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By Stacey Higginbotham

As consumers increasingly pick up smartphones rather than feature phones, wireless carriers are investing more cash in startups, hoping to make such devices more useful—and their networks more profitable. The uptick in carrier investments has been particularly pronounced over the last few months as wireless operators try to boost data revenue and differentiate their services by getting access to new technology first.

Just this week, Eventful, a location-based calendar service, announced a $10 million round that included money from Telefonica. In September, two firms announced deals with carrier participation: social calendaring service Zvents, which raised $24 million, some of it from AT&T, and femtocell systems maker Percello, which raised $12 million, including money from T-Mobile.

"In my opinion the operators are becoming a little more aggressive and the equipment folks are less aggressive, with less to spend on R&D," said Matthew Fix, a principal at Vodafone Ventures, the investment arm of the British network operator. "Carriers are more aggressive because there's a lot of uncertainty around their business models."

Paying Not to Be a "Dumb Pipe"

Operators spent the last decade focused on growing their business through building out new 3G networks and gaining subscribers, but as markets become saturated the only way to boost revenue is to get people to use the network for data. In some countries the only way to gain market share is to steal customers, rendering the differences among the services being offered by carriers—and exclusive access to those services—more consequential. As Fix observes, operators don't want to become dumb pipes for data, delivering services that only enrich others. They want to own their destiny. And they want to charge for it.

Driven by flat-rate plans, more widespread 3G coverage, and the iPhone, data spending in the U.S. reached $8.2 billion in the second quarter of 2008, or about 21% of total wireless-services revenue. This compares to spending of $5.85 billion, or 17% of total services, for the same period in 2007. The boost in wireless services increased average revenue per user by 5%, to 50¢, offsetting a 5¢ decline in voice ARPU, according to data released in August by Chetan Sharma Consulting. So to avoid becoming the dreaded dumb pipes, carriers are funding startups to get exclusive access to services, and possibly technology.

As one venture investor at a large European carrier noted to me, buying exclusivity from established vendors isn't cheap. Still, the carrier he works for, which doesn't allow him to talk to the press, has ramped up its investments to about a dozen from just one or two in prior years. His increased investment also puts him in the path of many fundraising companies, meaning he and his employer get a first look at new technology—and interesting startups—even if they don't choose to fund them. Russ Shaw, global innovation manager for Telefonica, said the Spanish telecommunications firm created a venture fund for similar reasons a year ago. The fund had 20 million euros to spend in the past year, and another 20 million euros is authorized for the coming year.

Why Wait for Nokia?

Aside from gaining access to exclusive features, or getting in early on the innovation curve, Eric Zimits, a general partner at Granite Venture Capital, predicts that carrier investments in hardware might become more common as carriers seek to exert added control over the component side of their business. He points to investments in femtocells as well as NTT DoCoMo's recent decision to invest in Quantance, which offers a handset component to increase battery life. Zimits is an investor in Quantance and Percello, the T-Mobile-backed femtocell company.

"It just seems to me that as carriers—especially wireless operators—look for a competitive advantage in the market, they should try to get proprietary access to key technologies instead of waiting for Nokia to take two to three years to figure it out and then sell it to all comers," Zimits said. "The big change for the startup is they have to sell to the operators from Day One. They are hard organizations to navigate, but the payoff can be enormous if you get them to specify your technology."

Back during the telecom bubble in the late '90s, carriers made investments in some of their suppliers, too. But for the most part, this turned out badly; the industry was soon beset by a glut of capacity—and too many me-too startups selling gear. This time around, carriers appear to be investing in silicon and software that can differentiate their services in a way they can market to the end user. Maybe it's access to a cool calendar feature or a longer battery life, but the efforts to fund startups this time around are all about making each carrier unique.

Finance guru Bodie (left), swaps ideas with Vanguard founder Bogle Illustration by Sean McCabe; (Bodie) Robert Spencer; (Bogle) Bill Cramer/Wonderful Machine

As of Oct. 7 retirement plans had lost as much as $2 trillion over 15 months, or some 20% of their value, according to the Congressional Budget Office. That has many workers wondering how they'll be able to retire and whether everything they thought they knew about investing has been turned on its head. Diversification across sectors and countries, for example, was supposed to protect investments, but few areas of the market have been spared. And what future returns can be expected from stocks and bonds? Have all of our rules of thumb gone out the window? We asked Jack Bogle, founder of fund giant Vanguard Group and a pioneer in the investment indexing business; and Zvi Bodie, a finance professor at Boston University School of Management, co-author of the leading finance textbook Investments and an expert on retirement security, to discuss issues facing savers and investors today. Christopher Farrell launched a discussion between the market veterans by asking if diversification remains a bedrock strategy. The conversation has been edited and condensed.

Jack Bogle: I am a believer in diversification. You buy index funds for stocks, and your bond portion should equal your age. This is how I invest, so I know how little it's hurt me to have a substantial position in U.S. bonds. I'm in half Treasuries, half corporates.

The most common diversification talked about is international. What's wrong is that as soon as people start really talking about it and believing in it, international stocks are overpriced. About 80% of money going into equity funds last year was going into international. If that isn't a warning sign! Here we are: The U.S. is one of the better-performing world markets. From the market peak in 2007, the S&P 500 is off 42.5%, international [measured by the MSCI EAFE Index of developed countries] is down 49.4%, and emerging markets [measured by the MSCI Emerging Markets Index] by 55.8%.

In recent years, international investing has had a higher correlation with the U.S. market than was traditional. If you invest internationally, you have to invest in foreign companies not as diversifiers but wealth producers. If you like international, get in gradually, maybe with 20% of your portfolio, half in developing markets and half in emerging markets. Europe looks a lot like us, so it's at least possible you might get a better return out of emerging markets. I don't invest internationally myself.

Zvi Bodie: I want to add something that strengthens your case. In markets like China, retail investors can invest only in the tiny fraction of equity investments traded on a stock exchange. So compared with the equity investments there that aren't traded on the exchange, those investments are way overpriced. A much better way to invest is to buy U.S. companies doing direct foreign investment in China.

I distinguish between diversification and hedging or insuring. When I use the term diversification, I use it in the sense that you have a bunch of risky assets, and instead of putting your money in one of them, you spread it across them by paying attention to whether those assets move in lockstep. Because if two risky assets are perfectly correlated, you're kidding yourself if you think you're diversifying.

And then there is insuring or hedging. That's when you've got a safe asset and to my mind that is Treasury Inflation-Protected Securities, or TIPS. One way to protect yourself is to combine a diversified portfolio of risky assets with the safe asset. We teach students that you only need two mutual funds—the risky assets and the safe asset—to generate the entire set of risk-and-reward trade-offs.

Bogle: Amen.

Bodie: And that could be provided at minimal cost. But then a lot of smart people working on Wall Street would be deprived of their high income. So they put all sorts of bells and whistles on these things, none of which has to do with improving the welfare of clients.

Bogle: If people would look at not just a percentage point in costs, but what 1% to 2% in lower returns costs you over a lifetime.

Tune in to Anderson Cooper on CNN and watch as he counts down the "10 Most Wanted Culprits of the Collapse." Pick up the New York Post and read about FBI investigations of top financial firms under the headline "Fraud Street." With a bewildering and frightening financial crisis in full swing, the new national pastime is finding someone to blame.

As markets crash and retirement dreams fade away, media and the public are full of outrage at everyone from mortgage brokers and Wall Street CEOs to real estate investors to experts who failed to predict the crisis was coming. Congress hauls the most prominent executives before tough committee hearings, while political candidates blame each other. Pundits proffer lists of the mustache-twirling villains who caused the whole thing.

An Epic Whodunit

Investigators will undoubtedly uncover fraud, cheating, and other criminal behavior. But for now, there is no shortage of players who stand accused of having a hand in the crisis. It just depends on where you think the landslide began or who gave it the biggest push.

If you blame loosened financial regulations, maybe former Sen. Phil Gramm (R-Tex.) or Securities & Exchange Commission Chairman Christopher Cox are your men.

Think that a political push to boost homeownership handed too many people mortgages they couldn't afford? Why not single out Franklin Raines, former CEO of Fannie Mae?

Maybe you think the whole housing bubble could have been avoided with an interest rate increase (Alan Greenspan, step right up). Or, that folks should never have signed up for no-doc, interest-only loans, no matter how many silhouettes danced across their computer screen in a Web ad. In that case, the villain may be no further than your bathroom mirror.

(For a walk through some of those people who are blamed for having a hand in the meltdown, go to our slide show.)

"Whole System" at Fault

Of course, all of these people had something else in mind other than wrecking the U.S. economy. Some of them were making lots and lots of money—for themselves, of course, but also for their investors. Others truly believed in the virtue of freeing the marketplace's animal spirits from the cold hand of government regulation. And how many people were arguing against the virtues of homeownership?

Just the fact that one can assemble such a long list of possible villains gives a hint as to how many institutions, officials, and regular Americans made mistakes. "It's so difficult to pinpoint one person or two people," says Georgetown University finance professor Reena Aggarwal. "It really was the whole system."

Even Presidential candidates eager for votes have acknowledged there's no easy scapegoat. "Part of the reason this crisis occurred is that everyone was living beyond their means—from Wall Street to Washington to even some on Main Street," Senator Barack Obama (D-Ill.) said on Oct. 13.

Indeed, it was a series of bad ideas, surprising linkages, and all-too-predictable blunders that came together to send the U.S. financial system, and then the entire world economy, into a serious credit crunch and global stock panic. That's not to say that it couldn't have been prevented.

The challenges have led to a dozen lawsuits, testy arguments among state officials and escalating partisan battles. Because many voters may not know that their names have been flagged, eligibility questions could cause added confusion on Election Day, beyond the delays that may come with a huge turnout.

The scramble to verify voter registrations is happening as states switch from locally managed lists of voters to statewide databases, a change required by federal law and hailed by many as a more efficient and accurate way to keep lists up to date.

But in the transition, the systems are questioning the registrations of many voters when discrepancies surface between their registration information and other official records, often because of errors outside voters' control.

The issue made its way to the U.S. Supreme Court, which yesterday blocked a challenge to 200,000 Ohio voters whose registration data conflicted with other state records.

It is impossible to know how many voters are affected nationwide. There are no reports of large-scale problems in Virginia, Maryland or the District, but the trouble is cropping up in many states.

In Alabama, scores of voters are being labeled as convicted felons on the basis of incorrect lists.

Michigan must restore thousands of names it illegally removed from voter rolls over residency questions, a judge ruled this week.

Tens of thousands of voters could be affected in Wisconsin. Officials there admit that their database is wrong one out of five times when it flags voters, sometimes for data discrepancies as small as a middle initial or a typo in a birth date. When the six members of the state elections board -- all retired judges -- ran their registrations through the system, four were incorrectly rejected because of mismatches.

As the gateway to voting, the new registration lists have become the focus of attention from many fronts, including voting rights advocates, officials concerned about fraud and political campaigns looking for an advantage.

It is "this season's big issue," said Wendy R. Weiser, who directs voting rights projects for the Brennan Center for Justice at New York University's School of Law, noting that efforts to keep names off the lists are "a new trend, not in the majority of states but in the battleground states."

The changes stem from the Help America Vote Act, passed by Congress in 2002 in the aftermath of the deadlocked presidential race two years earlier. The law provided millions of dollars for states to upgrade voting equipment and procedures, and to create the centralized databases, which allow voters in most states to check their registrations and polling places on the Internet.

TOKYO -- Kotaro Tamura, an investment banker turned Japanese lawmaker, has an immodest proposal for healing the sick global economy, making all Japanese richer and compelling the United States to be more deferential toward Japan.

"We are in a special position because we have huge money," Tamura said, referring to about $950 billion in government foreign reserves, $1.5 trillion in public pension funds and $15 trillion in personal financial assets, about $8 trillion of which is on deposit at shockingly low interest rates in Japanese banks.

"We should send the signal that we are ready to save the world with this money," he said in an interview.

Tamura leads a group of 65 lawmakers from the ruling Liberal Democratic Party who have proposed to Prime Minister Taro Aso that Japan treat the global financial meltdown "as a huge opportunity for us."

They are urging the government to inject some of its abundant cash into troubled U.S. and European banks, in return for equity, and to purchase distressed corporate assets at fire-sale prices.

"The economy of every major power has crashed, and Japan has the least tainted market in the world," Tamura said.

So far, Aso's government has said nothing about any such investments. Asked what the prime minister thinks of the idea, Aso's spokesman declined to comment.

In recent days the government has said only that it would assist developing countries by contributing money to a rescue effort organized by the International Monetary Fund.

The chronically risk-averse habits of Japanese savers, who keep most of their trillions in accounts that pay less than 0.5 percent interest a year, suggest that Tamura's plan to save the world and make Japan richer is unlikely to generate much popular support.

"We are a bank-centered nation that avoids risk, even good risk," said Akira Kojima, chairman of the Japan Center for Economic Research.

Kojima called the idea of investing some of Japan's cash in the midst of the financial crisis a good one, if done prudently. "It could be a catalyst for changing Japanese investment management strategy," he said.

At the same time, he said, it would be all but impossible to carry out, given the conservative bent of the government and the public. "The finance system is too rigid," he said.

Fox News Corporation Founder Rupert Murdoch and wife Wendi Deng and a splash screen from MySpace.cn


As MySpace continues to struggle in China, a country with 250 million Internet users, major changes are in store for the company

Rupert Murdoch hasn't enjoyed much success in China. Quotas on foreign films hinder the efforts of Murdoch's Twentieth Century Fox to make inroads in Chinese cinemas. Government control of the TV industry has largely kept News Corp. (ticker: NWS.A) subsidiary Star TV, the Hong Kong-based Asia satellite TV operator, on the sidelines of the world's largest country. And rampant piracy and illegal Internet downloading mean News Corp. can do little to cash in on the popularity of shows such as Prison Break.

That's why expectations were so high for the launch of MySpace in China. Unlike the movie and TV industries, the Chinese Internet business is open to foreign investment. China has the world's largest online population, with more than 250 million using the Net; many of them are students or people in their 20s, prime users of MySpace in other countries. Murdoch's wife, Wendi, was born and grew up in China and took an active role in launching a local version of News Corp,'s social networking service (SNS), MySpace.cn, (BusinessWeek, 6/26/07) in the country in April 2007.

Murdoch's bad China luck isn't changing, though. MySpace China, a joint venture among News Corp., venture capital firm IDG-Accel (a partnership between Boston-based IDG and Accel Partners from Silicon Valley), and local investment firm China Broadband Capital Partners, doesn't have much to show for its effort. "MySpace.cn has not become a Tier 1 SNS site in China," said Beijing-based market researcher BDA China in an August report. The company is an also-ran in the Chinese SNS scene, dominated by local names such as Qzone, Xiaonei, and 51.com, and was hit last month by reports in the local and international media of a management shakeup, including the departure of Luo Chuan, who had left Microsoft (MSFT) China to be MySpace China's CEO.

Rethinking the Business Model

While denying Luo has departed, an executive at one of MySpace China's shareholders confirms that some major changes are in store. Zhou Quan, managing director and general partner at IDG Accel, which owns 10% of MySpace China, says executives are in the midst of rethinking the business model. Luo, he says, continues to work at MySpace China "almost full-time" and is taking an active role in discussions regarding the company's future direction. "There will be a total plan, not just a change in CEO," says Zhou. "They will come up with a new strategy."

Other people involved with MySpace China declined to comment. China Broadband did not respond to requests for an interview. A U.S.-based spokesman for MySpace referred questions from BusinessWeek to the China operation. "We are not in a position to comment on the reports regarding our CEO," said MySpace China spokesman Yitian Zou in an e-mail. "The company and business are doing well."

There's certainly a big gap between MySpace China and its Chinese rivals, though. According to BDA, MySpace China hopes to have 10 million registered users by the end of the year. In contrast, market leader Qzone, owned by Shenzhen-based instant-messaging giant Tencent Holdings, already has 105 million registered users. Another Chinese SNS operator, 51.com, has 95 million.