Alibaba's U.S. Investments: Bloomberg West (08/01)

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Aug. 1 (Bloomberg) -- Full episode of "Bloomberg West." Guests: Chegg CEO Dan Rosensweig, Plus Capital Founder Adam Lilling and Forrester Research's Sucharita Mulpuru. (Source: Bloomberg)

? live from pier three in san francisco, this is "bloomberg west," were recovered innovation, technology, and the future of business.

I am jon erlichman, in for emily chang.

Tesla is looking to wrap up sales with a new lithium-ion battery.

Taz land panasonic our partners on the project.

Ground has been broken in nevada, but there is still possibility it could be moved to another state.

The los angeles dodgers are in first place, but if you live in l.a. you might not know it because of a standup tree and time warner cable and various pay-tv providers that has resulted in gains being blacked out for millions.

The fcc chairman and a dozen members of congress are getting involved, urging an end to the standoff.

A federal judge rules against microsoft in an e-mail privacy case.

The judge ruled microsoft must turn over e-mails sent -- stored in ireland to investigators.

Microsoft says e-mails deserve the same kind of protection as letters sent in the mail.

As for the lead story, alibaba group is pouring millions of dollars into u.s. tech companies as it prepares to go public later this year.

The chinese e-commerce giant invested $120 million in a san francisco company that makes mobile games.

This is after bloomberg reported alibaba is considering investment in snapchat.

Others include tango, lyft, and for more we are joined by dan rosensweig, ceo of online education site chegg.

He was the yahoo!

Chief operating officer from 2002 to 2007, the years ali baba formed a strategic partnership with yahoo!

Also, cory johnson, who is in new york this week.

At large, yes.

[laughter] dan, let's start with you.

Lots of investments.

Everyone is trying to make sense of what alibaba is trying to do in the u.s. what do you make of it all?

It is competent at.

It is very different from their strategy in china.

The strategy in china is that they start companies, they own them or buy them.

It looks like they have learned that the value of investing in these companies, and alibaba has made a fortune for yahoo!, there is a way to get returned both by investing in companies and seeing if they achieve success on their own, or at some point they will try to buy them because that has been the operating premise alibaba has generally followed.

There are so many.

I guess you cannot buy them all, but we have reported before how they hired a former executive from liberty media who specialized at liberty in doing just this, buying stakes.

Does this suggest that maybe the reason that they are taking these early investments and making decisions later on what happens is because they have to slowly but surely figure out the u.s. market, a regulatory thing?

Probably all of it.

First of all, they are not public yet, so right now they can use capital they will not be able to use.

Second, they are trying to figure out how to grow outside of china and outside of asia, particularly in the u.s. it makes sense that they are buying pieces, that when you add up all the pieces, parts of apple, of amazon, of google, so they are assembling a collection of pieces through investments that they may put together one day, or at least understand what is going on in the market so they can learn about it and decide how to participate.

You have been doing reporting on this -- what is your take?

My question about ali baba, one of the things we see across chinese industries are companies in china, homegrown companies that are blessed by the chinese government to operate in china and get an advantage.

While the government is keeping out apple, apple at arms length.

Eventually they got in a little.

They're keeping a google, facebook, twitter to some degree.

Those companies are kept out, while homegrown companies like ali baba or weibo, you name it across the spectrum, are allowed.

If alibaba invests in snapchat, does that mean it is the only messaging app allowed to grow, and suddenly becomes worth more by virtue of an alibaba investment?

That is an excellent point.

My answer, in some cases that is likely.

Look who ali baba is modeling themselves after, softbank.

When soft bank made all the investments in the united states in the late 1990's,, yahoo!, e trade, they were the gateway to japan and asia.

So that is how yahoo!

Japan got so big.

So i do think, i am not sure that it alibaba were to make investment in a media company, which i doubt they would do, that those companies would have a chance to be successful.

There are things that china will not allow to happen.

But i am sure the part of all the law --aalibalaaba's argument is that we have the connections and we can get you into asia.

Is a crazy to think that alibalba could be in a position after the ipo to just buy yahoo!? it is in a position to buy it now.

I would think it is more likely to be softbank, because softbank has more of a vested interest to get a bigger ownership in yahoo!

Japan than alibaba has in buying what is left of its shares.

That ship has sailed, but it is a possibility.

After ali baba goes public, the story will be more interesting.

As a ceo at chegg, you did an acquisition of an online tutoring business.

How do you think about parlor -- players like alibaba?

Are they in your mind if you think about the investments you might have to make?

We are in the education space.

We don't even think we are in the major leagues yet.

It is getting huge.

Aliens of dollars invested.

I doubt that alibaba will think about the education space in the u.s., given all the regulatory things.

But it does change how people think about the valuations.

The difficulty has always been when you are public, private valuations are higher.

When companies take big investments in high numbers, it makes it difficult for public companies to buy private companies.

Every one of these things affects the landscape.

We think the education market is huge, and buying insta-edu, where there are already 7000 tutors and it is all online, like uber for tutors, we think that will be a massive market.

Everything that happens affect the ecosystem, but i don't think alibaba will focus much on education.

Let me ask you about a chegg question.

I wonder if changes in the education space, critically around, knees like corinthian college being forced by the state of california to slow down and change and get rid of some operations, if that has any impact on your potential growth?

It does.

That's a great question.

So many people started to go to the for-profit colleges, and to name -- the name for-profit college tells you something.

It tells you they will spend 30% of revenue on marketing as opposed to education.

You are correct.

Worse than that, they claim to have lower tuition, but students that go to those schools have the highest percentage of student debt.

It is something the government should have looked at a while ago.

I am grateful they're looking at it.

What it will do, it will move people back into the mainstream.

Most people don't know that some of the schools we all know their names, over 1000 online degrees you can get from schools that you know the names of already.

So i think it is, what it does, it pushes people more towards online, less towards for-profit, back to the brand names.

And that is a healthier thing, but ultimately if you look at the next 10 years, think about the netflix model.

The more screens people can use, the more they will consume content.

The more they consume content, the money -- the more they consume education content.

All these things should expand.

Opportunities for people to learn, and lower costs, but the for-profit have done so much damage, it will take time to get past that.

So what are opportunities for you and companies like alibaba?

When people think of someone at alibaba, they think of jack ma.

Given that we have seen the ceo shift, does that mean that as we continue to explore the story, their investments in the united states, that that has changed the strategy for the company overall?

I think the strategy will have to change once they get outside of china.

The recent investment in the gaming company, which is an amazing company, by the way, probably a fantastic investment.

You would never see jack paying attention to gains in china.

He was always against it.

He thought they were bad for young chinese kids.

I think you'll see an evolution of the strategy, country by country, which is something american companies have had to learn as they go outside the u.s. i do think that jack will loom large over the entire strategy and vision of the country, the same way that reid hoffman.

As chairman of linkedin.

Jeff does a wonderful job, but these founders, their personality, their presence remains even if they don't run the day-to-day operation.

Happy friday.

Always a pleasure.

Thank you.

Our thanks to both cory and dan rosensweig.

Up next, the battle to build tesla's factory.

New details on where it may be built and how it could have a huge impact on tesla's business.

This is "bloomberg west." i am jon erlichman.

Tesla motors has broken ground in nevada on a site for the highly anticipated giga- factory, but there are other states competing for the factory where it the carmaker plans to produce lithium-ion batteries.

I will turn it over to cory johnson and alix steel.

The news of the factory, discussed in the conference call yesterday, started up with a really weird sentence.

Tesla said they had "broken ground in a location that could be the site of a factory." breaking ground if it is not determined to be a site is a strange thing.

The discussion is, do they have the capacity to build enough cars?

Can they get enough battery capacity if they don't have their own factory?

Is there enough lithium capacity?

Lithium is used in a lot of stuff.

In batteries, your ipad, your computer, also in medication, like for bipolar medication.

Also used to make your air conditioner quiet and for space shuttles.

It is pretty much in everything.

That is part of the issue.

If you look at the supply and demand dynamics, right now we are ok, demand is around 150,000 tons and production is 250,000 tons.

In 2015, looking at possible supply of 300,000 tons and demand of 480,000 tons, 710% annual growth for demand, so we would not have enough lithium as the project stands right now.

The white line is showing it is straight.

Would people show -- see straight demand and rising supply -- stray supply and rising demand, there is a problem.

There is no way to hedge it.

You're buying it from your supplier, unique agreement.

Obviously prices are rising because of it.

There are 30 million tons of lithium in the ground, proven reserve.

We are both geeks when it comes to commodities.

In mining, they measure what is known to be there, even if it is not mined there, what might be there, and possible -- the actual reserves they know is 13 million tons.

So there is enough, it just takes quite a long time to get it out.

Every five years about one or two projects come on stream.

It takes about two years to get the lithium out of brine, basically salty water.

The sun has to sit on it for two years to evaporate, then you add stuff to the lithium and pound it into what winds up looking like cocaine.

Are other uses for lithium, once the pirrice gets higher, you mentioned ceramics.

Ceramics is a quarter of the usage, of those products just are not worth using lithium for.

Are there substitutes?

The same way lithium has replaced nickel in batteries.

The real spike was in 2008, and that had no effect on demand.

The coke bottle, that has lithium in it.

As we go on, the other thing i've seen about the risk tesla might be taking by building this factory -- it is one billion cells, what they will make.

They are committing over the long term to this particular technology, which is somewhat new to vehicles.

There was some success and some problems they seemed to work through.

Is this the technology of the future if they commit?

If they can get the price down enough, and that is where it is key.

Tesla's goal is to make it $200 per kilowatt hour.

That measures the amount of energy you can store in the battery.

The cheaper it is, the bigger your battery can be, the more energy you can put in there, the longer you can drive on one charge, and the price stays the same.

It helps your margins and helps you as a consumer.

So the goal is to build a bigger factory to lower the price of lithium batteries.

The problem is, lithium prices will only go straight up as demand is not keeping with supply.

There you go.

You got it now.

Sound like a messed up plan.

The idea is that in term of the batteries, the more they create, the more they can lower the price, helping you on a consumer scale.

Where they end up sourcing the lithium and how much it costs is a different issue.

A lot of start up companies because of the ev market coming into its own, they are trying new technologies to get lithium.

There is one that is hooking up with a geothermal plant which sucks up brine, and theyh give it to them, they get their own lithium, and that is reinjected into the earth.

That will supposedly take 90 minutes instead of two years.

A fascinating story on a volatile commodity and substance itself.

The somewhat less volatile alix steel, thank you very much.

I am volatile.


Thank you very much.

[laughter] john?

Thank you, cory.

Coming up on "bloomberg west," in the world of bond investing everyone knows bill gross.

His son, less about bonds, a lot more about beats.

What he is trying to do in the music business, coming up.

? welcome back to "bloomberg west." pimco's bill gross is one of the best-known names in the bond business.

His son nick knows less about bonds, but plenty about beats.

He has his own music label, and he is making investments connected to the music industry.

I caught up with nick in los angeles to find out what he is up to.

Nick grossman loves his drums.

That is an 18 inch tom.

The 18 is the crazy one.

No one has ever seen an 18 inch floor tom.

He is the son of legendary bond investor bill gross.

I can't tell you what a bond is, to be honest.

[laughter] to this day i'm like, ok, it's a coupon -- i'm not even going to get into it.

He shows us around his music studio in hollywood, where his dad visited.

He came here one time and said, you know how to operate all this stuff?

Nick says all of bill gross's children are pursuing artistic tasks.

A photographer who just got the number one portfolio per getty images.

My sister is doing an arts related thing.

I'm doing what i'm doing.

He always supported us.

Not to say that he does not have his own business ambitions.

I put a lot of pressure on myself growing up in a situation like that to succeed and do well that he has done.

Beyond his rock band, gross is a producer and songwriter, connecting with a grammy-winning artist who works with everyone from u2 to madonna.

His company, stars enterprises, is helping musicians and managers own their -- grow their brands.

You have to be ahead of the curve.

Gross is investing in business that could shed light on where the music industry is headed.

I am in 10 or 12 different things on the tech side.

Social, mobile, big data.

Bill gross advised him on the investments, but not to steer him to a career in investing.

He has taken to every show and supported me for so long.

Never pushed bonds or stocks.

Is your dad musically inclined?


He always says if it were up to him he would take this career over his any day.

He's a rolling stones fan, big beatles fan.

He's --t hat's what he does, he loves music so much.

I think he's really happy he is able to pass that down.

He can drum.

My visit with nick gross, son of bill gross.

The sec is not happy with time warner cable, all coming down to the doctors.

We break down the brawl, next on "lunar west." ? time for bloomberg tv's "on the markets." let's do you caught up on where stocks traded today.

Lower across the board, the second a lower.

Dow erasing gains for the year.

S&p 500 down 2.7% for the week, the biggest weekly drop in two years.

Investors risk averse.

You are watching "bloomberg west," we focus on technology, innovation, and the future of business.

The federal communications commission is pressuring time warner cable to end a fee fight with pay-tv providers over the cost of carrying los angeles dodgers gains, resulting in the games blacked out to millions of residents.

The sec chair sent a letter to the ceo of time warner cable, saying he was troubled.

Dozens of lawmakers have written letters urging them to end the feud.

We are joined by mike kramer, former president of the texas rangers, now with the university of texas at austin.

He joins us via skype from austin.

Back from new york, our own cory johnson.

To some people, this might seem like a regional story, but it is now getting national attention.

What is the back story?

How did we get to this point?

Writes -- rights fees have just escalated.

Even though everyone outside california things that might be something wrong with the people in l.a. who keep driving the price of tv rights stuff between the clippers and the dodgers, but this is a national story because the price of tv, cable, satellite, has just gone through the roof.

It is tremendously funding all of the sports leagues.

It has made leagues that were very unhealthy very healthy leagues across the board.

So it is an integral part of the major league sports story in the united states.

Is that a function of the technological innovation of timeshifting where you have people recording everything else ? that sports is literally the only thing where people have to watch the commercials?

[laughter] that's probably part of it.

My gut tells me as ratings decline and as viewership declines on almost every channel on cable, and you know the channels keep multiplying, as viewership declines, and they are declining, the only thing that remains a constant is sports programming.

There is always going to be a core group of people watching sports, especially major league sports, especially in a town like l.a. those sports rights become tremendously important as cable operators and channels tried to keep the interest of the viewers.

Even though you have had this argument that live sports are incredibly valuable, the one thing that holds up, in this case you have pay-tv operators saying, directv, dish, they are holding firm.

What message does that send?

Well am a look -- you do have to look at the l.a. market.

Last year, i think the average l.a. dodger game, i might be off by a few on this, but was under 150,000 viewers per game.

Think of that.

Only 150,000 out of probably 4 million viewers in the l.a. area.

So that is under 5% of viewers watching dodgers games, even though they are perceived to be very valuable.

That is a problem here.

Time warner went out on a limb, way out on a limb to pay $8.3 billion over 25 years to the dodgers, besting that it could pass -- betting it could pass on a fairly substantial charge to cable and satellite operators and hoping they would pay.

But this is by far the biggest stretch that any station owner, channel owner, has gone to for these rights.

This is a difficult one.

Even their fellow operators are saying, enough.

I think part of the issue as well as of course that they are having to deal with one of their competitors, time warner.

So that doesn't help the process either.

We have seen the same thing in college sports.

As a giants fan, i am always glad to watch the dodgers when they lose, but they have not done that enough this year to my taste.

With college, with ut, we have -- with college, with ut, we have seen a germanic change in revenues from television.

How does -- the networks, how is that changing the game?

Two or three years ago, three years ago now when ut right here in our backyard signed up to do the longhorn network, what happened there, it almost caused the demise of the big 12. it changed a lot of the dynamics , certainly in college football.

You saw teams like texas a&m and missouri disappear from the big 12 and run to the sec, thinking they better get over there now.

It really sent a real shock through college football.

Quite frankly, while there is some stability now as every major conference has put together its own tv deal, there is more to come.

There will be more shifting.

A smaller group of teams that will be able to compete for a real national championship in college football, because the money will be all concentrated in probably the top 50. so it is having an impact.

Before we go, in terms of the dodgers dispute getting settled, everybody involved seems to be on board with the idea of maybe a mediator getting involved.

But even the observers are skeptical.

You do have comcast looking to acquire time warner cable and getting regulatory approval.

Do you think that transaction is ultimately going to force time warner cable to get this resolved?

John, i don't think so.

There's a lot of heavyweights.

If you look at who was involved in this, you put the united states government aside, i guess that is a big enough heavyweight , but you have comcast and time warner merging.

You have at&t and directv, trying to merge.

Those are four of the top providers of television content to viewers around the united states.

They make up a majority of the operators that provide service to subscribers around the united states.

So it is four very large companies that are really fighting here.

And then you layer in a few other medium-sized cable companies fighting about this, and all of a sudden you have almost everybody in the cable industry, all of them fairly large companies, all of them having an interest in this.

I don't think that this allowed changes that deal.

I think we talked, they don't want bad pr, but now i don't think that changes the deal.

Maybe we can get the broadcast rights for the board remains -- board room meetings, and people would watch that.

John cramer and cory johnson, joining us from new york.

Coming up, earning billions of dollars into silicon beach.

What snapchat could mean for l.a. a positive tech scene -- l.a.'s taxiing.

Welcome back to "bloomberg west." alibaba is considering an investment in snapchat, valuing the company at $10 billion.

Venice-based snapchat is the standout in the los angeles start up seeing, not just because of valuation, but also not selling to facebook.

I am joined by the cofounder of the startup accelerator launchpad l.a. how does the situation compare with what you usually see with startups in l.a.? the snapchat valuation is definitely a new bar being set for los angeles.

It is amazing to see only a few weeks ago maker studios sold for 500 billion -- $500 million.

Then oculus at $2 billion.

It is important for los angeles to see these returns to make venture capital work.

It is really important for los angeles.

The stats suggest the financing and the pure volume of deals, actual transactions, have been going up over the last few years.

Roughly 100 deals are so in 2009. basically tripled last year.

Are others in a position now to follow the snapchat lead?

It is really interesting in the evolution of los angeles.

From 2009 to 2014, it was a time of education and organization.

What you see now, once they have learned the playbook of venture capital, we lived in a town of storytellers.

So los angeles is probably the best place in the world to tell a narrative.

What's happening now, you see a lot of entrepreneurs getting money and trying to execute.

What will happen next, a lot of them will fail, and that is ok.

Some of them will sell for $30 million, $50 million, and what is important about snapchat and what it teaches entrepreneurs, is what was a $200 million exit a year ago would have been everybody high-fiving and saying, that is incredible.

I was in san francisco on wednesday with a venture capitalist, and an entrepreneur was almost apologetic that he had just sold his company for a few hundred million dollars and moved on.

In l.a. you have a $50 million win and the person gets rich by the employees don't, and the venture capitalists don't see a return.

What you see in los angeles in the next chapter is people ready to go the distance and build venture-capital-backed companies with multibillion-dollar returns . i think that will change l.a. forever.

We don't yet know, really even what the business of snapchat will be.

They are more focused obviously i'm growing what the business potentially could be.

Hypothetically, if that business plan fizzles out, what could it mean?

By the way, in venture capital it is a truly large company that focuses on user growth, scalable for monetization.

People -- facebook -- bashed facebook for not having enough revenue, and then twitter.

Both those companies did it well.

You will find snapchat falls into the communications bucket, where you will see advertising or subscriptions, native advertising with brands.

As long as they continue to focus on dominating in the space and getting more users and more engagement, they are teaching a lesson to other entrepreneurs that it is not about just flipping a company or selling and making money, but about truly changing the world and building a large-scale company others have to emulate.

That is the biggest lesson from los angeles.

You mentioned maker studios.

Before we go -- disney acquired the business -- there are all these networks, youtube creators, youtube stars popping up in being acquired.

Where are the big investments happening in l.a. right now?

In l.a., just because media companies are at the back door, you see these networks, maker studio, full-screen, they're the first ones to get really big attention.

But right behind if you have companies with over one billion views a month, vertical networks that could be next-generation cable networks, which follow the network of -- the model of 20 years ago.

That is a big focus in los angeles.

The question is, are they going to settle for a couple hundred million dollars or build multibillion-dollar companies?

That is where the jury is out in terms of media companies.

Even fox is worth less than google or apple, so tech versus media valuations are the question right now.

The question is, can you make next-generation media companies out of these youtube networks?

I think you can.

Adam thanks a lot.

Adam lillingh joining us from los angeles.

Coming up, amazon betting big on india.

? welcome back to "bloomberg west." amazon is making a big bet in india.

The e-commerce giant announced lands to invest $2 billion in indian operations, just hours after indian rival flipkart received $1 billion in investing.

Just how smart is amazon's push into india?

Back with us again, cory johnson, and joining us via skype, the vp of business at forrester.

Clearly there is an e-commerce landgrab in india right now.

How high are the stakes?

I think it is absolutely a bubble right now.

The indian e-commerce market is tiny, smaller than sectors in the united states.

It is probably no more than $5 billion total when you translate rupees into u.s. do llars.

A $2 billion investment and another billion dollars for flipkart seems like a lot of money flowing into a prize that is not that big.

I question the sanity here, to be honest.

There are a lot of people in india.

More of those people will be online eventually.

Doesn't amazon want to be there when it happens?

This is where, i'm interestes d to see exactly what this investment would go toward.

Tort logistics, acquiring other companies?

Toward influencing government officials?

Where is this money going?

What value does it ultimately provide?

China also has one billion people, and china is much further along in e-commerce.

It is a merkearket of nearly $300 billion from e-commerce alone, versus india where statistics, even the level of average income of the average chinese middle-class citizen versus the average indian middle-class citizen, huge gap.

India is not where china is.

I don'ty think it's a fair comparison.

Amazon has had a lot of challenges in a nationally.

Only three companies comprise the bulk of international revenue, japan, the u.k., and germany.

80% from this free-market, that share has been -- those three markets, that share has been declining.

They tried to make investments in china, have distribution centers there.

Revenue per distribution center in china is lower than anywhere else in the world.

They said they would invest in brazil a while ago, and the still has a lot of the same protectionist issues india has, and ultimately the only play they had in brazil is trying to manufacture and distribute kindles there.

They have not gotten into the full retail business.

Compare the story of amazon to the story of flipkart.

A homegrown companies some people may be less familiar with.

We did catch up with one of the cofounders.

Here is what he had to say.

This allows us to take a long-term view.

And take your teacher bets on what the ecosystem will look like in the future, and not just be part of the ecosystem, but shape the ecosystem.

This company has big plans.

They said they will be profitable when they get to 100 million customers, so they are thinking about big numbers.

What is your take on the flipkart business?

These are all businesses that american companies are best in a position to let them figure out what they like strategy is, let them make their mistakes, and lose money for as long as they need to, then swoop in and buy them.

That is the best approach.

There have been so many examples of foreign companies or american companies trying to make plays in these bric countries that are highly protectionist, and there are very few examples of success.

The level of internal investment, local, domestic investment needed, the fact there are huge tariffs on imported goods, these are ob stacles that are hard to overcome.

On top of that, you have other markets where it probably makes a lot more sense to continue to investing in, rather than these very nascent emerging markets like india.

Good insight.

Thank you.

Forrester research vp of e-business.

Bwest byte, one number that tells us a whole lot.

Cory is in new york with the byte.

0-1. microsoft is 0-1 in its appeal of a search warrant over the desire of the u.s. government to capture e-mails microsoft is storing for customers in dublin.

The u.s. federal district judge in manhattan upheld a federal magistrate's decision requiring them to turn over e-mails in a drug investigation.

Microsoft argued these kinds of requests really guhurt their business.

Earlier this week we talked to brad smith, chief legal officer for microsoft.

Here is what he had to say about the affect these things are having on the business of microsoft and everyone else in technology.

I would personally believe it is a problem for all of us in the tech sector.

A problem for us, for other companies focused on cloud services, or devices that connect to the cloud.

A big deal for business, all tech business.

You see it in results, ibm, hp, all the big tech companies in global business.

A great interview that u.n. and we did.

Do-- you and emily did.

Do have an idea about what microsoft's next upstart -- steps are?

Looks like they lost.

Fundamentally, this is about a single drug case, but the indications for technology are a big deal.

You saw some companies responding by moving servers overseas, inking that would at least help them with the nsa.

And verizon, a big loss in germany because of the nsa.

It is hurting technology, and a lot of companies are starting to cry about it.

I believe they will be appealing.

Always watch what you write in those e-mails, though.

Yes, i will.

[laughter] you can get the latest headlines all the time on your phone, tablet,, and bloomberg radio.

Thanks for joining us on "bloomberg west." ?

This text has been automatically generated. It may not be 100% accurate.


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