Transcripts For BLOOMBERG Bloomberg West 20140801

The second quarter. It is teaming up with panasonic to build a socalled gigafactory. The plant will produce lithium iron batteries, which has been a challenge for tesla. Cory, what is your take on the numbers . Are they good, not so good . Yes. There were some numbers that were good and some numbers that were not good. There were some things that were weird. Lets give tesla credit where credit is due. They showed a revival in sales. The company has seen a decline in sales in a quarter over quarter basis. March quarter going into june, you thought maybe in the early parts of summer they would sell even fewer cars. Tesla saw an increase in the number of cars sold. The sold about 1200 more model s cars, and that meant a 17 quarter over quarter increase. They need to do that. They have had a big target out there for annual sales in terms of units of 35,000. Even the revenues are really hard a lot of times we look at companies and say, look at the revenue number, look at the earningspershare number. In both cases, this can be weird with tesla because there is a dramatic shift from quarter to quarter. They have to parcel that out over time. When a car is sold, they collect that cash up front with a little bit left over for warranties they might be responsible for in the future. The interesting stuff was there guidance about how many cars theyre going to do. They held to that 35,000 number, but they lower the number of cars they are expecting to make for the upcoming quarter. What that really suggests is the Fourth Quarter for tesla looms so large, they will have to sell Something Like 14,000 cars in the Fourth Quarter, nearly twice as many as they have ever sold before in the Fourth Quarter, even though the car will not be any newer, will not be any more interesting than it is today. And they are saying they will hit a run rate of 100,000 cars per year by the end of next year. That is a lot more than they are doing right now. Is that overly ambitious . May be the bigger issue is not how many cars they can make, although that is a big issue, but how many cars can they sell. Right now they are selling a car that costs an average of 125,000 per car last year. It is an electric car with only so many charging stations, a fraction of gas stations in the world. Now they are trying to build more charging stations, but they will never catch up to how many gas stations there are any time soon. The question is, how big can this be when you are selling a car at this price . Most major cars are updated every year. This car has been out there a lot of people that want the tesla have the tesla. More people are buying them still. To get to 35,000, they will have to get you a massive increase in demand they are not seeing yet. What about the battery giga factory . Will that help them produce more massmarket cars . Did you learn anything about the model threecar . What anyone says they will do something cheaper than they have ever done it before, i say call me when it is cheaper. That aside, the gigafactory is seen as an important marker for teslas future. There is some weird stuff in the press release. There is one sentence i want to read to you. Here it is. Pay careful attention to this. In june, we broke ground just outside of reno nevada, on a site that could potentially be the location for the gigafactory. So they broke ground, but it is a potential site of the factory. They have some bulldozers pushing some dirt around, but they have not decided if that is where theyre going to build anything. It suggests to me that they are not very far along here. They want to suggest to us that they are further along than they actually are. Potential is all that have got with the gigafactory. Go pro, its first report as a public company, shares sharply down. Gopro ran up like crazy ahead of this announcement. Linkedins numbers really strong. Seeing terrific growth. 47 yearoveryear Revenue Growth for linkedin. Not saying by the stock. It is an Interesting Company that is buying it a really rapid clip even though it is over 10 years old. Cory johnson, our editoratlarge in new york. Thanks so much for the earnings roundup. Still ahead, he has challenge the big guys with his aggressive price cuts. Now another suitor has lined up to buy the socalled carrier. We hear from the tmobile ceo next. Im emily chang. This is bloomberg west. Tmobile is proving to be a popular acquisition target. French mobilephone carrier iliad has offered 15 billion in cash for a controlling stake in the uncarrier. Sprint has been preparing its own bid. According to a person familiar with the matter, Deutsche Telekom thinks that sprints deal could be better. Tmobile confirmed to bloomberg west that it received the proposal, but said it has no further comment at this time. Earlier today i spoke to Ceo John Legere minutes before iliads bid was reported about all the options on the table, and their recent subscriber growth. As you know in q1 we announced contract freedom. It was the launch of paying early termination fees, something we will do. That caused an aggressive spike. Amongst other things we did today, we raised our guidance for postpaid subscribers for the year, now saying we will be between 3 million and 3. 5 million. Further evidence we feel very confident that our momentum will continue throughout the rest of the year. I wonder about that contract freedom. You are enabling more customers to have no contract, to buy the phones upfront. Does that mean you are seeing less customers buying the expensive phones, the iphones and samsung galaxies, and are you selling more mid and lower tier phones . Actually, you have to go back you and i have had this conversation before. The uncarrier movement, which is focused on solving pain points for customers we want 100 no contract. Customers love it. Anytime upgrade. International data roaming for free. Tablet freedom. And then paying early termination fees is just another aspect of contract freedom. Something we can do very profitably. What you are seeing is that 93 of our phone sales last quarter were smart. We are selling the highest and devices, and we will be, i believe, the biggest beneficiaries of any new device that comes out because the switching school is noting they are most likely targeting a switch is tmobile. And what better to cause a switching pool to make decision than an iconic device coming out. There are some good variables coming up that are great for the Fastest Network in the u. S. If a new iphone comes out this fall, how many new customers do you think you will get as a result of that . Obviously, i have given guidance for a forecast. Im not going to comment specifically on how many. Im just going to point out to you that tmobile, because of the timing of launching the iphone we have the lowest percentage of our base that our customers that have iphones. When a new iphone comes out, that whole base is waiting for an upgrade. We are least susceptible to this big event that will take place, and expect to be the biggest beneficiary. Think about that. 33 of customers are likely to switch. A big base of change comes out due to a new device. Where do you think customers are going to go . We are excited about that, as well as a lot of other things that are causing momentum in our business. On the earnings call, to me it sounds like you backed away a little bit from the idea that a sprinttmobile deal is the only way. Is that just me . I backed away. First of all, you know me better than to see me back away from anything. I think what i have done is i have been very consistent on this stuff. I will not comment on any specific transactions for the company. I have always been consistent that in the long term, if i really want to bring longterm competition and lead this entire industry of the united states, scale is important. Capital is important here in one of the accelerants could be a transaction organically of some type. I have always said we have multiple options to look at that. In the shortterm, what i have pointed out, i think is qualitatively and quantitatively this company is hitting on all cylinders, and we have great runway. We will consider multiple options to look at things that accelerate the uncarrier. I have been consistent on that all along. If it happens, you are the guy in charge, but if it does not happen, you are the guy who has to figure out what to do, how else do you add scale and spectrum dish . You know my opinion. With a transaction, without a transaction, i am hugely in favor of john legere being in charge of anything. That is my position on that. You know i has said many times that there are multiple players, multiple options for the company. And im not going to comment on any specific one. You can figure out, how do you get scale, how do you get spectrum, how do you get capital. One way is to move aggressively, raise capital, participate in the auctions. And then various accelerants exist internationally, domestically. There is great interest in tmobile. We will consider any option that exists for the shareholders. John legere, ceo of tmobile, who is a huge fan of himself. Sam sun, the Worlds Largest smart phone maker, facing a serious challenge due to growing competition from chinese companies. Samsung electronics has been on an incredible run, becoming the Worlds Largest smartphone maker and growing its market cap to nearly 200 billion. The Korean Company has used clever marketing and a variety of products, including high to low and smart phones, tablets to dominate in mobile. But there are signs that samsungs rain on the mobile mountaintop may be coming to an end. The company just reported its first quarterly profit drop in nearly three years. Net income fell 11 . The Mobile Division reported a 30 drop in operating profit. Ibc says samsungs worldwide smartphone share fell to 25 in the quarter as the Company Faces increasing competition from lowcost chinese competitors such as lenovo. It is not just issues with mobile that had investors questioning whether samsung can remain on top. The chairman of the Parent Company has been in the hospital since may, leaving plenty of questions about future leadership. Cory johnson joins us with more from new york. We have so much to talk about this hour. What is your take on the numbers we saw from samsung today . There are some really interesting things going on in the cell phone business, the smartphone business right now. Tmobile is such an important part of that. What we see is not just the entry, the importance of lowercost cellphones, but lowercost smartphones are starting to become important not just in china, where they have had Great Success in challenging both samsung and apple, but tmobile by coming out and saying to customers, look, you just pay for the phone. You dont have to submit to a longterm contract. It means that customers in big markets like the u. S. Are looking at the actual cost of their phone, and they dont want to pay 600, 700 like the iphone and the Samsung Galaxy costs. This can create a new opening for Companies Like htc to come in there and take the market share away from apple and samsung. When we talk about samsung, we are not just talking about samsung electronics. It is a company that does all kinds of stuff in all kinds of arenas you might not know about. Lets take a look at the giant that is samsung electronics. Part apple, part intel, part whirlpool. Samsung electronics is a big, bold, and really diverse the Flagship Company itself, Samsung Group. Over 286,000 global employees who brought in 222 billion in revenue last year. You know about the companys huge success in smart phones and tablets. The mobile i. T. Division accounted for 54 of revenues last year. Samsungs Success Story goes well beyond the familiar. Samsung is the world leader in dram and solidstate drives. The Company Makes mobile chips. Manufacturers of led Lighting Fixtures as well. Samsung if the top flatscreen maker for tvs. The company has also cashed in on making largeformat displays. Those displays are not just for televisions. Samsung has taken its digital knowhow to appliances. The Company Claims to be the number one maker of refrigerators, more than 10 of the u. S. Appliance market. Cory johnson, our editor at large. For more on the state of samsungs business and whether the company can keep hold of its global dominance, i want to bring in a special panel we pulled together. Benedict evans is a partner at Andreessen Horowitz. The director of mobile device tracking. Cory is still with us. Benedict, do these numbers show that samsung, which has shown it is a company that can reach everyone from high to low, that that is not the case anymore . The android business is really unstable and uncertain at the moment. It is starting to look more like the pc market developed, with the components commodified underneath. Samsung and most of the android areas have been unable to create a value added in services on top. You have a commodity product, a commodity component. What everyone has been asking over the last two or three years is, is samsungs position sustainable. What you may see in a couple of months if apple comes out with a larger screen phone, and the way iowa state allows you to customize the iphone, you may see apple taking a larger share of the highend market away from samsung. Samsung is also coming out with a couple of higherand devices later this year, over the next six months as well. That has been a strategy, but is it the right strategy . You have been doing so much work on market share and crunching the numbers. How are they looking . The pressure from the ones below it is really starting to take effect. They have got to continue to focus on maintaining a position at the highend. The market share will be driven by the low end. They have to focus their strategies in these two areas. Their marketing investment, which has taken them to the top over the last couple of years, has been focused at the flagship. The reality is that they have got to change up that flagship strategy that has somewhat gone stale now for two or three years. Benedict, is it you who said that samsung is dominant but paranoid . The cloned nokia. People talk about similarities with apple products. Every product, every spectrum, every technology, every operator, every country and over 10 billion a year to support that. The question was always, at what point does the commoditization involved in running a business and the components of a company, basically logistics and Manufacturing Company when does that catch up with you . Samsung has spent two or three years at the top of the market. They have not managed to create any sustainable value on that. They have not created any reason why your next phone should be a samsung. It is not quite clear how they would do that anymore than it was clear how dell or hp could do that. Xiaomi came out of nowhere in china. Apple is finally coming out with a new iphone. Cory, what do you think about samsungs strategy . Does it need a dramatic shakeup, in the sense that they have been making devices for everyone, but should that change . You saw samsung doing a lot of things to try to differentiate their devices, talking about everything from a barometer in a phone to having crazy announcements over their phones. I remember being in new york at radio city music hall, and they had a tap dancing child on the stage to illustrate how their phone was going to be pervasive even to the tap dancers of the world or something. To the point of what makes these phone special, the more samsung there is always been tension between samsung and google about what would be different about their phone. One continually wonders if the day all, where there is a samsung map or an apple map or a map from somebody else, microsoft or somebody, on the samsung phone. Will they start to do things to break away from the android operating system in little ways to get less google on the phone and have something that is unique to samsung . And do they have any skills in that . They certainly have the market share and resources to do that. You saw a huge span of research and development from samsung that helped add to that operating disappointment. The question is, what are they going to do with that, and it might be something that is unique to samsung . They are just as important to the marketplace as google is to samsung. Benedict evans of Andreessen Horowitz, ryan reith of idc. We will continue this conversation after a quick break. Im emily chang. This is bloomberg west. We are continuing our coverage of the challenges facing samsung. We are back again with Andreessen Horowitz partner Benedict Evans and idc director of mobile tracking, ryan reith. We were speaking in the break about samsung, and what samsung can do to move the needle, what samsung can do to move more phones. What is samsungs identity . Samsung has been extremely effective at cloning nokia and producing this wide range of handsets. What it is not really been able to do is produce any particular sense of loyalty. It is not created a clear sense of identity, of what your next phone should be a samsung, other than the fact that phone is everywhere and it is subsidized and marketed. As we start seeing more competition coming from cheaper chinese manufacturers, and in parallel as you see samsung starting to run out of ideas of how to differentiate the highend handset, it feels it has hit the ceiling. They are using the android operating systems. They have a relationship with google to maintain. What do you think samsungs choices are . There is a few. One is to continue to be a good hardware oem. They are just good hardware and not as good at software, it is still that problem of what is their identity. You have seen them over the past year. You have seen him start to develop a Samsung Developers conference. As you log into a samsung phone, your profit to go into samsung services. That is their approach to try to build an ecosystem and following. The reality is that is not so easy to do. Do you think the new features are moving the needle . There are no bad phones on the market now, unless you go down to 50. The question is whether they are great and unique and different. They are not really. They are just perfectly good android phones. It is hard to persuade someone to buy a samsung one versus one from these chinese manufacturers. What do you make of iliad bidding for samsung . 15 years, maybe 20 years, every operator outside the u. S. Has look here and said, that its really expensive. And the service is terrible. If only we could do a basic level of standard practices in america, we would clean up. The spectrum allocation makes it much harder to do that. You can see that with tmobile. They are trying their hardest to do what any normal operator outside america would do. The spectrum allocation they have makes it difficult. In the rest of the world, there are spectrum covering the whole country. Would it be better for u. S. Consumers, would the u. S. Market be more competitive if sprint and tmobile were one operator . Then you would have two very strong guys and one quite strong guy. He arrived in the French Market and turned it upside down, which was a quite uncompetitive market. He came in and turned it upside down. He did that with the help of a lot of very aggressive supporters and regulators. He comes here, he buys tmobile. He gets tmobile. He does not change the spectrum landscape. Yes, he could come in and shake things up. Its not clear how quite easy it is to do that. Lets talk about that. I am getting some headlines. Deutsche telekom, the current owner of tmobile, is set to deem iliads offer noncompetitive. Cory, what does this mean . Deutsche telekom is a pretty important part of tmobile. They put this company together. Deutsche telekom will be necessary for any deal to happen to acquire the company. They are saying they clearly favor the sprint offer. I go back to iliads notion of where they will get the money to do a deal like this. It is unclear. Tmobile already has a ton of debt. Iliad is a Smaller Company than tmobile. Deutsche telekom saying they are not partnering with these guys, they are not engaging with them in any way, and they still prefer the sprint deal. Quick thoughts from you guys on it . They prefer sprint, they say. He forged his way into the u. S. Market and turn it upside down. He looks at the u. S. Market and says, this is right for pirates to come in. He thinks hes a pirate. John legere thinks very highly of himself. Everyone thinks very highly of him. The question is, is changing the ownership of tmobile changing how it will be able to compete . If you dont get Deutsche Telekom, it just cannot happen. There is no way. Even if they could control the debt somehow. This could be the quickest dealkiller of all time. Ryan . I would agree. Cory said earlier, it feels like the copy trying to swallow the fish. Not sure if this will follow through. He swallowed his Japanese Mobile operator. The difference is the debt. You cannot go into this right now and say, im going to add on the debt that tmobile does not have. Tmobile already has that debt. It feels like the guppy swallowed the fish. All right. Entries in horowitz, Benedict Evans, and ryan reith, idc. After this quick break, continuing our deep dive of samsung right here on bloomberg west. Im emily chang. This is bloomberg west. The lee family has led the Samsung Group since 1938. Now their dynasty may be threatened. The companys powerful patriarch entering his third month in the hospital after having a heart attack. His son is expected to inherit the family business. The possible handover comes as samsung faces increasing pressure for the company to unravel complicated Ownership Structure. You are the players in samsungs first family . Early and spoke with sam grobart, who visited samsung headquarters in south korea and spoke to the director of Congressional Affairs and trade for the korea economic institute. I started by asking sam about the samsung dynasty and the companys succession plan. Take a listen. Samsung is controlled by its current chairman, who is currently in the hospital. He is the son of the companys founder, who started some sun in 1938. His son is the heir apparent to a collection of companies, a true conglomerate that comprises 74 different Business Units that range from the electronics we often talk about Life Insurance am a shipbuilding, and many other businesses as well. A very complex structure across holdings that allow the lee family to maintain control while actually not owning very much of the company. Is jay lee the right person to lead samsung . Jay lee has a couple of advantages. He was involved in samsungs partnerships with Companies Like google and helped push the smartphone side of the business ahead or it he has worked in the partnership side of the business. Given the changes in Ownership Structure that are likely to take place in south korea, now that there are bands across shareholding in a push for greater Corporate Governance openness, he will need to be able to take and build types of alliances necessary to maintain control of the company. That being said, looking at samsung, it is hard to see who else might sit in his shoes. What are the chances it is not jae lee, that it is someone else . It seems highly unlikely. Jae lee has risen within the ranks of the company. He is the son of the current chairman. That carries a tremendous amount of weight within the company. The chairman looms large over samsung. If this is his choice, that is probably what is going to happen. I want to talk about something we touched on earlier, samsungs Business Structure. This word, table, it is a common Business Structure in korea. Can you explain how it works with respect to samsung . They go back to essentially pak jungh hee era. They were designed to take industrialized south korea. You have the equivalent of a u. S. Conglomerate or it it is family controlled. You dont have the strength of corporate ownership that shareholders would have in the u. S. Or other countries. This has really helped in south korea economically developed. It has allowed the government to work more closely with the development process. Much of that ended in the 1990s, and especially in the 1997 financial crisis. The chaebols seem to be under threat in south korea. There was a headline from bloomberg but called samsungs chaebol a time bomb. Why . I think the challenge with the chaebol is because of the family structure, you have a situation to where lee kunhee built a company into one of the Top Companies in the world. While e. J. Young may have many of the skills needed to lead the company, the question is, is family leadership in the long run the best strategy . Over time, if you look at even the politics and other things depending on generation after generation of the family, tends to be a dangerous strategy. You need at some point to move into a structure where essentially you can take and move in a person who has all the skills necessary to run the company. E. J. Young may have those skills, but if he doesnt, you need to put in place someone who does. What if the south korean governments position on this . What did you get in terms of a sense about the future of the family dynasty, and the future of chaebol . My understanding, having spent some time in korea, is that the chaebols are moving through transition period. There is a Younger Generation of koreans who look at them as being overly complex, not transparent, too much in bed with government, and that leads to corruption and inefficiency. It may have been something that was good to have in those years from the 1940s and 1950s and 1960s to get korea up and running. But this kind of coziness between government and business would appear to be less than democratic sometimes, and that there is need for reform and transition out of this more ossified system into something that resembles more western companies and economies as well. What is the opinion of people who work inside the company . Are they frustrated that they dont have a shot at these top leadership positions . I have never gotten that impression from the people i spoke to there. There is serious reverence for the lee family and what they have been able to do for the company. The company is so vast that you can really rise and be the boss of a huge amount of territory. If youre covering mobile, lets say, it is equivalent to running your entire own company. There is not necessarily a desire to move on into those upper echelons which have traditionally been occupied by lee family members. There seems to be no real impetus to change that. How do you see this playing out . What is the future of samsung . What will you be watching . I will be watching a lot of what happens in the industrial goods sector are they able to make the transition into smart refrigerators, smart dishwashers, and move into these types of products . How are they able to diverse the company. Perhaps even more important than diverse vacation we understand mobile is a fastmoving industry. We have seen mobile, nokia rise to the top and fall. The big question beyond the leadership transition is, how does the government transition work . Samsung is about to go public. It is the Holding Company for the Samsung Group. That will lead to governance changes. We will probably see in the future other parts of samsung go public as well. And how does it work in the future . Those are things to look at too. Sam grobart of bloomberg businessweek, and the director of Congressional Affairs and trade for the korea economic institute. From jayz to Ellen Degeneres to big papi, samsung has spent a lot of cash to be associated with some bigname personalities. But have these efforts paid off . Samsungs Mega Marketing efforts, when we return. Watch as streaming on your tablet, phone, and bloomberg. Com. Welcome back to bloomberg west. Im emily chang. Samsung has spent heavily on marketing. Oscar fans will recall samsungs marketing win at the academy awards, with ellens selfie. We are joined by Jon Erlichman from l. A. Still with us, our editoratlarge cory johnson in new york and sam grobart. Sam, samsung has not left anything to chance. They have pulled out all the stops, getting the biggest stars in hollywood to promote them. Its very true. It is a strategy that involves spending a lot of money, but it goes beyond that. Just spending money does not always get what you want. They made a very conscious choice if you years ago to say, how are we going to change the view of our company . They went after a very difficult category, that category of cool. They enlisted a wellknown ad firm in l. A. You think back to the next big thing is already here campaign they started to roll out, started to poke fun at apple, which would have been seen as a dangerous strategy. They have enlisted a lot of alist talent. People are always skeptical when they see celebrities endorsing products. In the end, maybe less so with samsung than say, alicia keys pushing for blackberry. The other thing they have smartly done is after they started to get more consumers using their products in the u. S. They spend on the galaxy brand more than 440 million last year they started to shift the story to business, to the enterprise. They took a different approach than some of the other players out there. You have got the selfie that Ellen Degeneres took at the oscars, where it just so happened that rad pitt and Angelina Jolie and Julia Roberts were also in the photo, the selfie that david ortiz of the Boston Red Sox took with president obama. Apparently, that was planned. Sam, what do you make of these guerrilla Marketing Tactics . Samsung is taking a Guerrilla Approach and marrying it to a ton of money. In 2013, the company spent more than 14 billion globally on its advertising and marketing efforts. That included 4 billion in advertising alone, which is quadruple what apple spent in that same year. Apple is a much better known brand in a stronger brand than samsung. They do need to spend that money. If they can couple that with appearances, with celebrities and so forth their campaign taking on apple and iphone customers was a big success. On some level, this is working. This is happening. It is also backed by an extraordinary amount of cash. Then of course, there is jayz amah who partnered with samsung on an album release. What kind of impact did that have . Jayz one of the most recognizable stars in the world. Yeah. Obviously, a lot of people targeted jayz. He took some heat for that. At the end of the day, i dont think theyre going to back away from what they have been doing. If you spend a lot of money and you try something that is seen as creative and it is working for the most part, do you move away from it . The fact that apple seems to be awakened by this and is now in some ways spending more money on marketing itself. All right. I do want to get to the bwest byte before we go that is one number that tells a whole lot. Sam, you have the byte today. The bwest byte is 150,000 that is the number of phones that were gathered together by chairman lee kun hee in front of 2000 samsung employees in 1995. He was disappointed with the quality of their mobile phones. He gathered the phones together and he set them on fire. When the fires burned down, he had bulldozers come in and raze the pile. And he turned to all of the employees at their major manufacturing facility outside of seoul and said, if you make poor quality products like these ever again, i will come back and do the exact same thing. And that story is known throughout the company as a legend, a part of the lore of samsung. Quite the way to make a statement, cory. Can you imagine that happening at apple . [laughter] sort of. Atari did this with their e. T. Game. They brought out millions of copies to a landfill. We should do it with our bad shows. Just burn the computer we watch them on or toss the tv into the bay. I will keep them move in my back pocket. [laughter] cory johnson, our editoratlarge, sam grobart him a Jon Erlichman thank you. That does it for this special edition of bloomberg west, looking at the challenges facing samsung and its future. Dont change a channel, because in the next few minutes you will learn about a breakthrough product that can help take years off your appearance. Heres the thing. You dont put it on your face. Want to learn more . Stay with us. Next, a paid presentation from perricone for cold plasma sub d. The first of its kind treatment for the area of your body that can actually age most