Transcripts For BLOOMBERG Bloomberg West 20140703

Xiaomi takes aim at apple and samsung. They sold 26 million smart phones in the first half of the year, quadruple the amount from the same period last year. Xiamoi is hoping to sell 100 million phones in 2015. Shares of shutterfly soared 15 after reports that the online Photo Company is looking for a buyer. They had hired partners to find possible buyers. Shutterfly is on track to post its first annual net loss since 2006. We have a special guest joining us for the day. That is the chief creative officer from newco, also the executive producer of the web 2. 0 conference. And the cofounding editor of wired magazine. And the list goes on. But newco is the main thing you are focusing on right now. How is it going . Its going great. We are going all over the world with this new idea. What do you mean by festival of innovation . We turn the standard conference inside out. Instead of going to a ballroom and hearing founder speak at you, you go into the company itself and see it in its native environment. Bloomberg west last year was the host company. Came in and saw how the sausage is made. I enjoyed that. You have some of the Biggest Technology companies in the world in Silicon Valley signed up to do this. Youre going inside. Google, adobe, salesforce, you name it. Its interesting to see the companies that are not Tech Companies, they are also changing how business is done. You also founded a number of Media Companies and you have a thought about the future of media. First i want to get to our lead story of the day, a federal privacy watchdog gave the boost to nsa surveillance, saying its surveillance of foreign Internet Usage is not only legal, its also effective. In a new report, the privacy and Civil Liberties Oversight Board said that prism and upstream collection programs show no trace of illegitimate activity and have helped improve the countrys security. The board is concerned about the incidental collection of american data. The report urges the nsa to put in more safeguards to protect the rights of u. S. Citizens. Cory johnson is here with more. Principally, this report came out and found there were no even accidental uses intentionally uses a private information that should not have been gathered. It thought there was a lot of unintentional gathering of information, and recommended 10 different privacy controls to be added onto the controls already out there. Different things about essentially purging data when it was accidentally collected and judicial oversight. The report was supportive of the policies of the nsa that led to the Prism Program and gathering of information, suggesting they were always targeting foreign individuals and stuff, and did not really address the commercial concerns. They have this orwellian phrase, compelled assistance, referred to what is happening to Companies Like yahoo and google and hotmail and apple and others who are compelled to turn over user data and traffic information. They went deep into the internet backbone to get information when they were not getting enough from the company, and exposed a lot more data about individuals that otherwise might not have been gathered. We are still waiting for response to the report. John, what is your initial reaction . I dont think this particular report will do a lot to dissuade the concerns of industry or the general public. In january they came out with a scathing report. This report is pretty muted. The places where people in the Technology Industry look for a marker, is this good or bad, those places are livid. The eff came out with a report and said, this is not good. When eff says that, a lot of people in technology say, i dont know if i can trust this. Hang on. Lets talk to someone who knows this report intimately, he joins us from washington, d. C. What do you make of the reaction you have gotten so far from privacy advocates who are upset and unimpressed . The privacy and Civil Liberties Oversight Board which i chair did an indepth study of this program, i had briefings at all of the agencies. We did an assessment of the program. We found the program was effective and it toward terrorist plots. It provided important advice to our leaders on how to conduct foreign affairs, and the program is authorized. As you point out, the program collects a lot of information about nonus persons, and some information about americans. It is important the protections be afforded to american communications. That was one of the recommendations, that there be more limits on the fbis access to information for criminal processes, and another board member george wald and i wrote separate statements saying there should be Court Approval for foreign intelligence accessing americans information. In your report you demonstrated a lot of information is automatically shared with the cia and fbi. The report is an interesting read and i encourage people to read it. I put a link corytv on twitter. You clearly delineate how you approach the study of what was going on. It looks like you chose not to look at the commercial impact, economic impact, the thing that is so important to the company. Why did you exclude that important thing from your study about whether or not this is proper and what the impact truly is . Our mandate is to balance privacy with global securities. We met with a number of the Tech Companies and other companies who do work in this space and are sympathetic to their concerns. We thought it was important in our report to have a clear understanding of what this program does, and a clear understanding of what the program does not do. Contrary to some conceptions about the program, it is not a bulk collection program. It is a targeted program. Not every foreigner is subject to having their communications listened in on where their emails read. They have to be a nonus person, overseas. It has to be a foreign intelligence value for the interception of information. Hopefully we will have some impact of putting foreign Business Partners at ease to recognize this program, not nearly as wide ranging as a lot of people feared it would be. One of the Major Concerns cory touched on it and you did too particularly with Multinational Companies based in the United States are starting to get a lot of heat as to whether or not the internet is becoming regionalized with data being secured inside national borders, creating all sorts of issues like germany deciding not to work with verizon, or cisco, which has said this has impacted their business. Do you think this report with its relatively muted statements and the response from advocacy groups like eff is going to put the chairman of ciscos mind at ease . Im not sure, but what i think is important is that we look at the international ramifications. One of the things we focus on in the report is that president obama has started a process through a policy statement he issued in january to afford more rights to foreigners under u. S. Surveillance programs. That is one of the things we will be monitoring over the coming year at the president s west and reporting back on. We have also established in our report there are protections for foreigners under american law. Having a better understanding of the scope of the program and the protections in place and the protections that will be in place hopefully will put some foreigners more at ease. On the domestic side, we can have a debate about whether there are adequate privacy protections. Another board member and i believe there should be more privacy protections, including court supervision, which is really integral to our regulation of government access to personal information. What is your assessment of how involved the Tech Companies were in this program . Were they fighting it or were they playing ball . As was noted earlier, it is compelled production. Under the foreign Intelligence Surveillance act, the Court Authorizes the government to go to these companies and make them provide communications, whether it is access to the internet backbone, which is socalled upstream part of the program, or access to email traffic, which is the prism part of the program. It is not voluntary cooperation by the companies. They were ordered by federal court and they would have been subject to federal Court Sanctions had they not complied with that order. David medine, chairman of the privacy and Civil Liberties Oversight Board, thanks so much. Cory johnson, John Battelle. Just how do you consume media . A new study says the shift to mobile has been dramatic and it could turn the Media Business upside down. We look into the numbers next. Welcome back to bloomberg west. Im emily chang. Mobile is a new place to consume content. More than half of the time americans spend consuming Digital Media is now done through mobile apps. The report found 60 of Digital Media time was spent on smart phones and tablets rather than desktop computers, up from 50 a year ago. The kinds of challenges does is bring to traditional media . John battelle of newco with us. Over the last year in particular, what is the biggest challenge that has emerged when it comes to building a Media Company that people want to consume . First of all, there is an extraordinary complexity to the media environment now. If you are an entrepreneur creating a Media Company, you have to think not just about one or two distribution channels. You have to think about 10 or 20. Not just mobile distributional, but apple, android, 10 different flavors of android, crosssection section with so many different devices. How are you going to present on different pieces of glass, as small as a watch and large is a big tablet, and even now television . Complexity means cost. Cost and the economics of the Media Business are thin. Secondly is form. What we have really managed to do is lose the concept of form. A thing, a media object, a complete object has been lost. Is said, it is a stream. Streams are great for dipping in and out of, but streams do not create an experience and brand. You make a great metaphor in a blog you recently wrote, a good piece is like eating a good meal. Sitting down to dinner rather than snacking all day long. Explain that. When you create a meal, either you will put a lot of time in or if you are at a restaurant, a chef will put a lot of time in. The chef also spent a lot of time thinking about the ambience of the restaurant, and the experience. You want to have an experience. A meal is nutritious. You need to eat a meal with lots of different parts. Media is like that. You do not take game of thrones in twominute segments over the course of a week. I dont know where it was that we lost the experience of a publication and instead we just go in and out. You did a great monthly magazine, industrystandard. What is interesting to me is, how do people change because of the way they are consuming the new medium . The message changes. I think we should look at the dominant use case now, which is our phone. We dip in and out of that phone 500 to 1000 times a day now. There are some new applications that are popping up and are starting to create experiences for me again, the way a magazine used to. One of them is a little cap called circa. It shows the most prevalent world news stories. It has a bank of information about those stories. I go in there for a fiveminute experience, which is very different than flipping through twitter and discovering stuff and getting frustrated and not having a consistent narrative experience through my media consumption. That is what i think is a big opportunity for us to create in the Media Business. At the same time you have websites like business insider, which has been successful. I read it to mac. If youre the person running the Media Company, how do you decide whether to put your resources there or into making a meal that might not be as popular as much as some people one of the jobs of entrepreneurs is to look ahead. I look at the success of huffington post, a lot of these big page driven sites as the success of the past model of the Media Business, which was driven by display advertising. I think the future has to do with longterm engagement and experience, and you can only do that by creating a narrative and making the brand that truly engages the community. The brand discussion seems so divorced of what things actually are. People have favorite things. They have favorite publications and publications that really engage them and take them away. Is there a place for that in mobile . I think there is. We will see later in the hour how many apps we actually use on a monthly basis. The architectural underpinnings of the internet, the mobile internet are shifting. We will start having richer, more varied experiences. We are currently in some silos right now. John battelle of newco, and many more. Thank you for joining us. We will be right back. Talk about xiaomi, its rise not stopping. The chinese upstart nearly quadrupled its sales in the first half of the year. What does it mean for apple, samsung and more . Xiaomi sold more than 26 million smart phones in the first half of this year. What do these impressive numbers mean for the competition, namely apple and samsung . Cory johnson is still with me, and joining me now, mark millia. We knew the numbers were going to be big. What is your big take away . They previously said they were going to hit about 60 million this year. They seem to be on track. They will get a huge holiday bump once singles day rolls around in china, it is this big gifting day where xiaomi sells a lot of phones. They are way ahead of where they were last year, almost quadruple the number that they did in the first half of last year. They are continuing to blow these numbers out of the water and they are forecasting even bigger numbers next year, 100 million sales in the entire year of 2015. That is compared to apple, they probably sold about 84 million worldwide. How much of it is china . The vast majority. In the past, it is been around 90 or above 90 of their sales have been in china. They still have yet to launch in a lot of the big markets. They plan to go into brazil, russia, india, are some of the next launch is on the radar. Right now this is mainly a chinese story. When you take over china, you can take over the world. 1. 3 billion people and hundreds of billions of the with smartphones. This is what hugo barrow, his day job is going to see if the xiaomi brand can translate globally. I wonder if it can. It is an interesting model that really no one else is doing. It is the concept of selling the phones, highend phones at a low cost. Take out the middleman completely. Exactly. They cut special deals, as they have done in india with one of the Ecommerce Companies there to not pay the retailer a huge fee. Taking all the money directly. And then they also plan to make up some of the cost. They have their own app store. They collect money through that. They also Sell Software and stuff through their. I talked to the president yesterday and he did not compare to xiaomi, but the model is used Silicon Valley innovation, chinese manufacturing innovation, and then take it all over the world. It is kind of the same model opening up for the steeper premium phones. One of the things that xiaomi will have to figure out is they are going to have to figure out how to scale up their manufacturing. Right now they are trying to get into tablets and routers. But they cannot build enough of them. They sell out in just a few seconds. In the tablet market is still immature in china at this point. Mark million of Bloomberg News thank you. We will be back with more. Time for Bloomberg Television on the markets. Im julie hyman. Lets take a look at where stocks traded today after the big update yesterday, really flirting with the 17,000 level on the Dow Jones Industrial average. It did not quite get there today. Little changed. Remember the adp report unemployment showed companies did add more workers than estimated in june. We had the big monthly report from the government tomorrow. You are watching bloomberg west. Im emily chang. These days, battles are being waged across Silicon Valley over tech talent, housing inequality, and politics. One battle being closely watched is over the congressional seat held by democrat mike honda. Fellow democrat is fighting to dislodge him, who has held his seat in Silicon Valley more than a decade. Joining us to discuss the growing inequality debate in Silicon Valley is congressional candidate himself, and John Battelle, founder and chairman of newco. Thank you for joining a spirit you are backed by a lot of people in technology. How did you get these people to support you . They like the platform. They thought we needed to have a better strategy on how to create jobs and get people prepared for the new economy and technology economy, and that Silicon Valley needed a stronger voice in washington. What is your platform . Government reform, getting all the pac money out of politics. I only take support from individuals. Two is saying we have to have new skills for the jobs that will exist. Advanced manufacturing or technology jobs, teaching folks coding in the classroom and preparing folks for those new jobs. The third is figuring out on education, how are we going to have teacher accountability, investment in teachers and schools, and have the right type of curriculum for the challenges of the new economy. It seems the companies in Silicon Valley more often than not serve the gold of these individual leaders. But they want access and influence into the decisions the government is making. We talked earlier about prison, a loud voice there as well. The guy you are running up against has been in washington for a long time and has got a lot of years to a lot of important people. How do you counter that . He passed one bill in 14 years. I dont think he has been as effective. The companies themselves lobby for their own interests. Our focus is more on everyone, what will it take to be prepared, to participate in the Silicon Valley economy. There are areas where i have taken positions that some of the companies dont like, the overreach of the nsa on consumer privacy, pushing for an internet bill of rights. The platform is really focused on the folks in the district. One of the largest issues that is a rock thing now and Silicon Valley is at the center of it is in equality. The way that the celebrated few make an extra ordinary amount of money, a middle income seems to be shrinking an opportunity seems to be shrinking for a majority of the population. Silicon valley is the target of a lot of ire. What is your point of view on that and how do we address it . There was a long oped in the New York Times on how this is the issue of our time. Some folks have had the opportunity to do very well. Others have been laid off, technology has disrupted their lives. The question is how do we have an honest conversation about it. What are the jobs that we can keep here . How do we prepare people to operate cnc machines or advanced robotics and have the jobs that actually will exist . The average employee at Apple Computers produces 2 million of revenue for the company. The average employee at mcdonalds produces about 67,000. It used to be in the country if you wanted to get rich, you had to hire a lot of people. Thats no longer the case with automation. How with automation are we going to prepare folks for the skills they will need to operate machines . How . It sounds like what you are suggesting is education, skills, recognizing some people will switch jobs, lose jobs over and over again, so give them the skills they can move along with. That is part of it. The unemployment rate, 35. 8 of folks longterm unemployed, it is the highest it has ever been. Once you are out of the job market, it is much harder to get back in. How do you know . [laughter] i dont know particularly. We have to figure out how do we get the longterm unemployed back in the market, how do we get money the companies have offshore back into the United States linked to hiring folks, particularly in their 40s and 50s . There is one strategy for young folks, but there are a lot of folks in santa clara in sunnyvale who are laid off from companies and cannot get back into the market. From a philanthropic perspective, how much more involved should Tech Companies be in education, transportation . One of the big targets has been the buses that shuttle employees down south. Should google instead be giving money back to the Public Transportation system . The protest against google buses misses the point. It is this anxiety. That is not what is causing the job dislocation of the middle class. I do think these Tech Companies have a bigger obligation to be responsible in the community. You go to my district, there is apple and google offices and linkedin. Then you have schools in the same area. They dont have basic computers. They dont have access to highspeed internet. An area that is technology rich, you have technologypoor schools. These Tech Companies, it is in their own interest to help the schools, to make sure they are partners in Public Transportation so that 237 or 101 are not congested with expansion. It has to be an effort to get the Tech Companies and local communities working together. Where will the money come from . You are talking about more education, more later in life education. Something has to get cut somewhere. Unless you want to raise taxes. One is an actual curriculum change. Some of this will not cost more money, to say we need to be teaching coding in the classroom or preparing folks to operate machines. There is a cost to some of these things. I would look at our overseas bases, cutting some of them. We are still fighting the cold war in a 21st century economy. I would look at streamlining government. I work at the Commerce Department and theres a lot of bureaucracy. We dont need bigger government, we need smarter government, and we need to make cuts of things. I would cut some of the corporate loopholes. One of the things i was reading, this has to cost a fortune. Some of the rules they wrote into creating prism. Created spending. Do you think Edward Snowden is a patriot or traitor . I dont think hes a patriot. I think he should face the consequences of what he did. Im glad that information is out. I dont think the nsa has i think that the nsa has overreached should he be protected by whistleblower laws . He fled the country. If he were in the country and said, im going to face the consequences, we could have that conversation. I dont think he is a patriot because he released sensitive, classified information. You cant have a precedent that anybody who disagrees with the policies of an administration has Carte Blanche to release it. You have to face the consequences of that. Im glad the information is out. I disagree with the president s policies on that. We often declassified Justice Department opinions. My opinion of him is perhaps that he has to be held accountable, but the information being out is a benefit to the american public. Salman rushdie once said the great thing about american democracy is there are no secrets. If everything gets out, we can have an honest debate. Ro khanna, congressional candidate, thanks so much. When you think of artificial intelligence, you think of robots. But what about Digital Advertising . How a. I. Is shaking up the ad industry. Welcome back to bloomberg west. Im emily chang. The forsale sign is going up at shutterfly. The company is working with Investment Bank Catalyst Partners to find potential buyers. This process is in the early stage and may not need to a transaction. Shutterfly, which allows customers to spread photos on everything from invitations to pillows, may post its first annual net loss this year since its 2006 ipo. Digital advertising is riding a wave of change, brought by big data and artificial intelligence. One of the leaders in this digital ad space, rocket fuel had a hot idea last september but since the stock has fallen, cory johnson is back with more. Rocket fuel almost doubled its initial public prices at the top and an stock went crazy. It sold off and now it is coming back. That is why stocks dont tell you much. The business tells you a lot more. Here to tell us more is the ceo of rocket fuel. Im glad to have you on. We have so many conversations on the show about the issues about privacy, monetization. You guys are right in the heart of bringing money to companies through bringing advertising. What are the newest tools . Explain it for me. In the old days if you were a company and wanted to run an ad somewhere, even in the web, you would scroll to the bottom of the page and there would be an advertisement us link and you would call them and say, how much space is available . These days it is all backwards. Lytle auctions occur in real time. People are looking at webpages or photos or apps around the world. Lytle auctions are going on. There is Anonymous User 32. At the top of that page is about gardening. Who wants to buy that and how much would you pay . Companies like rocket fuel have built Massive Technology platforms, server rooms around the world are trying to crunch these. It is almost on a scale of 45 to 50 billion a day. As you are making these bids on behalf of an advertiser, you need to figure out, what is the chance of this being a spot where the mercedes ad or the ice cream ad or the shoes at gets a response, and how much will that be worth to the advertiser . We have a study on our website where we broke it down to return on investment. Every advertiser usually want something a little bit different. Its not always about delivery or clicks anymore. It is, im a car manufacturer. Download the brochure, configure the car online and sign up for a lead, or i sell shoes and i want people to buy shoes. Or, i make toothpaste. I want people to do a survey. Whatever it is, the cool thing about using data and a. I. Is you can have this machine that will generate this response and not just a quick website. What you are talking about is the desktop web with the banners and display advertising. With the shift to mobile where content and publishers are seeing 50 plus coming in mobile, how does that affect what you do and how does that change, and how do you use data to understand that . Complexity is our friend of rocket fuel. When our traffic started shifting to mobile or when facebook came online, its more ways for the robots to serve us and every now and then they get a pat on the head saying, good robot. In the mobile world, our own results in the last earnings call, it is 20 of our earned revenue comes through mobile channels and 30 comes through new channels generally including video and facebook. To us, it all looks the same. It might not be just downloading the app, but using it. You dont want people downloading the app, you want them to use it. If we can measure that use and try to serve as a kind of people that seem to want to book travel through their phone, we can deliver Great Results for advertisers. Is that ultimately include Television Advertisers as well . I dont see why not. Theres going to be ways for advertisers to get smarter and smarter. Properties of household you are talking to, and being able to understand the results you are having. Its hard to imagine a world where all advertising is not just rational at some point. What percentage of your ads are viewed by bots . We have done studies. Internally we have a science team that is our bot squad the tries to figure out what traffic is real and what is not. If you are a publisher, you may be motivated to artificially inflate your traffic on your website to earn more money. If advertisers and your partners are not smart enough to buy this bot traffic or they do it intentionally. We throw away over 40 of the opportunities we have to bid on ad space. They dont pass our quality filters. We think it is a bot, or not a good website that a quality brand would want to see their ad on. Its massive, the stuff out of there you would not want to run a quality brand on. What are the tools youre using now the word not available to you six months ago . Six months is a tight timeframe for tech evolution. You could not have started rocket fuel before roughly when we did because it would have been so expensive to build the competition will infrastructure we have. 35,000 was the last reported number of cpu cores around the planet that are punching that stuff. I would say on the a. I. Tech, the machines are serving these ads all over the place and it is up to them to learn the patterns. Somehow or another they find this audience of expatriates living in the u. S. Who are qualified to buy luxury cars. All this kind of stuff that machines are finding for us. The important thing is the cost. You see Companies Invest a lot in avionics, it is an important thing if a jet falls out of a sky. Serving the right ad to someone, that is a decision that may cost you a 10th of a penny to serve one ad. Thank you very much. Emily . New cofounder John Battelle and rocket fuel cofounder and ceo george john. Government data collection, many are asking what kind of internet are we actually creating . We are back with our special guest host, John Battelle. Welcome back to bloomberg west. Im emily chang. The internet as we have known it is drastically changing. What started as an interweb with few rules and Global Access is being regulated and regionalized. Corporations are collecting our personal data. What will the future of the internet look like given these trends . Cory johnson and our special guest host John Battelle back with me. Five years from now, how is the internet different . Is a great question. I dont think we know, but if we think about what is happening now we can start to imagine how we would like it to be and then start taking actions now to skew us towards that better vision. What do we want . Many of the original values of what we might call the first web, where there was no limit to anybody who had ambition could put a shingle out and say, i will start something. Im not sure that is the only identity that we want to have in the world. What we are seeing particularly with youth is a move away from that. Ive got to have that. It is almost like linkedin for grownups. I got to have a facebook page. But where i really live is over here where i have control over my privacy and my friends and my interactions, and i feel there are safeguards. That is why they are going to snapchat, whatsapp, because they have more control. Its a great trend. We want to have the original values of the internet where it is open and we can set the rules on our own. But we also need some communication. Theres an aspect of that, email is an integral part of the net and away way the communication happens between individuals. There isnt a platform of email that is owned by one company. I think thats a good thing. Originally i recently interviewed reid hoffman, the cofounder of linkedin. Is he worried about platforms like google, apple becoming too powerful he is, in the sense that he wonders if there will be room for innovation. Are these Companies Going to allow this to happen . A very good use faces happening right now. If you think of the two ways the internet has rolled out. Phase one was the web, html. Phase two is mobile. The website and the app. Anyone with a website can link to anyone else on the web, and that created a ton of innovative value. Google was created out of that link structure. We are hundreds if not thousands of other valuable companies. In the mobile space, it is a much more narrow device. You either have a platform, or you dont. You either are one of those very few chicklets on the screen or you are not. Apple announced in may and google announce more about it last week at their developer conference. Deep linking between these apps will change the face of mobile. You have a byte for us today. 26. 8. That is on average how many apps people interact with on a month. The number has only increased by one or one and a half in the past three years. Thats a small number. Half of those apps are things you have to interact with, your search app or your phone app. Theres not a lot of room for a vibrant economy to really, truly exist. John battelle, chairman and founder of newco and so many other companies, thank you so much for joining us. It has been great to have you. Cory johnson, our editor at large. Thank you all for watching this edition of the show. Turning ideas into action. The Clinton Global Initiative attracts some of the worlds best people. The goal find solutions that promote economic recovery in the United States. On a bloomberg tv special. From this years meeting in denver, colorado. We sit down with bill clinton. We should look at this money as a onetime stimulus. Zillow cofounder, robert rubin, former treasury secretary