Why's Apple Investing $700M in Synthetic Sapphire?

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Aug. 15 (Bloomberg) –- AOL Vice President of Product Ryan Block discusses why Apple may be set to move away from “Gorilla Glass.” He speaks on “Bloomberg West.” (Source: Bloomberg)

Live from pier 3 in san francisco, welcome to "bloomberg west," where we cover innovation, technology, and the future of business.

I'm emily chang.

Ahead on bloomberg west, there are new concerns about the accounting practices of one of the companies bought by alibaba this year.

The company now known as alibaba pictures has uncovered some possible accounting flaws.

We will look into what it means were alibaba's ipo, and whether it is raising red flags for investors.

China mobile, the world's largest wireless character cut -- carrier, is cutting phone subsidies.

It has shares surging, but it can also lead to price hikes were samsung and apple devices in china.

Would this give another boost to companies like xiaomi?

And technology is making a big mark on the language.

Words like binge watching our -- are added to the online dictionary.

Alibaba has been on an acquisition spree in its run-up to its ipo.

But now, there are concerns about one of its deals.

A film company now known as ali baba pictures has uncovered some possible accounting flaws.

The unit may not have made enough write-downs for some assets in the first half of the year, according to a filing.

Alibaba has taken stakes in more than a dozen companies this year, ranging from video sites to the singapore postal service.

Will these accounting service -- issues raise red flags for investors?

I think wiring too much too fast -- are they acquiring too much too fast?

Grid -- crid, i'll start with you.

Did you ever do a deal in 15 minutes?

They said they were on a phone for 15 minutes nailing this down, and it was done.

15 minutes as fast.

Is unfortunate, because we thought chinese businesses are fast and loose.

We been watching, and finally, they had a hiccup.

If you are acquiring at the pace that ali baba has, you are about to hit a speed bump.

Is a too fast?

Compared to what?

They have been on an acquisition binge.

When we talked about this earlier this year, they had spent $4 billion.

That pace has continued.

I think they have a deliberate strategy to place a bunch of bets.

I don't think they will slow down.

I think they will be more careful.

Paul, does this raise a red flag?

I think it does.

It is pretty unavoidable.

The pace of acquisitions, i understand the strategic intent here.

But they are doing $10 billion in acquisitions in the first six months, he will always make you nervous that there are things that will fall through the cracks, in respect to do diligence.

This is that a small scale, these aren't hugely material numbers in terms of the company's balance sheet or income.

But is the notion that where there is one, there may be more.

Were here has to be -- what other issues has escaped attention?

It's of course, the case because of the whole structure of the company, which is been the fundamental red flag that has made investors nervous from the beginning.

This notion of variable interest entities during the entire structure that allows you to split things down.

Should investors be nervous?

They should think about what this means.

We talked about alibaba's ipo.

Most of the document was around the e-commerce business.

It's creating strategic value in the long term.

It's probably not going to be that material to these acquisitions alone.

Alibaba's balance sheet and income.

It will be a different matter if there's something wrong with the core business that has not disclosed.

What about the breadth of the acquisitions?

They have acquired the buddies ranging from pharmaceutical data companies to department stores.

How would you advise investors, given the wide variety of companies they have their hands in?

It's a long history of companies and technology have tried to put together conglomerates.

It almost never works.

It is hard to believe that this will be the one that finally does.

I understand the argument, with respect option element.

From an analyst standpoint, we are worried about positive and negative option allete -- optionality.

If you have a diverse range of acquisitions done very quickly, there is a high risk of material negative optionalaity.

It makes me much more nervous.

You know a bit about alibaba steam it.

They have been active.

How they actually work?

I don't know them personally, but they have been active in the valley, especially in the last three to four months.

They have taken a big stake in a gaming company based in san francisco.

They took a big stake in tango.

They were said to be in talks with snapchat.

This is hundreds of millions of dollars in investments.

We reported those talks have stalled.

As far as we know, they have stalled.

I think -- i agree that investors -- there is downside risk in the sense that you can place all of these beds, and even if they weren't due diligence problems, how do you execute on something this brought up?

I'm bullish on ali baba.

If you string these together, they make sense.

They are about mobile, commerce, or engaging users.

How foolish are you?

This is on track to be potentially the biggest ipo in history.

Not the largest tech ipo, the largest ipo in history.

What comes after wildly nervous?

I'm that.

This is a dangerous ipo in many ways.

It's unprecedented in terms of size and scope, it's unusual structure.

There is so many things.

And the new cv small red flags beginning to accumulate.

I applaud the innovation, but as an investment vehicle, i'm whatever comes after wildly nervous.

From bullish to wildly nervous, we have both sides.

Stick around, we have more after this break.

China mobile cuts smartphone subsidies.

Could this spell trouble for apple and samsung, and who stands to win?

We discussed, next.

? welcome back to "bloomberg west," i'm emily chang.

This subsidy cut would impact higher-end phones like samsung's galaxy line.

It comes back to the chinese government telling three carriers to lower marketing expenses.

Who stands to win?

Still with me, crid yu, and paul.

How bad is this for samsung and apple?

I'm torn.

On the superficial side, it has to be bad news.

50% or 60% of phones sold are sold with the subsidy.

It goes to the most expensive phones.

On the other hand, one of the issues is that they are selling to very affluent customers.

It's untested how much of a difference it will make when you are ready spelling and expensive phone -- selling an expensive phone to an affluent customer.

I don't think it will be as dramatic as people are making it out.

How big is this for the lower-cost guys?

It's adjusting, because this comes on the heels of a great quarter for xiaomi and lenovo.

They have overtaken samsung.

Everybody in front of them are local chinese manufacturers.

This would only accelerate how quickly these mid-end domestic chinese suppliers are doing.

Xiaomi in particular, to sell all their things direct.

They don't sell any subsidies anyways.

This can only help them.

Apple fought for years to get to be sold by china mobile.

It just happened six months ago.

This is something they have been working hard on, and the relationship with the chinese government, now this.

The flipside is china mobile really wants the new iphone product line in september to be available immediately in china.

It hasn't changed the emphasis on iphone products.

It's really a question of economics -- rice electricity.

-- elasticity.

History tells us not that much.

Less than you might think.

It will benefit the low-end customer, and a matter what happens.

Apple also now storing user data on servers in china, which is sort of unorthodox for u.s. tech company, which is part of the reason u.s. technology companies have had so much trouble breaking into china.

I think it will be very interesting.

The good news for apple is that they are not even in the top five.

There really a niche player in china.

I agree they will see some downside effect, but not too much.

I think the fact they put servers in china mean they are more committed to being a chinese player.

It could be interesting.

I wonder, paul, will we see other u.s. tech companies laying by -- playing by these rules to get the foot in the door?

Is brutally clear.

You can look back over the last three or four food fights that the blood had with the chinese government.

In the end, you are forced to do something because it is becoming such a huge share of tech companies business.

You are kind of increasingly forced to play ball, which is further involving the chinese government to do more.

It's a nasty cycle.

I wonder, beating about samsung, we talked about their market share flipping worldwide.

Samsung has been challenged by the lower end players.

They just came out with a new galaxy also phone.

-- alpha phone.

Is that the wrong strategy in china?

It's hard to say.

They are certainly under siege on all fronts.

That is something that has played out over the next asked the last four quarters.

Her member nokia -- remember nokia?

Everyone is wondering about that.

Samsung has been very nimble in the chinese market.

We love to see public shoring up of the mid and business.

Let's see what happens on the high-end.

They are quite vulnerable.

All, how much do samsung has story -- have to worry?

A lot.

They have very little bright halo in terms of being able to support brand price.

Apple has that going for it around the world.

Samsung is not the same kind of aspirational luxury product.

They will face price pressures and branding pressures.

That will happen more and more as subsidies come out of the business.

Thank you both.

Speaking of samsung and apple, can synthetic sapphire be the answer to cracked smartphone screens?

We will be back with apple's latest material moves, next on "bloomberg west." ? welcome back to "bloomberg west," i'm emily chang.

Apple wants the strongest most rest -- most scratch proof glass for the new iphone.

They are looking at sapphires.

Apple invested $7 million to produce synthetic sapphire screens.

We may see this glass used for the large screens of the two new iphones releasing in september.

Ryan joins me in the studio, and this is not like the jewel crushed up.

This is synthetically produced sapphire.

Is it really going to be that much better than gorilla glass?

It has the potential to be.

It is one of the strongest materials out there.

It would be kind of a classic apple move.

To use a different material that really only they have access to, and this level of quantity, in order to differentiate it from anything else.

I said $7 million, but $700 million they are investing in this collaboration.

Really glass actually came about on a mass scale because steve jobs wanted it in the iphone.

And now, apple is potentially raising the bar.

But it will add costs.

And it could potentially add weight to the phones, write?

-- right?

Essentially.

I doubt it will be noticeable to any normal user.

It might show up on the scale.

When you have a screen substance that is actually much more durable than gorilla glass, you might be limited center as well.

So you could counteract that weight.

This is text but apple -- textbook apple.

They've cornered the market with memory and cameras.

In -- anytime they can create a technological or materials advantage for their phone, they will go after it.

I can't tell you how many iphone screens i have cracked.

I'm very excited about any sort of advancement.

Corning, which produces gorilla glass, says it out forms sapphire glass.

If i were corning, i would be saying the same thing right now.

Would you be worried?

I'm not too worried.

If apple is going to make that move, they will do so for a reason.

If we're talking about just pure sapphire versus gorilla glass, maybe.

But there is no reason to believe that sapphire can be treated with everett substances to make up for some of the dissident edges -- different substances to make up for some disadvantages.

Its use in plain windows and armored vehicles.

That's pretty cool.

There is no question, it is probably going to add cost to the phone.

But will it be worth it, and will it create a customer experience that is better?

If there is one thing on the entire phone that you literally cannot have rogen or cracked, it is the screen.

-- broken or cracked, it is the screen.

The case can be scratched up, the camera could be two.

This is a focus for apple, it makes a lot of sense.

What about the reflection?

It might be more reflective than gorilla glass.

I think it is possible for sapphire to be treated.

We have seen different kind of coatings to all kinds of phones.

How excited are you about these larger iphones?

I'm always excited for the new iphones.

I'm really looking forward to it.

I'm not entirely sure it is going to be two different sizes.

I think a small, medium, large will be a few too many choices.

I think a regular sized iphone and a larger iphone might make a little more sense.

When you think about all of the difference/t things they have to manage, when iphone is really 30 to 40 areas.

That's a lot of product to manage.

If i'm going to take a guess here, i say they will introduce one new model, not two.

Something sub five inches.

Five-and-a-half is too big?

That's kind of ridiculous.

We were talking yesterday about the samsung galaxy alpha, which is this new phone they released stealthily.

It has a metal casing, it looks a little more five, the effects aren't as good as the samsung galaxy.

Are we seeing samsung just throwing things at the wall to see what sticks?

That a samsung strategy.

It has always been their strategy.

That's why they are in every industry in the universe.

They have the means to just throw products out there and try things, and see what works for them.

I think they are not only feeling threatened by apple, but by xiaomi at the mid-to low-end.

They will be trying a lot of different things.

Do you think we will see a strategy shift from them?

There've been reports that their head of mobile is under a lot of pressure right now, given all the market share that they have lost.

I think it is likely they will try to read group on the stuff.

As long as they are in control of their own destiny, and google is with android, they will have a really hard time differentiating.

This is the same play we saw in the pc space.

They have some real work to do if they want to be able to properly differentiate.

Ryan block, as always, thanks for stopping by.

Our shocks -- are sharks damaging underwater fiber-optic cables?

That's what google says.

We will look at why, and we will look at plans to prevent a sharp rknado from attacking the internet.

? it's 26 minutes after the hour, which means bloomberg is on the markets.

I'm julie hyman.

We have had declined today in concerns on tensions between ukraine and russia.

We are not seeing huge declines, the s&p down about one third of 1%. in terms of individual stocks, we're watching monster beverage and coca-cola.

Coke has taken a 70% stake in the company, and both are stopping -- swapping some grand.

Under this agreement, the two companies will combine marketing, production, and is region of the drinks.

Monster, which are really relied on coax for distribution, will get their access now to international markets.

According to a recent story, this is something that coke had considered in the past.

They decided that the owners were asking too much at the time to buy it outright.

"bloomberg west" will be right back.

?

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

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