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Thursday, October 31, 2013


Story first appeared on

he National Security Agency has secretly broken into the main communications links that connect Yahoo and Google data centers around the world, according to documents obtained from former NSA contractor Edward Snowden and interviews with knowledgeable officials.

By tapping those links, the agency has positioned itself to collect at will from hundreds of millions of user accounts, many of them belonging to Americans. The NSA does not keep everything it collects, but it keeps a lot.

According to a top-secret accounting dated Jan. 9, 2013, the NSA’s acquisitions directorate sends millions of records every day from internal Yahoo and Google networks to data warehouses at the agency’s headquarters at Fort Meade, Md. In the preceding 30 days, the report said, field collectors had processed and sent back 181,280,466 new records — including “metadata,” which would indicate who sent or received e-mails and when, as well as content such as text, audio and video.

The NSA’s principal tool to exploit the data links is a project called MUSCULAR, operated jointly with the agency’s British counterpart, the Government Communications Headquarters . From undisclosed interception points, the NSA and the GCHQ are copying entire data flows across fiber-optic cables that carry information among the data centers of the Silicon Valley giants.

The infiltration is especially striking because the NSA, under a separate program known as PRISM, has front-door access to Google and Yahoo user accounts through a court-approved process.

The MUSCULAR project appears to be an unusually aggressive use of NSA tradecraft against flagship American companies. The agency is built for high-tech spying, with a wide range of digital tools, but it has not been known to use them routinely against U.S. companies.

In a statement, the NSA said it is “focused on discovering and developing intelligence about valid foreign intelligence targets only.”

“NSA applies Attorney General-approved processes to protect the privacy of U.S. persons — minimizing the likelihood of their information in our targeting, collection, processing, exploitation, retention, and dissemination,” it said.

In a statement, Google’s chief legal officer, David Drummond, said the company has “long been concerned about the possibility of this kind of snooping” and has not provided the government with access to its systems.

“We are outraged at the lengths to which the government seems to have gone to intercept data from our private fiber networks, and it underscores the need for urgent reform,” he said.

A Yahoo spokeswoman said, “We have strict controls in place to protect the security of our data centers, and we have not given access to our data centers to the NSA or to any other government agency.”

Under PRISM, the NSA gathers huge volumes of online communications records by legally compelling U.S. technology companies, including Yahoo and Google, to turn over any data that match court-approved search terms. That program, which was first disclosed by The Washington Post and the Guardian newspaper in Britain, is authorized under Section 702 of the FISA Amendments Act and overseen by the Foreign ­Intelligence Surveillance Court (FISC).

Intercepting communications overseas has clear advantages for the NSA, with looser restrictions and less oversight. NSA documents about the effort refer directly to “full take,” “bulk access” and “high volume” operations on Yahoo and Google networks. Such large-scale collection of Internet content would be illegal in the United States, but the operations take place overseas, where the NSA is allowed to presume that anyone using a foreign data link is a foreigner.

Outside U.S. territory, statutory restrictions on surveillance seldom apply and the FISC has no jurisdiction. Senate Intelligence Committee Chairman Dianne Feinstein (D-Calif.) has acknowledged that Congress conducts little oversight of intelligence-gathering under the presidential authority of Executive Order 12333 , which defines the basic powers and responsibilities of the intelligence agencies.

John Schindler, a former NSA chief analyst and frequent defender who teaches at the Naval War College, said it is obvious why the agency would prefer to avoid restrictions where it can.

“Look, NSA has platoons of lawyers, and their entire job is figuring out how to stay within the law and maximize collection by exploiting every loophole,” he said. “It’s fair to say the rules are less restrictive under Executive Order 12333 than they are under FISA,” the Foreign Intelligence Surveillance Act.

In a statement, the Office of the Director of National Intelligence denied that it was using executive authority to “get around the limitations” imposed by FISA.

The operation to infiltrate data links exploits a fundamental weakness in systems architecture. To guard against data loss and system slowdowns, Google and Yahoo maintain fortresslike data centers across four continents and connect them with thousands of miles of fiber-optic cable. Data move seamlessly around these globe-spanning “cloud” networks, which represent billions of dollars of investment.

For the data centers to operate effectively, they synchronize large volumes of information about account holders. Yahoo’s internal network, for example, sometimes transmits entire e-mail archives — years of messages and attachments — from one data center to another.

Tapping the Google and Yahoo clouds allows the NSA to intercept communications in real time and to take “a retrospective look at target activity,” according to one internal NSA document.

To obtain free access to data- center traffic, the NSA had to circumvent gold-standard security measures. Google “goes to great lengths to protect the data and intellectual property in these centers,” according to one of the company’s blog posts, with tightly audited access controls, heat-sensitive cameras, round-the-clock guards and biometric verification of identities.

Google and Yahoo also pay for premium data links, designed to be faster, more reliable and more secure. In recent years, both of them are said to have bought
or leased thousands of miles of fiber-optic cables for their own exclusive use. They had reason to think, insiders said, that their private, internal networks were safe from prying eyes.

In an NSA presentation slide on “Google Cloud Exploitation,” however, a sketch shows where the “Public Internet” meets the internal “Google Cloud” where their data reside. In hand-printed letters, the drawing notes that encryption is “added and removed here!” The artist adds a smiley face, a cheeky celebration of victory over Google security.

Two engineers with close ties to Google exploded in profanity when they saw the drawing. “I hope you publish this,” one of them said.

For the MUSCULAR project, the GCHQ directs all intake into a “buffer” that can hold three to five days of traffic before recycling storage space. From the buffer, custom-built NSA tools unpack and decode the special data formats that the two companies use inside their clouds. Then the data are sent through a series of filters to “select” information the NSA wants and “defeat” what it does not.

PowerPoint slides about the Google cloud, for example, show that the NSA tries to filter out all data from the company’s “Web crawler,” which indexes Internet pages.

According to the briefing documents, prepared by participants in the MUSCULAR project, collection from inside Yahoo and Google has produced important intelligence leads against hostile foreign governments that are specified in the documents.

Last month, long before The Post approached Google to discuss the penetration of its cloud, Eric Grosse, vice president for security engineering, said the company is rushing to encrypt the links between its data centers. “It’s an arms race,” he said then. “We see these government agencies as among the most skilled players in this game.”

Yahoo has not announced plans to encrypt its data-center links.

Because digital communications and cloud storage do not usually adhere to national boundaries, MUSCULAR and a previously disclosed NSA operation to collect Internet address books have amassed content and metadata on a previously unknown scale from U.S. citizens and residents. Those operations have gone undebated in public or in Congress because their existence was classified.

The Google and Yahoo operations call attention to an asymmetry in U.S. surveillance law. Although Congress has lifted some restrictions on NSA domestic surveillance on grounds that purely foreign communications sometimes pass over U.S. switches and cables, it has not added restrictions overseas, where American communications or data stores now cross over foreign switches.

“Thirty-five years ago, different countries had their own telecommunications infrastructure, so the division between foreign and domestic collection was clear,” Sen. Ron Wyden (D-Ore.), a member of the intelligence panel, said in an interview. “Today there’s a global communications infrastructure, so there’s a greater risk of collecting on Americans when the NSA collects overseas.”

It is not clear how much data from Americans is collected and how much of that is retained. One weekly report on MUSCULAR says the British operators of the site allow the NSA to contribute 100,000 “selectors,” or search terms. That is more than twice the number in use in the PRISM program, but even 100,000 cannot easily account for the millions of records that are said to be sent to Fort Meade each day.

In 2011, when the FISC learned that the NSA was using similar methods to collect and analyze data streams — on a much smaller scale — from cables on U.S. territory, Judge John D. Bates ruled that the program was illegal under FISA and inconsistent with the requirements of the Fourth Amendment.


Story first appeared on

WASHINGTON -- Private contractors working on the troubled federal health insurance marketplace told a congressional committee Thursday that they needed several months, but had only two weeks, before its Oct. 1 launch date to fully test the website.

The task was further complicated by the Obama administration's late decision to require users to create personal accounts before they could browse and compare health plans on the website.

User bottlenecks created by the required accounts, along with the abbreviated test period, appear to be the main causes of the marketplace crash that disabled the website shortly after its launch on Oct. 1, the contractors testified. The crash occurred when just 2,000 users across 36 states tried to access the system.

Thursday's hearing before the House Energy and Commerce Committee gave lawmakers their first opportunity to question several key marketplace architects about the rampant problems that have plagued the system and created a political firestorm for President Barack Obama and Health and Human Services Secretary Kathleen Sebelius.

Congressional Republicans want the administration to waive the health-care law's fines for people who don't obtain coverage until the marketplace problems are ironed out. Had it done so previously, said Rep. Brett Guthrie, R-Ky., House Republicans wouldn't have moved to shut down the government during the debt-ceiling standoff earlier this month.

Democrats remain largely supportive of the Affordable Care Act and often used the phrase "fix it, don't nix it," during the hearing to describe their feelings about the problematic website. But some have begun to publicly express anger over the marketplace controversy.

Sen. Jeanne Shaheen, D-N.H., has called for extending the six-month open enrollment period, and others, like Sen. Bill Nelson, D-Fla., said administration officials should fire someone over the problems.

Both sentiments were on display during the four-hour hearing, which at times veered from confrontational to comical.

Committee Chairman Fred Upton, R-Mich., expressed the feelings of most Republicans when he described the website as "not ready for prime time."

After Rep. Joe Barton, R-Texas, repeatedly questioned a witness on whether an obscure website disclaimer would violate a federal privacy law regarding personal health information, Rep. Frank Pallone, D-N.J., angrily called the hearing a "monkey court," noting that the health privacy law wasn't at issue because the website doesn't seek any personal health information from applicants.

The federal marketplace -- a one-stop, online shopping center to purchase health insurance required under the Affordable Care Act --is not a standard consumer website. Databases for numerous federal agencies, more than 170 insurance companies and information on more than 4,500 health plans in 36 states are integrated into the system. It also determines consumers' eligibility for government health plans and federal subsidies that help pay for private insurance.

Government reports indicated that testing for the complex system was months behind schedule, due in part to delays by the administration in drafting guidelines for marketplace operation. But in numerous appearances before the committee, HHS officials and contractors indicated the project was proceeding on schedule with no problems.

"This is on us," White House Press Secretary Jay Carney said during his Thursday briefing. "And that goes from the president on down. This website needs to work effectively for the American people. And we need to get the product that they so clearly desire to them as efficiently and effectively as possible."

At the hearing, Cheryl Campbell, senior vice president of CGI Federal, the contractor that designed and developed the federal marketplace, testified that the system passed eight technical reviews before going live on Oct. 1. She said her team never suggested delaying the site launch because that decision was up to HHS, which served as the site development manager.

"Our portion of the application worked as designed," Campbell told Upton during direct questioning.

But in earlier testimony, she said, "We acknowledge that issues arising in the federal exchange made the enrollment process difficult for too many Americans."

Those problems, Campbell said, stemmed from issues with the "front door" to the marketplace, where people register and create personal accounts. That application, designed by Quality Software Services Inc., "created a bottleneck preventing the vast majority of consumers from accessing" the marketplace, she testified.

Andrew Slavitt, executive vice president of Optum, which owns Quality Software, explained the front door bottleneck to lawmakers: "It appears that one of the reasons for the high concurrent volume at the registration system was a late decision requiring consumers to register for an account before they could browse for insurance products. This may have driven higher simultaneous usage of the registration system that wouldn't have otherwise occurred if consumers could 'window shop' anonymously."

Campbell testified that she believed the window-shopping feature was ordered disabled in August by Henry Chao, deputy director of the Office of Information Services in the Centers for Medicare and Medicaid Services.

Julie Bataille, communications director at the center, known as CMS, called the move a "business decision" to make sure that users understood their eligibility for a tax credit before enrolling in a plan.

Slavitt said he raised concerns with CMS about the risks associated with the lack of system testing on several occasions during the site construction. He said he was told they "understood the concerns "

But Bataille acknowledged that the fully integrated system -- not just its individual parts -- wasn't tested properly. "Due to a compressed time frame, the system just wasn't tested enough," she said in a telephone briefing Wednesday.

While testing of the fully integrated system didn't occur until two weeks before the Oct. 1 launch, both Campbell and Slavitt said that several months of testing would have been optimal for a project this complex.

Rep. John Shimkus, R-Ill., said he believes "political appointees manipulated the system to hide (test) data they didn't want the public to know. And we're going to find out who that is because that's the crux of this problem."

At the White House, Carney dismissed a question of whether the administration was so wedded to the Oct. 1 rollout that it didn't allow adequate testing. He called the question "Monday morning quarterbacking."

"The fact that some critics of the Affordable Care Act, who have worked assiduously for years to try to do away with it, repeal it, defund it, sabotage it, are now expressing grave concern about the fact that the website isn't functioning properly, I think should be taken with a grain of salt," he said.

Meanwhile, at the hearing, Slavitt said Quality Software fixed the registration application to meet the site's "unexpected demand." By Oct. 8, he said, the system was processing personal accounts "at error rates close to zero."

But Rep. Anna Eshoo, D-Calif., said the complaints about "unexpected demand" were bogus and that other websites routinely handle similar, if not greater, volumes. "That really sticks in my craw," she told Campbell and Slavitt. "I think that's really kind of a lame excuse. Amazon and eBay don't crash the week before Christmas and ProFlowers doesn't crash on Valentine's Day."

Campbell said she believes the website will be functioning properly in time for people to purchase coverage by Dec. 15, the cutoff date to enroll in coverage that begins on Jan. 1, 2014. The Obama administration is preparing regulations that allow coverage under the health law for 2014 to be purchased until March 31, 2014, the end of the open enrollment period.

To date, 700,000 people have completed applications and gotten determinations on their eligibility for government coverage and federal subsidies to buy private coverage. The administration has said that in November it would provide the number of people who have so far signed up for coverage on the federal website.

Monday, October 28, 2013


This story first appeared in BizReport.

Some of the headlines surrounding the Pew Research Center's latest published figures regarding news consumption on Facebook might make you think the social network is becoming the place to go to catch up on current events, but they are misleading.

Pew Research Center, in collaboration with the John S. and James L. Knight Foundation, a non-profit dedicated to supporting "transformational ideas that promote quality journalism, advance media innovation, engage communities and foster the arts", has revealed the results of research into how consumers use Facebook to consume news.

The upshot is that, while two-thirds of all U.S. adults use Facebook, just 4% of Facebook news consumers said the platform is the most important way they obtain their news. Overall, under half (47%) "ever" get news from the social network.

Instead, most (80%) Facebook users simply stumble across news stories that their friends have posted in the newsfeed. Seventy percent will click through to a news story they come across on Facebook if they find it interesting, over half (51%) will click through if they find the story entertaining or surprising (50%). Whether that news story is from a news organization they prefer is neither here nor there and a reason cited by just 20%.

"People go to Facebook to share personal moments - and they discover the news almost incidentally," says Amy Mitchell, director of journalism research at Pew.

However, while Facebook isn't currently the go-to place for news, the survey does reveal that Facebook exposes some people to news they might otherwise not have discovered. While 38% of heavy news followers who get some of their news from Facebook say the social network is an important place they get news, that figure rises to 47% among those who follow the news less often.

According to one survey respondent, "If it wasn't for Facebook news I'd probably never really know what's going on in the world because I don't have time to keep up with the news on a bunch of different locations".

Thursday, October 24, 2013


Story first appeared in

The federal Obamacare insurance marketplace's many tech problems were inevitable given the brief time contractors had to build it—but they can be fixed fairly soon at a fraction of the troubled website's cost, the ex-president of software giant Oracle told

"This is not an intractable problem," Infor CEO Charles Phillips said Tuesday about the government's site. "It takes time, but it is fixable ... It's going to take several months, most likely, not years."

"Relative to what they've already spent, it should be a small number," Phillips said of the cost to solve problems at the site, which is selling health insurance to residents of the 36 states not operating their own Obamacare insurance exchanges.

Phillips said primary contractor CGI Federal and the other contractors like his former company Oracle didn't have enough time to properly build and test by the Oct. 1 launch date, because they received system requirements from the government only last April.

"I would have been surprised if it had worked on Day One," said Phillips, whose current company provides software used by 23 of the nation's 50 largest public hospitals.

"Given when they got the requirements, this was bound to happen," said Phillips, noting that it is a complex task to build a site from scratch that involves sharing data between multiple government websites that were never designed to work together.

In addition to that, CGI has told Congress, federal officials a month before the launch told contractors to change the design of to prevent users from seeing competing insurance plan prices before they created an account, a change that has been blamed for clogging up the site.

 Contractors "didn't have time to do adequate testing," such as running multiple simulations of people opening accounts, applying for insurance and qualifying for government subsidies, said Phillips, who has served on President Barack Obama's Economic Recovery Advisory Board.

Now, ironically, "they have time now [to test] because it's not working," and "they have a lot of data cases, they see what fails," Phillips said.

Separately, an executive at a company that worked closely with government officials involved in said that in the months leading up to the launch date "there were lots and lots of bugs that just got swept under the rug and ignored."

"There were all these things that just didn't work; rates were not working, certain sections of the site were not working and just a week before they said, 'All of these things don't matter, we're going to launch anyway,' " that source said.

That attitude, the source said, echoed what federal officials had long been saying about, the centerpiece of the Affordable Care Act.

"They had said, repeatedly, month and months before, there was no way they were going to delay it," the source recalled. "They were going to launch with what they had no matter what they had."

As a result, enrollments in the Obamacare insurance plans are believed to be extremely low. And insurers have reported that the few enrollments they are receiving from contain questionable data, which are further slowing down the sign-up process.

 Enrollment levels "are very, very, very much below what was anticipated," said Brandon Cruz, president of online insurance marketplace GoHealth. "I don't know anyone who has gotten through the [enrollment] process, and I don't know anyone who knows anyone who has gotten through the process, but I'm really hoping that changes soon," he said.

Experts have said that if tech problems persist on, the government may need to extend the enrollment period, and/or the mandate requiring most individuals to obtain health insurance by 2014 or pay a tax penalty.

Cruz's company, and several other big Web insurance sites such as and, were supposed to be connected to by the Oct. 1 launch so that they could offer the same plans being sold at the government's site, with the same subsidies available from the government.

But as of Tuesday, none of those websites have been able to start selling subsidized Obamacare insurance because the integration function between the private sites and "doesn't work" yet, Cruz said. He said it was not clear when would fix that particular glitch, which is related to another serious problem of integrating insurance carries into the system.

DeAnn Friedholm, director of health reform for Consumer Reports, said, "we're hoping that the problems with the website can get fixed quickly."

Consumer Reports has urged its readers who are becoming "frustrated" with logging in and navigating to take time off from trying to get on that site and check back periodically to see if it has become easier to use.

 In the meantime, Friedholm said, Consumer Reports has encouraged readers to "get educated" about Obamacare and the options available to them by referring them to a new website CR has set up:

"What we've been telling consumers is, 'There's time for you to sign up,' " Friedholm said.

Open enrollment in the Obamacare exchanges continues through March 31, although people must enroll and begin paying for insurance by Dec. 15 for it to kick in by Jan. 1.


Story first appeared on

The principal contractors responsible for the federal government's trouble-plagued health insurance website say the Obama administration shares responsibility for the snags that have crippled the system.

Executives of CGI Federal, which built the federal website serving 36 states, and QSSI, which designed the part that verifies applicants' income and other personal details, are testifying Thursday before the House Energy and Commerce Committee.

The hearing comes as President Barack Obama's allies are starting to fret about the political fallout. Democrats had hoped to run for re-election next year on the benefits of the health care law for millions of uninsured Americans. Instead, computer problems are keeping many consumers from signing up through new online markets.

(Read more: White House IDs Obamacare site flaw)

One House Democrat says the president needs to "man up" and fire somebody, while others are calling for signup deadlines to be extended and a reconsideration of the penalties individuals will face next year if they remain uninsured.

 On that point, a change in the timeline for signing up for coverage is underway, the White House said. Consumers have until Dec. 15 to apply for coverage that's effective Jan. 1. Even though open enrollment lasts until March 31, people would face a penalty if they postpone buying coverage beyond mid-February. Calling that a "disconnect," the White House said officials will soon issue policy guidance allowing consumers to sign up by the end of March without penalty.

(Read more: White House to adjust health care penalty deadline guidance)

The focus on the contractors is a first step for GOP investigators. After the failure of their drive to defund "Obamacare" by shutting down the government, they've been suddenly handed a new line of attack by the administration itself. Administration officials, including Health and Human Services Secretary Kathleen Sebelius, are to testify next week.

Cheryl Campbell, senior vice president of CGI, suggested in prepared testimony that Congress should look beyond the contractors. HHS "serves the important role of systems integrator or `quarterback' on this project and is the ultimate responsible party for the end-to-end performance," she said.

Overwhelming interest from consumers triggered the website problems, she said. "No amount of testing within reasonable time limits can adequately replicate a live environment of this nature," she said.

Andy Slavitt, representing QSSI's parent company, said the operation's virtual back room, known as the federal data hub, is working well despite some bugs. But his company was also involved with another part of the system, a component for registering individual consumer accounts that became an online bottleneck.

Slavitt blamed the administration, saying that a late decision to require consumers to create accounts before they could browse health plans contributed to the overload. "This may have driven higher simultaneous usage of the registration system that wouldn't have occurred if consumers could window-shop anonymously," he said.

(Read more: Obamacare gains support despite glitches: Poll)

Rep. Joe Pitts, R-Pa., chairman of the panel's health subcommittee, said he wants to focus on the administration's decision not to allow browsing, or window-shopping. That's a standard feature of e-commerce sites, including for seniors. Lack of a browsing capability forced all users to first go through the laborious process of creating accounts, overloading that part of the site.

"Who made that decision? When was it made? Why was it made?" Pitts asked.

Acknowledging what's been obvious to many outside experts, the administration said Wednesday that the system didn't get enough testing, especially at a high user volume, before going live. It blamed a compressed time frame for meeting the Oct. 1 deadline to open the insurance markets. Basic "alpha and user testing" are now completed, but that's supposed to happen before a launch, not after.

The administration provided no timetable to fix extensive computer snags but said technicians are deep into the job. Its explanation, posted online in an HHS blog and accompanying graphic, identified six broad areas of problems and outlined fixes underway but in most cases incomplete.

The HHS explanation identified some bugs that have gotten little outside attention. Technical problems have surfaced that are making the application and plan-shopping functions difficult to complete. That's a concern because those stages are farther along in the signup process than the initial registration, where many consumers have been getting tripped up. The problems are being analyzed and fixes are planned.

Meanwhile, House Democrats are starting to worry aloud about persistent problems with the rollout.

Rep. Richard Nolan, D-Minn., told The Associated Press the computer fiasco has "damaged the brand" of the health care law.

"The president needs to man up, find out who was responsible, and fire them," Nolan said. He did not name anyone.

Obama says he's as frustrated as anyone and has promised a "tech surge" to fix the balky website. White House spokesman Jay Carney said the administration will be more transparent about the problems. After more than 20 days without briefing the media, HHS will start regular sessions on Thursday, he said.

In light of the computer problems, some Democrats are saying Obama should consider extending open enrollment season beyond March 31 and revisit the penalties for individuals who don't sign up and remain uninsured. Under the law, virtually all Americans must carry health insurance starting next year or face fines.

Tuesday, October 22, 2013

Facebook, Google Announce Advertising Partnership

Story first appeared in redOrbit.

redOrbit Staff & Wire Reports – Your Universe Online

Despite a somewhat contentious history between the two, Google and Facebook announced on Friday that their respective advertising arms had agreed to a deal that would make them marketing partners.

According to TechCrunch author Josh Constine, customers using the Google-owned DoubleClick online ad-placement service will soon be able to purchase re-targeted ads on Facebook Exchange (FBX), the social network’s marketing platform.

DoubleClick helps ad agencies and individual advertisers purchase space on multiple websites, primarily through automated exchanges that speed-up the bidding process, explained Alistair Barr of USA Today. Now, the new deal will allow customers of the Google-operated service to buy ad inventory on FBX within the next few months.

“Partnership has been key to Google’s success as a rising tide lifts all boats,” Payam Shodjai, DoubleClick’s Senior Product Manager, said in a blog post. “So we’re excited to announce a new way to help our clients succeed by working with Facebook to participate in FBX, their real-time bidding exchange.”

“DoubleClick allows clients to buy ads on dozens of different ad exchanges, but excluding Facebook may have forced some clients to look elsewhere for their media buying needs,” Constine added. “Once the integration is live, DoubleClick will become more of a one-stop-shop for buying ads across the web.”

Last year, Facebook launched FBX, which allows advertisers to place cookies in the browsers of users and then re-target them once they log back into the popular social media website, according to Mashable’s Todd Wasserman. The company gave no explanation as to why Google was initially prohibited from participating, nor did they explain the reasons for the sudden about-face, the AFP news agency noted.

“Though Facebook and Google compete on many levels, their partnership isn’t unprecedented,” said Wasserman. “In June 2012, Google bought Wildfire, a social media marketing agency that develops ad campaigns for Facebook, among others. Facebook this year also purchased Atlas, an ad server that sells ads on Google’s display network.”

“It’s unclear who reached out to who about the deal. While Google may have hoped that FBX would flop, the platform gained steam and became necessary to support in DoubleClick, so it may [have] caved. Or perhaps Facebook pushed for the partnership in hopes of driving more FBX sales,” Constine added. “Either way it proves that Google doesn’t have a stranglehold on demand fulfillment anymore.”

Friday, October 18, 2013

Google shares touch $1,000 for the first time ever

Story originally appeared on CNBC.

Google shares jumped to an all-time high above $1,000 after the search engine giant reported a surge in mobile and video advertising that helped drive quarterly revenue up 23 percent.

At least 16 brokerages raised their price targets on the stock to between $880 and $1,220, with Deutsche Bank bumping up its target price by 26 percent.

The shares rose 13 percent to $1007.40 after the opening bell on the Nasdaq, before easing back a few dollars.

Google said paid clicks increased by a quarter in the three months ended Sept. 30, from a year earlier, the highest rate of growth in the past year.

This offset an 8 percent fall in average cost-per-click, the price advertisers pay Google when consumers click on their ads.

"We view solid paid clicks growth to be a good indicator of demand, driven by the continued shift to mobile,'' J.P. Morgan analysts said. They had expected 21.5 percent growth.

In contrast, analysts say Yahoo, which this week reported a tepid quarter, has lost market share in display and search advertising in the face of strong competition from Facebook and Google.

Google shares have climbed 38 percent this year, rewarding investors such as Fidelity Investments' $101 billion Contrafund.

Contrafund added to its stake in Google in the third quarter and got a big lift from the surging performance of Facebook and Tesla Motors as well. The fund, managed by star stock picker Will Danoff, returned 8.94 percent in the third quarter, easily beating the 5.24 percent advance of the S&P 500 Index.

Facebook is expected to report its third-quarter results on Oct. 30.

To counter declines in cost-per-click rates, Google rolled out in February a service to help advertisers market through a mix of smartphones, tablets and desktops.

The J.P. Morgan analysts said this drive was a major opportunity for Google in the upcoming holiday season.

Analysts also highlighted Google's ability to generate revenue from its video-streaming website, YouTube.

YouTube branded video-ads grew more than 75 percent in the quarter, from a year earlier, with 40 percent of traffic now coming from mobile devices.

"We estimate that Google's key YouTube asset generated approximately $4 billion in revenue in 2012, positioning Google extremely well for the strong growth in video advertising,'' RBC Capital Markets analysts wrote in a note.

Analysts at Jefferies said Google is best positioned to benefit in mobile with one billion Android activations. The company sells applications and content through its Google Play Store.

The Mountain View, Calif.-based company—known for its Google Maps service, Chrome browser and Nexus line of smartphones and tablets—reported a 32 percent jump in revenue from the rest of world (excluding UK) during the quarter with growth coming from Japan, South Korea and Australia.

"Google should be a good play off any European and Emerging Markets recovery,'' analysts at RBC Capital markets said.

"We think the worst is behind Google from a sentiment perspective,'' Deutsche Bank analysts said.

Tuesday, October 15, 2013


Story first appeared in CNBC.

Google funneled €8.8 billion ($12 billion) of royalty payments to Bermuda last year, a quarter more than in 2011, underlining the rapid expansion of a strategy that has saved the U.S. internet group billions of dollars in tax.

By routing royalty payments to Bermuda, Google reduces its overseas tax rate to about five percent, less than half the rate in already low-tax Ireland, where it books most of its international sales.

The figures were revealed in the latest filings by one of Google's Dutch subsidiaries, and means that royalty payments made to Bermuda – where the company holds its non-U.S. intellectual property – have doubled over the past three years. This increase reflects the rapid growth of Google's global business.

The company has been at the center of the international controversy over corporate tax avoidance because it earns "substantially all" its foreign income in Ireland and pays relatively little tax in the countries where its customers are based.

 It has also faced criticism for its use of a "double Irish" structure that exploits differences between the U.S. and Irish tax codes to move the profits from Ireland to Bermuda. It also routes the profits through the Netherlands to avoid withholding taxes, using a structure known as a "Dutch sandwich". Google declined to comment.

Revelations about Google's tax planning have stoked widespread public anger, prompting politicians to launch an international crackdown on corporate profit shifting. The problems raised by digital companies is one of the central issues being addressed by the initiative launched by the G20 group of leading economies this summer.

In principle, multinationals such as Google that pay relatively little tax overseas will face big bills in the U.S. when they bring their earnings back to the U.S. But Google has not provided for extra U.S. tax because it intends to permanently reinvest $33 billion of offshore profits outside the U.S.\

 The new figures come from the accounts of Google Netherlands Holdings, which represents the "Dutch sandwich" part of the tax structure. It received €8.6 billion in royalties from Google Ireland Ltd and €232.8 million in royalties from Google's Singapore operation. All but €10.4 million of this was paid out to Google Ireland Holdings, a company that is incorporated in Ireland but controlled in Bermuda.

Differences between the Irish and U.S. tax codes mean that this dual-resident company is viewed as Irish for U.S. tax purposes but Bermudan for Irish purposes. It acquired much of Google's intellectual property in 2003, which it licensed to Google Ireland Ltd, a Dublin-based business that is at the heart of its global operation. The business, which employed 2,199 people last year, paid €17 million in Irish corporation tax, having reported pre-tax profits of €153.9 on turnover of €15.5 billion.

 Google's U.K. operation, which provides marketing services to the Irish affiliate, paid £11.5 million in corporate tax in 2012, nearly double the bill for 2011 but far less than many MPs and other critics believe it should have paid. The U.K. is Google's second-biggest market, responsible for almost 10 percent of its sales, or almost $4.9 billion last year.

In a stormy parliamentary hearing earlier this year, Margaret Hodge, chair of the Public Accounts Committee denounced Google as "evil" and accused it of "devious, calculating and unethical" behavior by booking sales in Ireland. But Google said this was an unfair representation of the way it operated in which sales activity took place in Britain but only the Irish business had the right to close the transaction.


Story first appeared on CNBC.

Three weeks ago, Yahoo Chief Executive Marissa Mayer strode into a Manhattan hotel and was greeted like a rock star by hundreds of advertising executives who snapped pictures as she sat down for an interview with journalist Charlie Rose.

That same audience a year ago would have been grousing that Mayer had not done enough to engage Madison Avenue, which is arguably Yahoo's most important constituent since the Internet company derives more than 75 percent of its revenue from ad sales.

"I think that Marissa has gotten a bit of a bad rap," said David Cohen, the chief media officer at UM, the global media arm of Interpublic Group.

 The industry perceived Mayer as not caring about advertising, choosing instead to focus solely on products, Cohen said.

Ad agency executives say that over the past six months Mayer and her team have been working hard to change that perception, courting advertisers at key industry events, hosting lunches and attending meetings with agency representatives that include Yahoo executives like Chief Operating Officer Henrique de Castro, Senior Vice President and head of Americas Ned Brody and Chief Marketing Officer Kathy Savitt.

The charm offensive has impressed many on Madison Avenue, but getting advertisers to actually spend more on Yahoo's web properties will not happen overnight, industry experts said.

The shift to advertising exchanges, which allow marketers to instantly buy placement for their ads across a broad constellation of websites, has pushed down the prices that online publishers such as Yahoo can charge.

That was painfully apparent in the second quarter of this year, when Yahoo's display advertising revenue slid 11 percent due in part to a double-digit decline in ad prices.

"Advertisers will become more excited if there's clear evidence that Yahoo is growing again in terms of its users and its engagement," said Mark Mahaney, an analyst at RBC Capital Markets.

Since Mayer became CEO, Yahoo's stock has more than doubled, recently reaching a near 8-year high of $35.06. But analysts say the gains are mostly due to aggressive share buybacks and the impending initial public offering of Chinese e-commerce giant Alibaba Group, in which Yahoo owns a 24 percent stake.

 More than a year into Mayer's tenure, Yahoo's core business remains stagnant. Revenue has been flat or down for the past four years and Wall Street does not expect the situation to improve when Yahoo reports its third-quarter results on Tuesday.

Analysts are expecting third-quarter revenue to decline around 1 percent to $1.08 billion, according to Thomson Reuters I/B/E/S.

A Yahoo representative said the company has built a team to specifically focus on agency relationships and has recently realigned its sales force according to industry expertise.

Yahoo is "working closely with our advertisers to develop opportunities in a more integrated way across our full suite of media, programmatic, video and mobile properties," Yahoo said in an emailed comment.

Mobile target

Yahoo is trying to play catch-up to Facebook, Twitter and Google in the fast-growing mobile advertising business, as consumers increasingly access the Web on smartphones instead of PCs, and flock to social media websites that require novel ad formats.

Spending on mobile ads grew 145 percent year over year to $3 billion in the first six months of 2013, according to the Internet Advertising Bureau.

Mayer has revamped many of Yahoo's mobile apps to make them more attractive to consumers and advertisers. In May she spent $1.1 billion to acquire Tumblr, a popular blogging and social media website.

"There's a promise there but it's not ready for prime time today," said Ritu Trivedi, managing director, digital marketplace at MediaVest, a Publicis media agency, referring to Yahoo's mobile ad efforts.

Mayer has said that turning Yahoo's business around will be a multi-year process. She has accelerated the pace of product development, and added workplace perks such as free food and top-of-the-line smartphones for employees.

But even as the CEO tries to forge closer ties with advertisers, she has made it clear that Yahoo's users come first. That is a big change from the old Yahoo, which was famous for loading its websites with advertising that critics said were overly intrusive and detrimental to the user experience.

For instance, Yahoo's new mobile weather app, which takes basic weather feeds and links them with the Flickr photo-sharing service, has sparked interest from advertisers. The app could be particularly appealing to hotel and retail marketers, said Peter Stein, CEO of Razorfish, a digital marketing agency.

So far however, Yahoo has kept the weather app ad-free.

"Their message has been very direct and on point, they are definitely focused on the consumer," said Ari Bluman, chief digital investment officer in North America for WPP's media buying arm GroupM.

Consumers first

Some ad experts say Mayer's prioritization of users before advertisers is a smart move that could ultimately pay off by increasing Yahoo's popularity with consumers. But others say it may not go over well on Madison Avenue in the short term.

For instance, Yahoo did a major overhaul of its popular sports home page to coincide with the start of the NFL season this year. One advertising agency executive said they found out about the change a week before the launch, and so the agency had to scramble to re-design ads that would fit with the new format.

"Our client was very upset," said the executive, who did not want to be identified because the agency works closely with Yahoo. "I have a six-page typed memo about the problems we had with Yahoo and this one client."

A Yahoo representative said that the company has "moved faster in the past year than anytime in our recent history" to launch better products and to "evolve" the ads on its websites. "We think this will improve performance for our advertisers over time, and we're working closely with our advertising partners."

Still, the overall assessment of Mayer is positive.

Tamara Bousquet, senior vice president of media at digital marketing agency DigitasLBi, recalled a dinner she attended in late September with other advertising executives where Yahoo was the topic of conversation. "Every single person around that table thought the company was handled better since Marissa came on board," she said.

Monday, October 07, 2013

Microsoft Bings on a challenge to Google in search

Story originally appeared on USA Today.

It's Microsoft vs Google in search: Bing is vastly improved, but Google, well, out Googles it.

VENICE BEACH, Calif. — Microsoft has its work cut out for it with its provocative "Bing It On" search challenge.

Say this three times to a co-worker, and gauge the reaction: "People prefer Bing over Google for the Web's top searches." Skeptical, most likely.

The words are Microsoft's tag line in a marketing campaign for Bing, the No. 2 search engine after Google.

Google had 67% market share in July, compared with 18% for Bing, according to measurement firm ComScore Media Metrix. But its influence is growing: Bing now provides search results made with the Siri digital assistant on Apple's iPhone and iPad, and provides search for Facebook and Yahoo.

Meanwhile, Google recently celebrated its 15th birthday by announcing refinements in its search engine, so we staged our own "Bing It On" test and took a deep dive into search-land.

First, the bottom line: Bing is way, way better than you might think, vastly improved since its 2009 launch. It's a very respectable second opinion, and if you were forced to only use Bing for searches, you'd be well served.

But Google is, well, Google — home of the driverless car, Internet-connected glasses and very simply, the greatest search engine ever. It is not just a way of life for most computer users, it is also — at least for this columnist — far ahead of Microsoft, especially in mobile.

Both Google and Bing get the majority of their results from links — the more folks point to an article or website, the more likely it is to be at the top of results. Both tap into the vast array of online databases — Wikipedia, IMDb, YouTube, Amazon and elsewhere — to add additional information.

Google's newly enhanced results also look at what it calls the "Knowledge Graph," a massive database with 570 million items, connected 18 billion ways, according to Google.

The results understand questions — "What time is it in Tokyo?" — and conversations that begin with a question and continue with follow-up queries you can ask in shorthand.

For instance, we asked Google to show us photos of the Eiffel Tower, and continued with "What year was it built?" and "Where is it?"

Google got all three on the money.

It can now do comparisons — "What's the difference between olive oil and butter?" — and show the calories, carbs and total fat for each.

Additionally, the Knowledge Graph pulls from your various Google tools, as long as you're signed into Google.

You may or may not like this, depending upon how much personal information you want Google to have. But once you're signed in, Google can pull from your Gmail, Google+ social network, Picasa photo library and more.

In our tests, we asked Google to yank "my sunset photos" (from G+) and find my upcoming flight to New York (from Gmail), and both worked spot on.

In past USA TODAY pieces about Google search, we've heard from readers who were uncomfortable having Google know even more about them. They found Bing to be less intrusive.

Reader Rich Steinberg, a Bing user, said "I avoid using Google as much as possible. I don't trust them at all."

Reader Mark Jenkins said he switched to Bing, because he didn't like how Google tries to jump-start his queries by offering responses before he's finished typing the question. "Bing makes suggestions but does not start something until I say go."

Here by the beach, most consumers we spoke with were die-hard Google users.

"I only use Google," said Jenny Cameron, from Bakersfield, Calif. "It's my default."

Angela Stephens, visiting from Georgia, switches immediately back to Google when Bing shows up on her computer. "I never use Bing," she says.

But Gwen Speas of Oregon does. Her Bing search is part of her MSN home page, and she likes it. "I use Bing, but I say Google," she says. "I'm actually Binging."

Beyond the "Bing It On," campaign, Microsoft is working hard to woo users from Google by paying them. The Bing "Rewards" program distributes retail discounts and freebies, similar to a frequent-flier program. A massive Bing searcher (every two searches is worth a point) could get a free Redbox DVD rental (110 points), $25 off an Expedia flight (250 points) or a $5 Starbucks card (525 points).


Google suggested we try the searches on mobile, where voice-activated search has gotten much attention from the company. The results — from flights, photos, olive oil vs. butter and a query about how many calories there are in a grape — handily beat Apple's Siri in speed and relevance.

Bing's app (on iOS, Android and Windows Phone,) paled in comparison:

• The Eiffel Tower query: Bing showed hotels near Eiffel Tower and a Wikipedia article about its history.

• "Show me my sunset photos." Results: Online sunset pictures.

On the plus side, when we asked Google and Bing a trick question — "How old is Punky Brewster?" — " Bing got it right, and Google didn't.

(Bing responded with the age of the actress who played Punky on the 1980s sitcom — Soleil Moon Frye — while Google responded with a link to a Wikipedia entry for the TV show as the top result.

So, it's great that Microsoft is spending lots of money and energy on improving its search results. No one wants to live in a world where Google's results are the only option.

While the company clearly overreached in claiming that people prefer Bing to Google (just look at the market-share data) Bing has morphed into a fine search engine.

Complaints about Google search largely have to do with privacy. Maybe you don't want Google to know what you're thinking, or fish through your e-mails and pull up your flight info, or give you search results before you've even finished typing.

That said, if it's basic information you're looking for, you want it to be fast and accurate, and are willing to surrender parts of your life to Google, well, it's still far and away the best game in town.

Friday, October 04, 2013


Story first appeared on the Business Insider.

There has long been speculation about how many users Twitter actually has, because there was no concrete number about how many accounts were inactive or fake.

The New York Times reported this year that 20 million, or about 4%, of Twitter's users are, in fact, fraudulent. Fake accounts are often made by companies who sell new followers to advertisers that want to build large follower populations quickly.

Well, the mystery is officially solved. According to Twitter's S-1 filing this afternoon, we see that the company estimates that less than 5% of its monthly active users are fake. (Twitter currently has 215 monthly active users, so that's about 10.75 million users that are fake.)

When Facebook IPO'd, it had about 5-6% fake users, so these numbers are pretty close.

Here's exactly what Twitter said in its S-1:

"The numbers of our active users and timeline views are calculated using internal company data that has not been independently verified. While these numbers are based on what we believe to be reasonable calculations for the applicable period of measurement, there are inherent challenges in measuring usage and user engagement across our large user base around the world. For example, there are a number of false or spam accounts in existence on our platform. We currently estimate that false or spam accounts represent less than 5% of our MAUs. However, this estimate is based on an internal review of a sample of accounts and we apply significant judgment in making this determination. As such, our estimation of false or spam accounts may not accurately represent the actual number of such accounts, and the actual number of false or spam accounts could be higher than we have currently estimated. We are continually seeking to improve our ability to estimate the total number of spam accounts and eliminate them from the calculation of our active users, but we otherwise treat multiple accounts held by a single person or organization as multiple users for purposes of calculating our active users because we permit people and organizations to have more than one account. Additionally, some accounts used by organizations are used by many people within the organization. As such, the calculations of our active users may not accurately reflect the actual number of people or organizations using our platform."

Tuesday, October 01, 2013

Google, at 15, perfects search for the next big thing

Story originally appeared on USA Today.

The thriving search giant is embarking on futuristic new endeavors while facing stiff competition on mobile devices.

FORT WORTH — In a vast, fluorescent-lit facility, rows of workers in white and pink and blue smocks stand at workstations and snap color-splashed backs onto mobile phones. Then the handset moves down the line to the next station. Occasionally, a cheer erupts from one of the rows as work teams meet daily quotas.

High-tech assembly lines such as these are typically seen in places like Burma or Beijing. But this facility — a vast space larger than two Costco warehouses — sits in an industrial zone in this Texas city. And the workers, mostly Americans, are making history: assembling the first-ever smartphones produced on U.S. soil — for Google.

The phones are Motorola's Moto X brand, Google's latest high-stakes gamble and a first step in returning high-tech assembly jobs to the USA, according to executives at Google and Motorola, which is owned by the tech giant.

"Google is a place where we take bets," Google Executive Chairman Eric Schmidt said recently to a gathering of workers and journalists at the facility. "This is a bet we're taking on America, on Texas, on this incredible workforce assembled here.
 We think this is a very, very safe bet."

He added: "This is the first of a series of steps that are going to change the perception of the United States as a manufacturing hub.
 It's historic. And it's changing America."

Whether the Moto X facility sparks a resurgence in U.S.-based manufacturing remains to be seen. But it's clear the smartphone facility is the latest high-stakes gamble in what could be called the tech industry's Teflon company.

Google, which turns 15 on Friday, has become ubiquitous in the lives of millions of Americans — from e-mail and maps to searches, documents and self-driving cars. Google-owned YouTube has become the biggest video site on the planet, and its Android is the dominant mobile phone operating system, with 80% market share. Meanwhile, the mysterious Google X wing of the company is crafting forward-looking projects like Google Glass (computer-equipped glasses) and Project Loon, in which balloons transmit broadband Internet to remote regions from 12 miles in the air. Calico, which focuses on the process of aging, is an independent company wholly owned by Google.

While much-older tech rivals Apple and Microsoft fend off questions about their innovation chops, Google is as inventive and financially stout as ever. Google topped $50 billion in sales for the first time last year. Bold bets on Android, Web browser Chrome and YouTube have paid off, and the company is breathing new life into popular services like Search, Gmail and Maps.

Schmidt says the Moto X facility is a perfect example of how Google operates: an idea hatched by low-level employees that bubbled up and became a reality.

"The way Google runs is a sort of bizarre, bottoms-up innovation model, where people are encouraged to think outside the box," Schmidt told USA TODAY in an exclusive interview alongside Motorola Mobility CEO Dennis Woodside. "I'd love to say Dennis and I had the brilliant idea of doing this. But these ideas actually came from the bottom up."

But what grabs the public's fascination are big ideas that CEO Larry Page calls "moon shots" and for which Google has carved a considerable niche. Projects range from Google Glass and driverless cars to high-altitude balloons that provide Internet access to remote areas.

Such is the grand scheme at the Googleplex in Mountain View, Calif., where top engineers and designers toil on bold initiatives. "Not every moon shot turns into the next big thing, but some will," says Google board member Ram Shriram, managing partner at Sherpalo Ventures, an angel-venture investment company. "We're taking as many risks now as ever before."

Says Woodside, "Google has always made very large bets on big technological trends that are going to persist for at least a decade."


Yet just two years ago, Google had seemingly lost its way, and some questioned its long-term prospects.

When he took over the company he co-founded as CEO from Schmidt in 2011, Page inherited a jumble: dozens of confusing products, a faltering stock price and growing competition from Facebook.

"They were like the land of lost toys," says Bryan Stolle, a general partner at venture-capital firm Mohr Davidow. He says Google drifted into a trap most corporate behemoths face: how to create new businesses without sucking R&D resources and detracting from its primary source of revenue — in Google's case, search.

Page has brought a sharpened focus, shuttering marginal products while stressing out-there "moon shots."

"You have to reinvent yourself but not stray from what makes you successful," says Matt Cutler, CEO and founder of Collaborate, a software company. Google, if anything, is at what industry observers call peak innovation. While search goes gangbusters, the company is accelerating its own search for cutting-edge products.

But, make no mistake, search is the engine that drives the Google machine. "Their core business is so wildly profitable and deeply defensible, they have the breathing room to be highly experimental," Cutler says.

Google intends to forge ahead beyond driverless cars (which may debut in five years), computer-equipped glasses (a year or two away) and its life-extending venture.

"The path we are on — the runway — is huge," says Ben Gomes, vice president of search. Gomes has watched the company's narrative arc from a front-row seat as Google employee No. 45; he joined the firm 14 years ago.

Google Maps, like search, has undergone major upgrades. The latest version offers 360-degree views of streets, from Main Street USA to locations as far-flung as Europe, Australia and Asia.

"The goal is to have the most accurate, three-dimensional map of the world," says Brian McClendon, vice president of Google Maps.

And Google may well be at a point of transition.

"Google's first 15 years have focused on mastering information collection," says Ross Rubin, an analyst at Recticle Research. "The next 15 years will be more about information application."

"The next phase of this is to help provide the right decision-making resources to you at the right time and in the right context," he adds. "For example, you're driving home from work and Google might remind you that your dry cleaning is ready — 'Would you like to pick it up?' Maybe that info is in Google Calendar or maybe the info has been posted by another company aggregating laundromat services. Just say yes, and your phone or connected car GPS will reroute you to the dry cleaner along with info on some other stores and specials nearby."


But not everything is rosy. Questions persist about Google's mobile strategy, thanks to an engineering-heavy culture that sometimes leads to product that misfire with consumers, and stiff competition from formidable rivals including Apple and Samsung.

Mobile is a tough arena because Google — which is dominant in search and advertising on personal computers — faces competition from smartphones, tablets, game consoles and set-top devices for the attention and dollars of consumers. Google also must contend with social media stalwarts such as Facebook and Twitter in the battle to attract advertising. So far, Google has yet to corral large social audiences, according to Internet analysts.

"If Google starts losing ad revenue to other ad platforms like social and mobile, projects like self-driving cars and Google Glass look more like distractions than big innovation," says Patrick Moorhead, principal analyst at Moor Insights & Strategy.

Another potential problem area is privacy, for which data-intensive tech companies face scrutiny in light of disclosures about their role — many contend unwitting — in the National Security Agency's PRISM surveillance program. (Page has said Google works "very hard to protect your data as a user.")

"Google is in an interesting position of leveraging data — how far do they push that?" venture capitalist Stolle says. "They are on a tightrope in that regard. Government might scrutinize them. They have to be more careful than smaller companies."

On the day of the Texas media event, a U.S. appeals court in California ruled that Google was not exempt from liability under federal privacy laws for inadvertently intercepting e-mails and other data from private Wi-Fi networks while creating Street View, which provides panoramic views of city streets.

Asked how Google plans to pursue its aggressive, bet-taking philosophy while protecting privacy rights, Schmidt says the company takes conscious steps to ensure privacy while keeping up with the latest technology, such as blurring people's faces and license plates in Street View.

"There's usually a way to find an appropriate protection of people's privacy along the technology lines," Schmidt said.


The Fort Worth facility pushing out the smartphones once made Nokia phones but had been idle for years, says Mike McNamara, CEO of Flextronics, which provides logistics to build the Moto X. The space was transformed for Motorola, which was acquired by Google last year, in just six months and production began in August. Today, its 2,500 workers are capable of putting together and shipping 100,000 phones a week, according to McNamara. The phones' interior workings are still made overseas but are assembled in Fort Worth.

Making Moto X in the USA may not have happened without Google's backing, says Mark Randall, Motorola's senior vice president of supply chain and operations, "Google is a company that takes big risks," Randall says. "Being part of Google allowed us to take those risks."

Workers and executives at both companies were struck by the fact that of the 150 million smartphones used in the U.S., none was actually made here, Woodside says. The company decided to assemble the Moto X in Texas as part of a long-term strategy to bring well-paying, high-tech jobs to the U.S., while making phones that reach customers faster.

The gamble is consistent with Google's DNA, Woodside says. He points to the company's purchase of YouTube in 2006 for $1.65 billion — a move many industry experts questioned, he points out. Today, the online video service is seen by more than 1 billion people worldwide and is the largest of its kind in the world, Woodside says.

"The question is not where we see ourselves in the next couple of years," he says, "but: What's the big accomplishment we can drive over the next decade?"