over the financial restructurings that are the lifeblood of buyout firms; their overhauls of companies have often included massive cuts in jobs or benefits. In countries like Germany and France, private equity firms have been derided as locusts that strip companies of their assets.

Last month the Service Employees International Union , a politically active organization that represents nearly two million workers, released a report expressing public policy concerns about private equity. Among those were questions about the lack of disclosure and about certain tax breaks for buyout firms.

Nonetheless, DaimlerChrysler’s shares have climbed 15 percent, to $82 on Friday, since mid-February, when private equity firms entered the bidding for Chrysler. The shares rose again in early trading today in Europe.

At the company’s raucous annual meeting in Berlin last month, a succession of shareholders stood up to demand that the company move swiftly to dispose of Chrysler.

“This marriage made in heaven turned out to be a complete failure,” said Hans-Richard Schmitz, who represented the German Association for the Protection of Shareholders. “What’s missing now is a swift resolution of the issue by the management of the group.”

EPA/AFP

• RUSSIA gets a visit from Condoleezza Rice, America’s secretary of state, at the beginning of the week and an EU delegation led by Germany’s chancellor, Angela Merkel, arrives later in the week. Ms Rice will have much to discuss with her Russian hosts. She wants their help with Iran and North Korea, for example. But Russia is in a foul mood over American plans to install anti-ballistic missile batteries in eastern Europe. When Ms Merkel shows up, she may try to reassure the Russians while chiding the country over its recent bullying of Estonia. But Europe relies heavily on Russian energy, limiting the pressure she can exert.

• ISRAEL'S prime minister, Ehud Olmert, will meet the Palestinian president, Mahmoud Abbas, in Jericho. Both men are weak: Mr Olmert is accused of botching last summer’s war against Hizbullah in Lebanon; Mr Abbas leads the minority Fatah party in a power-sharing government with the rejectionist Hamas. Both Israeli and Fatah officials denied rumours of secret talks between the two. Outsiders will look for the smallest hint of a breakthrough in the frozen peace process. Mr Olmert will then travel to Jordan for talks with King Abdullah.

• EFFORTS to improve relations between North and South Korea may gather steam. A “peace train” is scheduled to cross the heavily-fortified border of the two countries for the first time in over 50 years, possibly as a prelude to the establishment of more frequent rail traffic. Still nobody is counting on it. Last year's nuclear test by North Korea knocked relations with the neighbours and previous attempts to re-establish a train service were cancelled at the last minute by the North’s jittery military chiefs.

• NICOLAS SARKOZY takes over as president of France from Jacques Chirac. He promises reform in areas such as employment law and education, but expect some resistance. Opposition politicians and trade unionists have already poured scorn on his plans and protesters have already taken to the streets, setting alight cars in customary fashion. French voters get an early chance to weigh up their decision in parliamentary elections next month.

WITH skinny trousers and Mary Quant dresses, fashionable Americans are taking their cues from the 1960s this spring. For financial markets and central bankers the retro theme comes from a different, less pleasant, decade. With growth slow yet inflation stubborn, America is facing a weak echo of that 1970s scourge—stagflation.

The economy grew by only 1.3% at an annual rate in the first three months of the year, whereas the overall GDP deflator—the broadest output-based measure of price pressure—rose at an annual rate of 4%. The deflator for “core” personal consumption expenditures (PCE), which excludes fuel and food, rose more modestly in the first quarter. But this favourite inflation yardstick of the Federal Reserve was still outside its comfort zone.

By the standards of the 1970s, when inflation was in double digits and unemployment not far behind, today's plight is hardly grave. Jobs are plentiful and price pressures, by historical standards, are low. But for today's central bankers, determined to maintain their credibility as inflation-fighters, it is distressing all the same. Despite a year of sluggish growth, America's underlying prices have been rising uncomfortably fast.

So far the central bankers have talked tough and done little. They have kept short-term interest rates steady at 5.25% since June, but have made clear that inflation is what worries them most. That bias is likely to be repeated at the Fed's next policy-setting meeting on May 9th.

Less obvious is what will happen over the next few months. Financial markets reckon the Fed will eventually fear recession more than inflation. The price of Fed and eurodollar futures suggests that the central bankers are very likely to cut rates by at least a quarter point in the second half of the year, with more loosening likely early in 2008.

That may not mean much. Financial markets have consistently overestimated the central bank's willingness to cut rates in recent months. Look at the sources of inflationary pressure and it is hard to see the Fed dropping its guard. Energy costs have risen sharply (petrol prices are up 80 cents a gallon or more than 30% in the past three months). The dollar is down, hitting a record low of 1.366 against the euro on April 30th. Virtually every measure of wage growth has been accelerating, although increases in productivity have been lacklustre.

Traditional danger signals, in short, all point one way. But they may be becoming less important. The statistical evidence suggests that, thanks to the central bankers' credibility as inflation fighters, America's underlying rate of price increases has become less vulnerable to transitory pressures, such as rising energy or food prices. The relation between unemployment and inflation has also weakened. And with profit margins fat, America's firms have room to absorb higher wage costs.

What matters most, as several Fed governors have pointed out in recent weeks, are people's expectations of future inflation, which in turn depend on their faith in the central bankers. Provided people believe in the Fed's determination to keep inflation low, inflation expectations will stay low. That seems to have been the case. Most gauges of long-run inflation expectations, such as surveys of professional forecasters, have been relatively stable, at 2% or just above, for the Fed's preferred inflation gauge. However, one measure—the Michigan consumer survey—has jumped a fair bit in April, thanks to higher fuel costs.

Despite the underlying inflation risks, a statistical quirk may push core inflation down in the coming months. Housing costs make up a large chunk of America's inflation basket (almost 40% of the core consumer-price index and 20% of the Fed's preferred measure). Since the statisticians lack a direct measure of housing costs for homeowners, they impute a cost based on rents. As the property bubble burst in 2006, more people decided to rent houses rather than buy. That pushed up the imputed cost of housing. Now the supply of rental properties is rising as beleaguered owners try to rent out their unsold flats. With vacancy rates high, rents may slow. March's core PCE index was flat, bringing the 12-month increase down to 2.1%, barely above the Fed's informal limit. It may fall further in the coming months. Exclude rents and it looks even better (see chart).

Less clear is whether core inflation at 2% would calm the central bankers enough for them to cut interest rates. One problem is that Fed officials have not agreed on what their optimal inflation rate is or how quickly they would like to reach it.

Some of the board's more hawkish members would probably prefer core consumer inflation to be well within the central bank's comfort zone of 1-2%. Others might be content with something closer to 2%. One governor, Frederic Mishkin, recently made clear that getting inflation below 2% would demand a reduction in inflation expectations that could be “difficult and time-consuming to bring about”.

Much will depend on just how weak the economy continues to be. So far, sub-par growth has not brought the higher unemployment that the central bankers expected and want. And their official forecast is that GDP growth will strengthen in the second half of the year.

The most recent evidence is mixed. Durable-goods orders suggest investment spending may be recovering from its recent funk. A widely watched index from the Institute for Supply Management showed manufacturing was unexpectedly strong in April. With a weaker dollar and perky growth in the rest of the world, exports are likely to grow fast.

But news from the housing market is getting ever gloomier. An index of pending home sales fell unexpectedly to its lowest level in four years in March. And, hit by higher fuel costs as well as falling house prices, consumers may finally be flagging. Americans cut their spending by 0.2% in real terms in March.

Add these mixed signals on growth to the uncertainties about inflation and the chances are that the Fed will simply do nothing for a good while yet. Unlike in fashion, in central banking the underlying trend can take a while to spot.

Finance directors are paid most in Anglo-Saxon countries, according to a survey of the average pay in 15 countries in 2006 by Mercer, a consultancy. Directors in America received an average of $305,644 in total, while those in Britain got some $253,000. In developing countries such as India, however, total remuneration is a fraction of this, at around $60,700.

As a human being, you’re pretty much stuck with the features you had on the date of manufacture. Very few adults ever become substantially taller, faster or more artistic.

In consumer electronics, though, it’s another story. By nipping, tucking and incorporating improved technologies as they come along, companies can refine a mediocre product through successive versions until it’s a success — if they know what they’re doing.

Research in Motion (R.I.M.), maker of the BlackBerry e-mail phone, definitely knows what it’s doing. If you need proof, just look at the new BlackBerry Curve, which will be available first from Cingular/AT&T in a few weeks. The price hasn’t been announced, but $250 with contract is a good guess. (R.I.M. also announced the cameraless corporate BlackBerry 8830, which, surprisingly, works on the Verizon network in this country and also on the ordinarily incompatible G.S.M. networks overseas.)

The BlackBerry, as any corporate white-collar type can tell you, is an addictive little cellphone with a Stuart Little thumb keyboard. Its best trick is delivering e-mail from any kind of account in real time, as it arrives, without your having to fetch it. In fact, if you have Yahoo Mail or a corporate e-mail account, your BlackBerry even synchronizes your actions wirelessly. Send a reply from the BlackBerry, and you’ll find it in the Sent Mail folder back on your computer.

Lately, though, R.I.M. has been on a quest to hook the rest of us: the hordes who place just as much emphasis on making phone calls and playing music. The tiny BlackBerry Pearl, released last year in chrome and black, may be the most gorgeous smartphone ever designed, and it won legions of new noncorporate fans.

As the torn-out hair tufts from a smartphone designer’s head can attest, however, you can’t have it all; a phone can either be sleek or have a full alphabet keyboard, but not both.

The Pearl has only 14 keys to represent the entire alphabet, most labeled with two letters. Built-in software guesses at which word you want.

That system is generally successful, but it can occasionally drive you nuts. Typing in a word that’s not in its dictionary can take minutes, as I discovered the day I tried to address a message to my friend Jennifer Bowtruczyk.

The point of the new BlackBerry Curve, then, is very simple: it’s a BlackBerry Pearl with a full QWERTY keyboard. On this new model (also called the BlackBerry 8300), every letter gets its own key.

Of course, this new phone is wider than the Pearl, but it’s the smallest full-keyboard BlackBerry ever: 4.2 by 2.4 by 0.6 inches, which is shorter and thinner (but slightly wider) than the Palm Treo 700.

It’s nice that R.I.M. chose a cool name like the Curve, instead of calling its new machine the DCR-5700C or whatever. Still, Curve is a baffling name for this phone, which is no curvier than other BlackBerrys. Nor is R.I.M. throwing you a curve, as in “something totally unexpected”; the Curve is a pleasant and logical descendant of the Pearl. It even has the Pearl’s translucent central clickable trackball, which is so efficient a navigation tool that you forget all about the lack of a Treo-like touch screen.

Actually, several of the Curve’s components are improvements on its predecessor’s. The camera’s flash is much more powerful, and the photo resolution is now two megapixels (although the photos still look as if they came from a phone). You can run a new spelling checker before firing off an important message, although it doesn’t flag errors as you type them, as Word does. The volume increases automatically when you’re calling in a noisy place — an extremely obvious feature that ought to be on all phones.

The Curve’s biggest overhaul, however, has been in its multimedia features. New, attractive, graceful software is in place for playing music and showing photos and videos. You can install a microSD memory card, too — a good thing, since the built-in 64 megabytes of storage hold precious few tunes. Weirdly, you have to remove the battery to get at it.

A new piece of Windows software lets you set up a “watched” folder on your PC desktop; any videos or photos dumped into it are converted into a format that the BlackBerry likes — and are copied over to it.

Better yet, the Curve is one of the first cellphones to offer Bluetooth stereo music playback. That is, it can transmit music from your pocket, wirelessly, to a pair of lightweight Bluetooth headphones; the sound is fantastic. Some of these headsets even have microphones for making calls; when a call comes in, the music pauses automatically until you hang up.

If that all sounds a little bit too 2012 for your tastes, here’s a less radical feature: this phone has a 3.5-millimeter headphone jack. That’s the same audio jack that’s on the iPod and every other music player in existence. On the BlackBerry, it means that you can listen to music with any headphones you like.

This, too, may sound like an obvious feature, until you realize that the earphone jack on 99.99 percent of cellphones is a 2.5-millimeter jack, too small for standard headphones. (The Curve comes with wired stereo earbuds that have a microphone on the cord.)

That’s really the whole Curve story: smaller, lighter, masterly at multimedia.

The rest is pure, traditional, delightful BlackBerry. Efficiency nuts in particular will lap up the ingenious keyboard shortcuts. For example, you can press the I and O keys for “zoom in” and “zoom out” (when viewing photos); N and P stand for “next” and “previous,” T and B for “top” and “bottom,” and so on. In e-mail addresses, you can tap the Space bar to produce the @ sign instead of hunting for a special symbol. The BlackBerry puts in apostrophes automatically in “wont,” “dont,” “Im” and so on, and auto-capitalizes sentences.

There’s also a simple Ringer Off switch on the top, a screamingly obvious feature that is, bizarrely, a rarity on cellphones.

You can charge the phone with a U.S.B. cable attached to your laptop. And the e-mail program can open Word, Excel, PowerPoint, WordPerfect, PDF, JPEG and GIF attachments, which is very cool indeed.

This is a G.S.M. phone, meaning that it works in most other countries (for an additional fee, of course). It works as a speakerphone; you can dial by voice; you can assign speed-dial numbers to any key; and the ring tones are rich and polyphonic.

Unfortunately, the Curve also inherits some of the Pearl’s downsides. It can’t capture video at all. And despite the full keyboard, AT&T’s Curve can’t get onto any of the popular chat networks like AIM, MSN or Yahoo — only Google Talk and BlackBerry’s own proprietary network.

More appalling to the techie set is that while the BlackBerry’s Web browser is nicely designed (and saves you from having to type “http://www” each time), it’s slow; you wait about 10 seconds for the text of a Web page to appear, and 15 more for the graphics. That’s because this phone can connect only to Cingular/AT&T’s sleepy old Edge network, and not to the much faster one that’s already available in several big cities. There’s no Wi-Fi wireless, either.

Finally, of course, there’s the little matter of the network itself; Cingular/AT&T’s cellular coverage is not what you’d call universal. The Curve’s audio quality is fine — but only when a decent signal is available.

Still, only a curmudgeon would focus on those nits. This BlackBerry is a great phone (four hours of talk time, 17 days of standby); a fast, comfortable, responsive e-mail terminal; and a surprisingly full-fledged multimedia machine. With its super-intelligent software design, it blows away all those awkward Windows Mobile phones, like the Motorola Q and the Samsung BlackJack, and presents a tantalizing alternative to the Treo. (The choice of smartphone won’t become any easier in June, when Apple’s even slimmer iPhone is introduced with gigabytes of storage, a complete iPod system and a huge full-length screen — but no physical typing keys.)

All of this is good news. Because even if you can’t upgrade the components you were born with, it’s easy enough to improve upon the ones you buy.

David Simonds

WITH the approach of summer, pilots at the Royal Air Force's base in Coningsby are preparing their vintage aircraft from Battle of Britain times for the season's popular air shows. These days, though, the buzzing of Spitfires and Hurricanes in the skies over Lincolnshire is drowned out by the imperious roar of a newer arrival.

Typhoon, to hear the pilots talk, is as impressive a plane as the Spitfire was in its day. With its power, agility, ease of control, ability to fly high and fast, modern weapons and data links, Typhoon can beat any jet in the world, they claim, except possibly America's top-of-the-line (and far more expensive) F-22 Raptor.

Perhaps so. But the army and the navy are less than enamoured. The 232 planes the RAF is expecting to buy will cost some £20 billion ($40 billion) in all, making Typhoon Britain's most expensive defence programme yet. It is eating up funds that could go to equip other services—and this at a time when overstretched ground forces are fighting wars in Iraq and Afghanistan. Built by a consortium from Britain, Germany, Italy and Spain, Eurofighter (as Typhoon was known) was designed to give superiority in the air during the cold war. Critics argue that it is ill-suited to today's business of seeking out insurgents on the ground.

Not true, says the RAF. Typhoon will excel both at shooting down other planes and at precision bombing and aerial reconnaissance. The air force hopes to prove its point in the coming months. The first operational Typhoon squadron will be on high alert in June, ready to protect Britain's skies from foreign intruders and intercept hijacked aircraft. By the middle of 2008 the RAF expects to have the multi-role version on the front line supporting ground troops in Iraq or Afghanistan.

The RAF says air power should not be taken for granted; it is only through mastery of the air that the army and navy enjoy freedom to manoeuvre below. The Falklands war 25 years ago was a reminder that unexpected conflicts do happen.

The trouble is that it takes decades to develop a complex new defence system but threats change quickly. Each of the services argues that it holds the key to future security. Their usual tussle with each other and with Whitehall for resources has become more bitter as the Comprehensive Spending Review, which sets the parameters of government spending from 2008 to 2011, nears its conclusion this summer.

Admiral Sir Jonathon Band, the navy's chief, gave warning in February that cuts to the fleet risked reducing the once-mighty Royal Navy to the status of the “Belgian navy”. The navy frets that it could lose the two new aircraft carriers it has been counting on. With a planned displacement of 65,000 tonnes (and costing around £3.6 billion together), these carriers would be three times larger than the mini-carriers the navy has now. They would carry short-take-off and vertical-landing versions of the Joint Strike Fighter, stealthy planes that are being developed jointly with America to replace the Harrier jump-jets. The Ministry of Defence has proposed buying some 150 for the British navy and the air force. They would cost at least £8 billion in total.

Senior army commanders complain that Britain will have a surfeit of expensive fast jets, even though the main threat in the foreseeable future will come from old-fashioned weapons such as AK-47 assault rifles, grenade launchers and improvised bombs. The army chief, General Sir Richard Dannatt, gave warning in October that prolonged deployments overseas could “break the army”. It claims it needs more money to improve pay and conditions in order to attract soldiers and keep them. Army sources say the service wants to expand its shrunken ranks, raising its current 99,500 soldiers to the full budgeted number of 101,800 and then adding 3,000-4,000 more.

The army also wants to buy medium-weight armoured vehicles to replace existing equipment, some of it built in the 1960s. But the so-called Future Rapid Effect System (FRES), which costs around £14 billion, is hopelessly delayed. If the price of the FRES is the postponement or cancellation of the carriers, say some generals, so be it.

At its heart, the argument over what equipment the armed forces need, and what they can afford, is a debate about Britain's place in the world. Should it aspire to remain a global power or give up the pretence of imperial policing? Should it give priority to countering insurgency or invest in the capacity to wage high-intensity wars against more sophisticated, but still unforeseen, enemies in the future?

In a speech in January the prime minister, Tony Blair, said that British servicemen should be both “war-fighters and peacekeepers”. In an age of global terrorism, Britain had to be able to project military power around the world because “the new frontiers for our security are global”. This was not to prefer “hard” military power to “soft” political and economic power, but to make sure that they could reinforce each other.

That's all very well, say the top brass, but such ambitions do not come cheap. They also know the real decisions will be made not by Mr Blair but by the man next door—the current chancellor of the exchequer and future prime minister, Gordon Brown. It is unclear whether he shares Mr Blair's global ambitions.

Although the defence budget has been increasing in real terms, it has declined as a share of GDP and now stands at around 2.3% (see chart). Defence spending is running at £32 billion a year—excluding the cost of current operations in Iraq and Afghanistan, estimated at more than £1.5 billion in the year to March 2008. Defence sources say there is a £500m gap in the budget for next year. But the authors of a recent paper in the journal of the Royal United Services Institute argue that the equipment budget (currently about £9 billion) has been under-funded by £1.5 billion a year since the 1998 Strategic Defence Review shifted Britain's focus from defending Europe to expeditionary warfare.

Much of the equipment considered necessary in that review has been cut back, and so has the number of squadrons envisaged. At the same time, the number, size and duration of operations has been much greater than planned. For ordinary soldiers, the strains are visible from the moment they leave Britain in clapped-out Tristar jets to the moment they reach the valleys of Afghanistan with little or no American-style computer networking.

All this does not begin to consider the cost of renewing Britain's Trident nuclear deterrent. The one thing all three services agree on is that the nation's nuclear “insurance policy” should be paid for separately, not out of the defence budget.

Since the terrorist attacks on America in 2001, Britain has in many ways been a country at war operating on a peacetime budget. Without a substantial increase in funds, say commanders, something will have to give. Some argue for a full-blown defence review. “We have lost the art of strategy,” says one general. “All we have is bits of policy.”

AFP

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WILL Tuesday May 8th be marked, in years to come, as a day of celebration in Northern Ireland? There are many reasons to hope so. After generations of bloodshed, followed by nearly a decade of angry political haggling between Protestants and Catholics, local, democratic rule has been restored in the troubled province. The most stubborn of the Protestants, Ian Paisley, an octogenarian hardliner, has been sworn in as first minister of the local executive alongside his arch-foe, Sinn Fein's Martin McGuinness, who has become deputy minister.

The two sides sounded optimistic enough on the day. Mr Paisley, shortly before taking his pledge of office, talked of new beginnings and putting Northern Ireland “on the road to prosperity”. Mr McGuinness suggested that the day’s events represent “one of the mightiest leaps forward” that the Northern Ireland peace process has seen in 15 years. The two, reportedly, had not even exchanged a word until a few weeks ago. But, according to those close to the men, their working relationship has already proved cordial. Last week the two leaders met the president of the European Commission, José Manuel Barroso, and were seen to be smiling and chatting amiably.

Britain’s prime minister, Tony Blair, would obviously like to claim the ceremony on May 8th as the moment when local rule was finally embedded in Northern Ireland. Later this week Mr Blair will announce the date of his departure from office (that will probably come in a few weeks’ time) and he can rightly claim some credit, along with his counterpart in Ireland, Bertie Ahern, and the former British prime minister, John Major, for getting the rival sides in Northern Ireland to strike a deal. Mr Blair and Mr Ahern—the “Teflon taoiseach”—attended the ceremony, the latter keen to point to a success of his Dublin government before voters south of the border take part in a general election on May 24th. There is some possibility that Sinn Fein could become part of governments on both sides of the border.

Yet despite the backslapping this week, there are reasons, too, for caution when assessing the power-sharing deal. Despite grand comparisons with historic political compromises elsewhere, such as the joint rule of whites and blacks in post-apartheid South Africa, the province’s new government represents the coming together not of moderates and visionaries but of hardline parties. Both Mr Paisley’s Democratic Unionist Party and Mr McGuinness’s Sinn Fein—the political wing of the terrorist Irish Republican Army—are responsible for ditching decent parties in the province that had striven for peace and compromise far more consistently over the years. Then it took political pressure from Britain’s government—threats to make Northern Ireland’s residents pay water bills for the first time and to weaken the province’s excellent grammar schools—to get the hardliners together at all.

As for Northern Ireland’s future, the brave talk of prosperity will depend in part on getting closer economic ties with the strong economy south of the border. But the province has also to wean itself off massive subsidies from Britain. Over a third of the 770,000 people in jobs are directly employed by the public sector, which accounts for two-thirds of economic output. Between the omnipresent state, large numbers (around half a million people) who are economically inactive and the black economy run by both Protestant and Catholic paramilitaries, little space exists in which private enterprise can flourish. In the long term, Northern Ireland’s prospects depend on it getting not only a government of local leaders who are prepared to work together, but also on adopting policies that will ease massive economic dependency on London.