tv Best of Bloomberg Technology Bloomberg February 4, 2018 1:00pm-2:00pm EST
♪ emily: i'm emily chang and this is the "best of bloomberg technology. the tech earnings bonanza, all the major players reported this week. we will break it down. we will narrow in on facebook's hit and miss. our look at fourth-quarter earnings for the social media giant and the most concerning the trick for wall street. a new alliance takes aim at health care. the implications for the industry as amazon, berkshire hathaway, and j.p. morgan join
forces. first to our lead. we had earnings this week, and getting the attention was apple. i traveled to their new headquarters in california on thursday to sit down with tim cook it after earnings were released. >> it sounds solid to me. a device like this is incredibly sophisticated. it is at a higher price point. i think it is very -- it is a very strong number. while a high price point might deter consumers from upgrading, you have to keep in mind it is a total cost of service. the hardware isn't the biggest chunk of the service. emily: we also talked about the performance of the iphone x in china. there has been concerned that
the price was too high. i asked cook about that, he told me, in china, the top five selling smartphones, everyone is the iphone. -- every one is the iphone. not bad, he said, i feel great about that. what do you make of these numbers, given all of this fuss? >> i think the numbers show it was too expensive. there are different ways to look at this. apple made a lot of money selling an expensive phone. they are defensive about what we are hearing about a slowdown. unit sales on the year-over-year basis were down, even though this phone is a technological marvel. i think julia's point is an important one. looking at the competitive world in a apple itself, apple is trying to move its financial model towards a service model and away from being purely about
hardware. the introduction of new hardware isn't about the hardware itself. it is the trojan horse to services that customers will pay for overtime. over time, we have to evaluate it is not just about how well the phone sells, but the ability to pull in revenue overtime. that will take a little longer. we didn't know brent instagram would be invented and become the killer apps for this device of a smart phone and the iphone. we might not know when the first 15 weeks or so of the existence of the iphone x what the killer app is. apple's goal is it will be an apple app and that the next uber and instagram want to be created with the materials but will be owned by apple. emily: i asked tim cook about the so-called battery date.
the sec and department of justice are asking questions about the iphone battery replacement issue. he couldn't comment on the specific issues but that there are agencies asking questions around the world. they are cooperating. he singled out the apple watch and how well -- and how quickly that is growing, that this category would be better size of a fortune 300 company on its own. how optimistic are you about the non-iphone products in the portfolio? >> this builds on the point. one of them is the services. that makes these devices more valuable, and the more devices and consumer owns within the apple ecosystem of products, then it is more valuable that each of these products become an more likely apple will be evil to sell services like music,
payments will become embedded in day-to-day life, things like that. both of those things are important as we think about apple's momentum. emily: we know that apple is bringing billions and billions of dollars back from overseas, thanks to tax reform. i asked tim cook of that would be changing anything about m&a strategy, like if they would be consider -- like if they would consider buying other companies. the key question is always, would it improve the life of a customer, can it help us prove better products? what do you read into that? cory: i want to go back to your fortune 300 comment. that seems ridiculous. fortune 300, i understand what he means by that, but when he is still pointing to lists that
don't exist anymore, there is no fortune 300 list. it is stretching a little bit. apple sold fewer phones. it was the biggest release they said they have ever had. they sold fewer phones than they did a year before when they didn't have such a big release. some of that has got to be about price. they charge a lot of money for this film. the revenues were fantastic, the free cash flow is fantastic. it is all those things you expect from this company, but the success of the phone is tepid. the success of the watch business paled to the phone, because the phone has such a historic growth rate. fundamentally, it is going to be about the phone sales going forward. i think the introduction of the guidance for the next quarter in terms of revenues, so much below what wall street had a net and what wall street expected in terms of growth based on where
apple directed them. it shows that apple is up against it a little bit with this phone. emily: julie and cory johnson. still ahead, we will zero in on facebook. mark zuckerberg said time spent on facebook decreased 5% in the fourth quarter. what it means for the social media giant. check us out on the radio. this is bloomberg. ♪
tether has yet to verify it holds $2.3 billion in reserves. facebook has banned a whole sector of ads on its platform. it has nothing to do with russia and the u.s. election. the social network is banning ads that promote cryptocurrencies i'm initial coin offerings, and binary options. they say these ads are frequently associated with misleading or deceptive promotional practices. facebook reporters this -- reported its fourth-quarter earnings. revenues coming in at $13 billion, beating highest estimates from analyst. daily active users came in at 1.4 alien, slightly below forecast. for the first time, daily active users declined. we brought in patrick to discuss.
>> it raises the question about the changes they are making to the platform. it could be a temporary shift to these metrics, but instagram and add pricing our big offsets for them. more commentary will be focused on what those changes mean to this trajectory of the decline. emily: zuckerberg saying the changes they are making are decreasing user engagement. have you look at these results? >> i wouldn't put too much importance on the drop of daily active users globally. what he mentions about a decline in the u.s. is interesting and could be a response to facebook's manipulation of the way the newsfeed work. i want to point to something in the release that makes me wonder how the world ought to respond
to this notion of the making these changes to try and make us all do better. it is a manipulative attitude. listen to what he said. he said we have made the decision to show fewer viral videos to make sure people time as well spent. we reduced time spent on facebook by roughly 50 million hours every day. that is global, but really, doesn't it sound a little bit like geppetto and the screen -- and the strings of pinocchio? we will show you fewer viral videos come up because we know what is good for you. i think they are in thin ice with the way they were handling -- they are handling these problems. i measure telling us to watch fewer viral videos of the answer. -- i am not sure telling us to watch fewer viral videos is the answer. emily: you can watch the live headlines as they happen on our terminal. is this thin ice for now
facebook is swinging in the opposite direction, trying to do better for its users? jitendra: i believe so. having said that, that platform is heading towards one billion people right now. it is just in the beginning phase of monetization, and it could be much more material in terms of revenue contribution. i think at pricing offsets and instagram would be my core point. as far as changes are concerned, if they are able to show this trajectory of actor -- of active users is temporary, i think they will be fine. emily: do you think they will have to make these hard choices on instagram as well? david: it's possible. it's interesting instagram hasn't been hit with the same concerns as facebook's platform. even as instagram is clearly getting more advertising revenue. i want to point out that, despite the political and social
challenges facebook faces, the financials of this quarter are spectacular. they have the highest operating margin they may have ever had. their revenue went up just about 50%, but their costs only went up 30%. that is a 12 billion dollars per quarter revenue run rate. this is a profit machine that has a lot of money to experiment with these many problems they need to solve. emily: i want to point out another number. there is increased headcount, 47% year-over-year. they now have 25,000 employees. they have been hiring people to combat things like fake news, offensive and disturbing content. what do you make of the sheer scale at which the employee base is going?
jitendra: they have under monetized properties as well. on top of that, i don't know if hiring people is directly correlated to the actual impact of that in terms of reduced fake news and better quality content. at least they are making the effort. based on what mark zuckerberg has said, that number might be even bigger this year. emily: you can see what he is saying, reiterating the importance of personal connections and how passively consuming public content takes away from that time people spend connecting with each other, so there you go again. david, to some extent, demoralizing the way we use facebook. david: it is interesting. moralizing is an interesting word. clearly, the world wants facebook to have less of a toxic effect on society, and i would argue, on balance, facebook still has a been national -- still has a beneficial effect on
society. there are components whether it is addiction, political manipulation, etc. that is a global problem. it is interesting to ask whether the world really once these people with very little transparency to be the ones telling us what is good for us. i think it's a slippery slope, and i think they could get pushed back for that. it underscores what a challenging position they are in, as they try to make us stop thinking they are doing us harm. emily: that was jitendra and david. amazon is joining forces with j.p. morgan and berkshire hathaway. when it means for the health industry, next. taiwan may be positioning itself to be the next cryptocurrency hub in asia, following crackdowns. our full coverage from taiwan, later this hour.
♪ emily: amazon, berkshire hathaway, and j.p. morgan are planning a new company to provide u.s. employees with tech solutions for simplified care at a reasonable cost. this could possibly be a massive disruptor for the industry where rising costs are under the microscope. the trio is an unexpected partnership. what is not as a prize is amazon's expansion into another sector. >> there is absolutely nothing to stop this company. >> amazon is a powerhouse in the digital space and online space and their acquisition of whole foods is a game changer. >> the risk here to the
incumbent payment players is that amazon decides to build it on paypal. >> amazon has been great. all the things they have done, we can't do is sit idly by and allow them to take our business. >> this company could double from here. >> they are going to be a force in content, in search, 55% of u.s. product searches we calculate are initiated on amazon. last but not least, on advertising. >> whatever amazon is bumping up against, the others are winning. what is bumping up against apple, 77% share of voice in the home. apple in the media, number seven. percentage of share during prime time, now it is number three. fastest-growing media group. it is literally kicking be but of theory in -- kicking the butt of siri in front of everyone.
emily: jeff bezos said we open up to this challenge. >> what a week for health care innovation. first, apple getting into the space and now the announcement that amazon and j.p. morgan and berkshire hathaway made. i think it is all about cost for these large companies. if you look at amazon, they spend somewhere between three and $5 billion -- $3 billion in $5 billion on health care alone for their company. it is threefold times inflation over the last 40 years. for amazon, that is $250 million in costs. that is 1% to 2% of their profit. the fact they are getting health care, that they have been frustrated with the way it has worked in they will bring know how to disrupt this industry, it
doesn't surprise me. emily: what other details to we have about how this will work? >> the interesting thing is we don't know that much about how this is going to work. we know berkshire hathaway, jp morgan and amazon are teaming up to take on health care, this really big cost. they say they are going to look at transparency, doing stuff digitally to bring down cost, to provide care to employees, but it remains to be seen. does this mean they will try to replace some of the middlemen in the system, some of the folks who provide insurance? investors are concerned about it, but we don't know yet. emily: jamie dimon saying the three of our companies have extraordinary resources. our u.s. employees and families, potentially all americans. warren buffett saying the ballooning costs of health care acts as a hungry taper on the american economy.
we don't come with answers, but we don't accept it as inevitable. what kind of challenges are they going to run into? steve: there has been intermediaries, insurance companies, pharmacy benefit managers who have been trying to do this for these companies for a long time. not surprising, their stocks are down significantly anywhere from 4% to 6%, copies like cbs, express scripts. i think amazon and j.p. morgan, berkshire are going to try to build this. they need to build direct relationships with health care systems and with providers. they need to do direct contracting. that is where a lot of the cost is.
the cost of health care is actually care itself. they need to get down into where care is provided and develop contracts. they need to bring the know-how around engaging with the consumer, around paying. that is where j.p. morgan comes in. they have expertise in payment rails. you are talking about a broad population. you have to underwriter help the risk and cost. that is where berkshire hathaway comes in. amazon comes in with the consumer engagement know-how and the analytics and data around segmenting population according to their risk. they have a lot of road, a lot of would check. a company like amazon, they have proven almost every single industry, the health care economy is a percent of gdp. i don't see why they wouldn't start attacking this industry. emily: right. how much could this threaten the
incumbents and industry standards? other customers across the u.s., how much could this actually change the industry? zach: investors are saying this threat is real, take this seriously. cigna and an them are done quite a bit today. it is still not clear. what these companies are going to discover is they will want to build. they may say we will let unitedhealth group cvs handle that, because they are better at it it remains to be seen. that is why people are so nervous. emily: that was zach tracert and steve cross. amazon's move into health care is the latest in a string of major announcements from the company.
we took a look at amazon's continued expansion. ♪ emily: amazon's question for world dominance continues, almost seemingly unchecked. it has unveiled a convenience store of the future, office spheres, and the purchase of whole foods. the purchase pushes amazon deeper into the $800 billion grocery market. now, amazon share price has rocketed up over 66% in the last year and it surpassed $1400 for the first time on friday, fueled by investor enthusiasm around e-commerce growth and profitable cloud. that's not forget is the growing advertising business that promises better profit margins than on mine sales. some investors aren't bullish, thinking this wall street darling is due for a pullback. after all, big spending the
outweighs revenue growth has been the thing that triggers and amazon selloff. investors are watching for signs of growth for prime subscribers. the service can turn occasional shoppers into the voting. the fourth quarter is an ideal time for subscribers. could a company that has 90 million members and is planning to open a second u.s. headquarters that wants to take over your home appliances and get into the health insurance game the reaching saturation point? -- be reaching a saturation point? we will be watching. ♪ emily: ahead, we get back to the big headlines, and that is earnings. amazon and alphabet reporting this last week we will bring you the main takeaways. all episodes are livestreaming on twitter. check us out. this is bloomberg. ♪
♪ emily: welcome back to the "best of bloomberg technology. i am emily chang. turning to all the bit, which reported thursday after the bell. i spoke with the cfo right after earnings work released and discussed the takeaways. >> the other parts of the business are costing them too much. the expenses grew faster than revenue in the quarter, so what you see is that, while some of their new efforts are making great progress, particularly the clip you just played about their cloud, their cloud business is growing. it is starting to get to scale, but they are the number three right now in a three horse race.
they need to do a lot of work in order to get that business to contribute on a scale that is going to allow them to not only continue to grow, but pay back some of the investment they have made in that business, which is still what you are seeing in the numbers. there are other spots in the numbers. youtube has had a tough year. they have to consolidate some of the other businesses where they have been making their other bets, but the bottom line is that the business hasn't scaled the way they needed to. that is why you saw the mess. emily: i just got off a call with the alphabet cfo. we talked about how shares were down, and she told me we are proud of the ongoing strength of the business and overall revenue growth across all regions. we are staying focused on long-term investments for the businesses and intra-quarter variability will be what it is.
how concerned should we be? cory: i don't know if we should care it all, but i don't think terribly. i saw some things within the numbers that looked reasonably positive for the company. i am no genius for tracking this, but the two things that i think are the important metrics outside of generation of free cash flow is the click growth and the value of a click. what we saw from the click growth, how many times people are clicking on ads, it grew faster than last year. 43% is better than the 36%, and that is a year-over-year change. i think that is pretty good. more encouraging, and maybe i'm looking for good news and i shouldn't care, if you look at the devaluation of the ads, as ads have gone to mobile, marketers are paying less and less, unlike facebook. the price per click, value per click, how much marketers are willing to pay, they don't tell
us the number, but they tell us the numbers are not getting worse. it was down 40% year-over-year, but that is less than recent decreases we have seen. emily: cory johnson and crawford on amazon's earnings report. >> we are talking about amazon where the biggest story is what happened with alexa and how it has become this giant platform. jeff bezos said they will double down and that we are at this important inflection point where the most important device in the world -- i just talk to scott gallo a. he said this is the moment, the most important moment in technology today where the leader in technology is no longer apple and now it is the amazon alexa.
this inflection point is so important because computer -- computing is moving. you can see it in the results both companies announced today. the apple like platform was open to most developers and multiple hardware developers. amazon is reaping the benefits of this. hardware developers. amazon is getting services revenues already. two thirds of households are prime members. alexa is part of the ecosystem. emily: i did have a fairly long conversation with tim cook about the home pod, which is now out to the public in a matter of days. i asked, do you think you missed the category that you let amazon get away for -- get away with that? he said i think quite the opposite. he talked about this idea that a personal assistant, the number one personal assistant is your phone and they have siri.
their conception of home pod -- cory: but they missed it. emily: music and audio device. cory: they missed their own release date. emily: history has yet to be written. we don't know how the home pod is going to do. i want to bring in crawford. what do you think? crawford: two cory's point, alexa has got over 4000 home connected devices now in their ecosystem. apple may not have missed it, but they sure are looking at taillights going over the horizon. they will have to do one thing and that is attract massive amounts of developers to their platform to pay attention to home pod and to go out and do the work to get people onto the platform. i want to add one thing and that is that aws grew 45% in the
quarter. as it gets stronger, it's a platform that brings developers into enable things like alexa, so now they are into this virtuous cycle they get stronger and stronger and stronger. that is a pretty big move. it is unassailable for apple? no, but apple has a lot of work to do to close the gap. cory: we were listening to the apple call. tim cook was talking about service revenue. he is talking about babel double service revenue by 2020. it was an impressive quarter and the other category, but to your point, amazon's business here, web services does fantastic. they are also learning about what everyone is able to do on the web. this notion of a completely hardware independent distributor service business in the world of technology, separate from
selling people lots of stuff i'm a dropping off boxes, these guys are the leader and growing at a fantastic pace and throwing off a ton of profit. emily: tim cook says we are to have a personal assistant in 1.3 billion people hands, and that is the iphone. let's talk about the cloud. dig into the aws numbers and how quickly this business is growing. cory: it is growing at a fantastic pace at a large scale. i put a couple charts together to show what is happening in terms of margins. amazon loses money basically in the selling of stuff, and yet the margins they put up of 26.5%
in a quarter are terrific and even better than last year. compared to the rest of their business, it drove the rest of the results to a 3.1% profit. amazon was profitable selling packages, selling stuff in the u.s. a very profitable in aws and lost money selling stuff in europe. they had a fantastic cash flow. free cash flow is down because they spent a lot of money building a lot of stuff, so we will see a lot of quarters like this. it is worth noting that amazon is not working on the last quarter or current quarter. amazon is working hard on a quarter three years from now. these results show what they were working on three years ago, where is apple is still tried to get up the speaker product you were talking about. they missed the date of it earlier in the year.
crawford: my bet would be that those aws margins expand going forward as they start adding more and more tools that developers can use. the trick is, get the developers in, get people opening apps, and get people when they are managing to use more of amazon's developed tools. my bet is that could be a really scalable business, even more than it has been. emily: that was crawford del pratt and cory johnson. elon musk's telling -- elon musk's startup boring company sold a product. it seems like his quirky promotions on social media are paying off. come thursday, he declared he was already sold out of flame floors -- flamethrowers after four days.
he district in $10 million. the money will be used to fund his ambitious product to build underground transportation systems. they began digging a tunnel in los angeles a year ago. it will be a sellout crowd when spacex has the launch of its new falcon heavy rocket. his new rocket could be launched as soon as february 6 from cape canaveral. coming up, cryptocurrencies continue to face hurdles in asia, but one country is looking to be the next big hub for the digital asset. we will bring you through taiwan. this is bloomberg. ♪
♪ emily: japan's claim check says it was hacked after it lost digital tokens last friday. it has prompted calls first or industry oversight. officials said the country will conduct on-site inspections of exchanges and cryptocurrencies will most likely become an issue at the next g20 meeting. poly chain has decided not to go public. the crypto hedge fund is backed by sequoia capital. the -- sticking with crypto's, taiwan may become the next cryptocurrency hub in asia following crack down in china and north korea. the best of half $1 billion from the coincheck exchange in the pen is raising questions about
fraud. >> the 23 brew company in taipei is at the intersection of old versus new. in a micro way, it is an establishment that is challenging the establishment, at least the established way of buying around. patrons can come if they desire, pay for their microbrew pines with that going. >> we want to support bitcoin and kickstart that in taiwan, give power back to the people. >> in might of the highest in japan and crackdowns in china and south korea, taiwan is trying to figure out where it stands think of the currency. should the government and regulators suppress the market or set it free? a broker believes taiwan's state of statelessness works to its advantage. >> this awkward position that taiwan finds itself in is not a mike the awkward position that bitcoin finds itself in in the
established banking world. >> i think we should -- we should take advantage of this and filled the void. >> redtape run deep, and yet, led by a younger breed of lawmakers, the legislative you wanted pass a bill last month to allow fintech experimentation. initial corn offerings could be covered. >> it seems our government is passes or chooses to avoid talking about it, but it can -- it will just go underground and you will have a lot of implications. i think taiwan can become a trading hub in asia. >> what happened on the mainland was too much, too soon.
violent -- it violated that do no harm. >> for now, taiwan is taking a more palatable first step in to decrypt the world. -- into the crypto world. >> this is where they can start, having a beer at a local pub. emily: joining us now is stephen engle, who spent all last week in taipei. do you think this councheck -- coincheck situation derails taiwan? stephen: it could enhance regulation and oversight, but it can put a damper on the kind of innovation taiwan is trying to achieve, at least another breed of lawmaker that is trained to
facilitate this revolution through that innovation act they did pass in december. this whole story in japan blew up just as i was wrapping up my reporting, and boy did i get a lot of messages from the various people i did talk about. they were wondering how this was going to play out, because keep in mind, the cautionary tale for taiwan has always been what is happening in china with the fraud? japan was always looked upon as being the model for which to build a cryptocurrency hub in asia. emily: taiwan has a lot of advantages. there has been a lot of processing power on the island. how can we see them exploit these advantages? what about bitcoin mining? stephen: that was a question recently put. it needs a lot of power. this was a big concern of some
of the lawmakers. taiwan can do a few things really well, but after they start stretching that power grid, which they do in the summertime when those chip factories start cracking up their air-conditioning, there is severe power shortages in taiwan, especially the summertime. when we were doing live hits with you that morning last week, that whole neighborhood went black because of a power outage. that is double be going to prevent taiwan from being a mining hub. -- that is probably going to prevent taiwan from being a mining hub. emily: ebay's shift from its longtime partner is not paying off for paypal. this is bloomberg. ♪
♪ emily: lift is expanding to europe. the rival to his opening an office in the southern german city of munich. this comes after it announced an expansion into toronto in november, its first outside the u.s. the company hasn't said how many people it is hiring for the office, but they will work on the company's autonomous driving efforts. alphabet plans to rollout a ride-hailing service using driverless cars this year.
the companies aren't saying have any vehicles are involved or the cost. it is the third deal between an italian-american carmaker and the search giant. waymo scored hybrid minivans in 2016 and another 500 last year. ebay rose to a record this week after giving optimistic revenue forecast and unveiling plans to shift payment business from longtime partner paypal to a global payments company based in the netherlands. shares of paypal tumbled on the news. we spoke with the paypal cfo on thursday. >> the main takeaway is that this is a national evolution of our partnership. it is the next chapter. this was completely anticipated, completely built into our financial plans and is nothing to our long-term earnings growth potential.
emily: the market did not anticipated. they are concerned about how it will impact payment volume and how you will replace that. how much volume comes from ebay and how do you and tend to make it up --how do you intend to make it up? john: it is 30% of our volume and the slowest growing part of our business. the average revenue growth for our ebay part of the business is 4%. the rest of our business has been growing at 23%. if you fast-forward to the end of the operating period, it would be a much smaller piece of our overall business. there are a couple key points. first is we will still be a part of ebay's business. we have a term sheet for a three-year extension where the largest part of the business we do, the brain it processing, we will continue to do that. that is the most profitable part of the business. this allows ebay to partner with someone else. large marketplaces, most of them already do that. that allows us to go out and partner with some of ebay's
competitors must some of the largest and fastest-growing marketplaces in the world with unfettered ability. emily: let's talk about profitability. there is concern about profitability of ebay transactions on paypal. how will this impact the pulse profitability? john: this is within our plans. we continue to grow these other faster parts of her business, and we believe it doesn't do anything to change the profitability profile. emily: when will be billed that's when will be -- when will we be evil to buy things on amazon with paypal? john: hopefully we can do something there. emily: how has tax reform impact in your forecasts and desire for
m&a? john: we generate a lot of cash flow offshore, so tax reform is an unmitigated benefit for us. we will see our effective tax rates stay in the same range. taxes will go up slightly, because of the so-called guilty text that will be imposed internationally. emily: what might you be interested in, bill payment, lending? john: all of the above. there are two categories we look at in m&a, one is expanding our geographic footprint. we would love to be bigger in some markets. there are a lot of complementary services or payments like bill pay, like international money that are good for our customers. emily: we have seen square rolet bitcoin trading. --square roll out to bitcoin trading. john: we have experimented with bitcoin with our braintree platform in the past. because of the volatility of
this currency, it is not something merchants readily accept. if you have a 5% operating profit margin as a merchant and you see -- and you accept that going and see a 10% swing in one day, you are now underwater on that transaction. it'll be a while before we see stability and its currency to where merchants will readily accept it. emily: what about on venmo? john: to the extent our merchants want to accept it and customers want to use it, it is something we will look at in the future. emily: what about a store with paypal in-store capability? john: we actually have that. in-store is something that has a greater foothold internationally, a little slower in the u.s., but we want to be on the forefront of that and allow customers to use paypal however and whenever they want. emily: the paypal cfo there.
one last thing, my book is out this tuesday. this is the story of how women have been excluded from the largest wealth creation and the history of the world and what we can do to foster real change. i have been working on this for the last few years and i have so excited to share this with the world. we will have special coverage on this throughout the week, imported interviews you don't want to miss right here. that does it for this edition of the "best of bloomberg technology." tune in each day, 5:00 p.m. in new york. remember, all episodes are livestreaming on twitter. check us out. that is all for now. this is bloomberg. ♪ tune in each day, 5:00 p.m. in new york. ♪