Live from pier 3 in san francisco, welcome to the late edition of "bloomberg west," where we cover the global technology and media companies that are reshaping our world.
Our focus is on innovation, technology, and the future of business.
Let's get straight to the rundown.
Microsoft ceo steve ballmer announces plans to step down.
Could the technical error that shut down the nasdaq yesterday have been prevented?
We talked to an expert and see if this could become more common.
Google has the technology to track your web searches and now they want to track anything that catches your eye.
A new optical tracking technology patent.
But first, to the lead.
The window was about to close on steve ballmer's 13-year career as ceo of microsoft.
He announced he will be retiring within a year.
He wrote, "there is never a perfect time for this type of transition but now is the right time.
This would have happened during the middle of the transition to a devices and services company.
We need a ceo who will be your longer term for the new direction." ballmer was known for his colorful personality.
He has had a decidedly mixed 10 year.
Revenue way up during his time but shares down about 35%. they have been noticing his failures to innovate quick enough allowing microsoft to fall behind in crucial areas like search, mobile, and virtualization.
Prior to the launch of windows 8, i spoke to steve ballmer and asked him what his legacy might look like.
Everything has a bit of hyperbole.
For me, personally, i was not at microsoft for the founding of the company but the launch of the ibm pc in 1981 was a big deal.
The launch of windows 95 and the explosion at elegy was a pretty big deal and the launch of windows 8, in my 32 years of microsoft, those are the three seminal moments that i have had a chance to participate in and drive.
An interesting interview in "the seattle times," he said his biggest failure may have been microsoft vista.
Let's head to senior west coast correspondent jon erlichman.
What are we hearing ec?
Given the 10 year, it gives us the opportunity to look over the last decade and see where microsoft has had some challenges.
We see so many technological shifts.
The first one though, the move to search, the growth of google, i think that is an obvious one.
Steve ballmer took over back in 2000 and we did not know at the time how powerful ultimately google would become.
Being has become an important player in the search market, it does not have the first mover advantage.
A secondary event i think we should focus on, and we spoke about it on the yearly edition of "bloomberg west," the shift to the cloud in the virtualization of server networks and the fact you see these companies like vmware, salesforce that have become giants.
Microsoft gets a lot of top marks for the growth of its cloud business but not making that pivot early perhaps cost them some market share.
The final area we should focus on is this new world of mobile devices.
I don't know that anyone could have predicted exactly how things would have laid out when apple introduced the iphone, but the smartphone revolution, the tablet resolution, they have clearly forced microsoft to change its approach and we have talked about the push and hardware.
Add those things up and throw in social media and it has been a lot for microsoft to deal with over the last decade plus.
And it is certainly coming up soon.
All of the people at microsoft, we have seen some of the certain names flourish.
Who might be ready to step up in the microsoft ranks?
Everyone is having fun look at who might need to successor.
The first area people have looked is the highest level of the bench.
After the recent reorganization to simplify the business model there.
You see people like julie larson green who has really overseen the hardware and nadella, focused on cloud, and tony bates brought in outside expertise after the purchase of skype.
There is the possibility they will go outside the board and they are looking into all of those options.
Jon erlichman, thank you for joining us to talk about what could be next for microsoft and what kind of leader they may select.
Joining us now, he says ballmer should have left microsoft eight years ago.
Trip, it's good to see you.
Welcome to "bloomberg west." you wrote a piece in april saying he needed to go now.
He suggested someone from google could come in and take his place.
We have to look at the issues microsoft faces right now.
They have a culture issue and a strategic issue.
The company over ballmer has been rewarding politics over performance.
What do you mean?
People are reworded for being in the majority of the process.
Anything people want to talk about that is different than windows, the history of executives being asked to leave, it shows that microsoft's basic strategy has always been windows and intel and that cycle broke today.
What is that about?
It is making simple things complex, solving complexity with complexity is not a recipe for success.
It works for them for so long and i also worry about steve's personality.
I have interviewed him many times and he really is a difficult interview because he does not want to say much.
But those moments when you see him really selling, let's just call this the famous monkey boy video, it's our favorite of all time.
I think i might have to play it at least half a dozen times during tonight's "bloomberg west," so stay tuned.
Did that work inside the company?
There were so many different fiefdoms.
It did work 15, 20 years back.
What do you think about windows?
If you ask about of a high school kid, it is not one of the first three or four words they remember.
Facebook, linkedin, iphones.
The windows story is good for entertainment purposes, but is it good enough to say, ok, we are going to increase the performance of each and every product 100 times and price it at 100 the price?
That's a recipe to succeed.
Look at salesforce.com, the spinoff from vmware.
Look at the start ups.
These companies are all working on this premise.
100 times performance, 100 times the price.
Look at amazon.com's flagship program.
Microsoft has nothing.
And they are right across the lake there in seattle.
When you look at microsoft, what do you see as their biggest business strength?
We should not look at it in terms of one big strength.
What is the one thing they need to fix right now?
It is the cultural aspect.
Complacency should be punished.
Today, all executives, even during the re-organization, they have been complacent.
In the cloud business, it has been enormously successful for microsoft.
According to the cio, it is the second-most important cloud business next to salesforce.com . i would disagree.
It depends on how you define success.
The question to ask is what is amazon easy to deliver?
Products to your house and the cloud.
36 times, amazon.com has reduced the price and they have economies of scale, and every day they put new services online.
The biggest change in the marketplace six months ago, amazon.com did a deal worth $600 million over 10 years time and it changed the industry overnight.
Who is winning today?
One key metric, the servers that they are putting in their data center is a $300 server running the secret sauce.
Everything is in software.
Amazon is the leader of the technology and is four companies i mentioned are going to set the tone for the new i.t.. the question to ask thomas's microsoft position to dictate the terms and tones of the new i.t.? i don't think so.
Trip chaudhry, we really appreciate it.
-- trip chowdhury.
More on microsoft coming up next on "loberg west." -- "bloomberg west." ? on cory johnson and this is "bloomberg west." microsoft ceo steve ballmer stepping down within a year.
What will this mean for changing of the guard?
Running us to talk about this is paul kedrosky, an early stage investor focusing on start ups with talks and ventures.
He also worked at microsoft does a shareholder in the company.
Let me start with you.
When you look at steve ballmer tenure, what do you get the sense of what pushed him out today?
We are going through a major generational change in the industry and over the last decade or 13 years he has presided over something and he has kind of missed the boat on a number of different fronts, the smart phone industry, tablets, and computing even though microsoft has efforts in all of those.
There were a string of product launches they really did not work, windows 8 being the most noticeable.
The board probably made the decision that is time for him to go.
Kinross key, your thoughts on why this happens now?
-- paul kinross key, your thoughts -- paul kedrosky?
In the wake of a poor windows 8 launch with poor results around the tablet platform, he became almost a laughing stock.
I was with another venture investor and whenever a meeting would pitch, they would say what if microsoft launches a product like that and now it's almost a joke.
What if microsoft launches?
That's a real fundamental change in how the market now views microsoft as result of missing all of these major shift and and that is quite a condemnation for his tenure.
In the last segment, we talked about the emergence of google, vmware, even salesforce.
Throw-in amazon web services.
Any one of those could have been a great area for microsoft.
Except for his work, have not pursued any of them.
-- except for a zure.
With a dominant position they had in the browser market.
That was the gateway drug for them to be exposed and they managed to lose two thirds of their market share in the browser market over the subsequent decade from whenever it peaked.
And no brueghel chrome now dominates.
-- and now google chrome now dominates.
There are more increasingly more options on the web.
Running a product organization, they looked at what are the channels, what you can push through, and what you can sell it a best priced through the channels and steve jobs nailed it in the recent biography where he made the comments that the problem that companies like microsoft and ibm have is that they end up being run by sales guys and it's exactly what we saw at microsoft.
53% of the people who worked at microsoft were dissatisfied with his leadership of steve ballmer but that was better than it was two years ago.
I think it was an increasing frustration on the company.
One of the organizational challenges is that the middle tier never had room to move up anywhere in the company.
It was built why folks in the late 1980's, most of them are still young guys am far from retirement, like ballmer, who would not leave the company and you have a young generation who arm to more switched on and embedded in technology who have no room for growth in the company and it is itself missing out on a lot of the opportunities that you would see.
It is very rare that you are unable to build a product.
Usually you are able and it is just the unwillingness.
That's exactly what was happening and microsoft.
They spotted these trends but there was not room in the leadership for the next generation to come in and punch out with breakthrough products.
You have guys like steve who is maybe thought of at one point to be a successor.
He left and is now a venture capitalist.
Paul maurice was there and he left to start vmware.
Hussein, when you look at that , did the good people leave?
Are they're still great people there who could run this better?
Looking at the bench inside, one thing ballmer did very well was replace almost every single divisional head during his tenure.
People were rotated out, around.
I don't know how big the bench actually is inside the company and a lot of the really great company among the guys who were formative and building it into what it is today, they have all retired and the next generation has left it is there's no room at the top for them.
The only person i can think of inside the company who might be a good candidate is nadella who runs the cloud business.
The rest are guys who have probably been there a little too long.
I think that's really the problem.
There's also a corrupting influence.
Having been inside for too long, there is an absence of fresh blood at senior levels of the organization.
These are people who can survive under steve ballmer's tenure, so do i want them in the first place?
People stop believing and going out to their sailboats and now the microsoft is gone.
Paul kedrosky and hussein kanji.
We will be back with more " bloomberg west" after the break.
? welcome back.
I'm cory johnson.
Trading was halted on the nasdaq for three hours thanks to a technical glitch.
They experience connection problems causing a software breakdown.
Earlier, i spoke to the executive vice president for a software company and i asked if incidents like this could become more common.
Unfortunately, at this point, we are almost programmed to expect of these things to happen.
Over the last week we have seen three with goldman the one in shanghai and there have been a lot more activity in terms of these types about it is happening in the capital markets.
A level of complexity plus the level of volumes that these exchanges are experiencing are starting to drive this at an increasing pace.
What do we know about what actually happened?
What might have been done to prevent it?
There is a lot that probably could have been done to try to prevent it, a bit more than perhaps was done.
There's a lot to say in terms of some of the things that i think bob was referring to in the comments you just aired in terms of defensive driving that could take place and i expect will take lace more frequently at the exchanges as well as the major market makers that participate -- that will take place.
I called around to trading desk stand up a were asking me what was going on and i was asking them.
-- i called around to the trading desks asking around.
It was a stock or motion machine where they have the studio down in times square and they have the billboards everywhere, all the ways to sort of broadcast convincing people to buy stocks but they were not using that to communicate what was happening with the markets yesterday.
What is your sense about why they were not there explaining what was going on?
My feeling is they acted correctly.
First of all, you want to take care of the market participants and treat the people that are actually trading on the exchanges to make sure their questions are answered and that you are helping them kind of get through the process.
To the credit of nasdaq, they handled it quite well as well as getting the systems up and running and everything back to normal within a three-hour time frame.
They did not brush it.
-- they did not rush it.
They were right to not go public too soon.
We want to focus on the defensive driving points that bob alluded to earlier, the robustness, the resilience of the systems to make sure that this type of situation does not happen in the first place.
You can look at them as a utility.
They provide a trading utility to the markets.
Unfortunately, for utilities in general , you only realize they are there when the power goes out, right?
Utility was most needed when they had their biggest ipo ever with facebook and they fell on their face.
Then this on what should have been a very light trading day, no options expert larry xpiration.
If i were in bob's hughes her leadership of any of the exchanges or market makers, i would be concerned about the level to which technology issues are a threat to my job, my existence.
That is something business leaders need to put this on the development team and push them to go as fast as they can.
It has been more of a drag race than defensive driving and i think now that will change and business leaders will start to pay attention to the technology complexity.
More "request" next.
-- more "bloomberg west" next.
? you are watching "bloomberg west." our top story today, steve ballmer, ceo of microsoft, stepping down within one year.
What will the next ceo need to deal with to get them back to its former glory?
Joining us again, bloomberg contributing editor paul k edrosky.
Do you see a strength they can build on or clouds and v on the horizon?
Is that a pun?
For those of you keeping score at home, that was a pun.
There is burgeoning business in the cloud and mobile, some around being, and they bring this up too often but there is an article pointing out that once growth falls below 6% or 7% year-over-year it is unlikely they ever restart again.
That is when the end of the growth engine happens.
The reason why we return to apple over and over again.
Who can do to microsoft would steve jobs did to apple?
I don't think it's possible to turn the dial back and turn it back to what it once was.
History says it's a very difficult problem.
The three ships they need to be on board have really sailed without them.
Microsoft, as one of the earlier guests pointed out, they ran in all three and was short of making major acquisitions without a jobs-ian leader at the top.
I'm skeptical that anything can happen here.
To the clouds on the horizon, i wonder if the problems in the pc business, the sixth consecutive quarter of declines, and we have, adding to that, microsoft will have a tough fight against the playstation for their xbox and things could be getting worse.
Things could be getting worse.
Is the right playbook here for an incoming ceo to go back and think about the transition?
The company they vanquished, ibm, they went to a very profitable services company and it involved a leadership change, much like what we are seeing, and a deemphasis on a product rollout and being a service provider around the ecosystems they created around other people's technology systems.
As well as the teams underneath whoever the new ceo becomes and a deemphasis on the research in the company, none of which would be appropriate and a more services-oriented organization and for my money, that's the right path for this organization to take.
I'm doubtful they will do it because it will involve a major swallowing of pride here.
You think of all the things that steve ballmer did and the one i cannot forget is this video.
Him running around the stage screaming and yelling.
The monkey video.
I am playing this fortuitous and repeatedly on the broadcast today.
Why shouldn't i? it's great.
It never gets tired.
The one that's even better though -- that one is great and cartoonish, but the one that is more striking is the one from 2007 where ballmer is asked what he thinks about this new iphone thing from apple and he is just so skeptical.
$500? that's a huge guffaw.
It does not have a keyboard.
He dismisses it as a toy for the apple faithful.
It's one thing to promote your own product but it is something else to get something so gong- crushingly wrong that you have no insight into markets that way.
Click the video does show us what he's like.
He just said the guy is the most passionate in sales he has ever heard.
Steve ballmer was probably one of the best vice presidents of sales and organization could ever had and he closes deals like you've never seen.
He gets out there to sell whatever is given but that's the wrong person at the top as the ceo of a technology organization.
They have to sell the crap out of it.
Bloomberg attributing editor paul kedrosky, thanks.
Have a good weekend.
A big move after the announcement.
It was the second largest individual shoulder for -- the second largest individual shareholder, steve ballmer, he was already the 44th richest person according to the bloomberg billionaires index.
Will he continue to climb as he heads into retirement?
Let's bring in bloomberg news editor tom galles.
There was a time when the microsoft guys just got rich.
You got a job there and you had it made.
Those early guys are some of the wealthiest people in the history of mankind.
They have gone on to do amazing things.
Bill gates will be known as much for his philanthropy as he will for cofounding microsoft.
It's an amazing story and it continues to be.
We have not seen the end of that.
There's is great potential for steve ballmer to do great anxiety well.
As you pointed out, while the wealth has not grown at the same pace, he certainly continues to amass wealth.
Remember that microsoft has returned tens of billions of dollars, record levels of cash, to its shareholders one of whom, of course, is steve ballmer.
He says he plans to continue being a holder of microsoft stock.
Bill gates is sort of redefining, with warren buffett, the way to give money back in amounts that massive scale to try to effect big changes in society.
Do you think this is the kind that ballmer and others will replicate as they move into retirement?
We don't have any insight into what he will do.
We have not seen that side of him so much because he has had his hands quite full with microsoft.
It will be interesting to see the kinds of things he ends up doing with his money.
We talk earlier about how he tried to move the kings up to seattle.
We have this video of steve ballmer.
I don't know if you've seen it.
Would it be gratuitous to show this video again?
Is that the kind of thing that i would do you code there it is again.
Look at that.
That looks like how you go up and down the sidelines.
Seattle wants the sonics back.
Steve ballmer could not get the kings.
Who better to pitch?
As paul mentioned, he is a master salesman.
The billionaires club likes to do it and there's pressure to give away a lot more of your wealth and that is something like a great legacy of warren buffett to give away more than half of your wealth so we will see if he signs the billionaires pledge.
And maybe bring shawn kemp back to seattle.
Tom giles, bloomberg news editor.
Pandora lifting limits on the free mobile listening service.
What does this mean for its big growth plans?
We hear directly from their cfo next.
? i'm cory johnson and this is "bloomberg west" on bloomberg television, streaming on your ipad, and on bloomberg.com.
Now to the digital re/max.
We are always looking at how technology is changing the music business and nobody knows that better than pandora.
There shares took a beating today down almost 13% as they announced plans to hire more sales people.
The business is growing fast and second-quarter revenue up 55% year-over-year and they had a big bump in active users.
I spoke to the cfo mike herring earlier today and i asked about the strengths they are seeing an mobile revenue.
We are driving mobile revenue mainly through advertising, investing in a sales force, and moving into the blinding platforms -- into the hot forms that radio users by advertising and we have expanded dramatically our radio advertising footprint.
And on the subscription side of the business, it has grown significantly and we had added a net one point 2 million subscribers.
What is the key to adding subscribers?
What is the lever you are adding that can increase the number?
There are a lot of levers and our business.
In the last six months we have had a mobile listening cap in place.
It to continue listening at 40 hours on the mobile, you needed to subscribe.
That has been a big factor to introduce them to the subscription factor.
About the mobile cap, what is the effect on gross margins having to take that away?
It does two things.
It converts our heaviest users into subscription.
It also controls and helps us manage content costs.
When i looked at the model, content costs could really be a killer for these guys.
How is the mobile cap affecting content costs.
It controls hours and we pay content costs on a flat fee per song essentially.
We pay content costs only based on the number of hours we pay and we are actually implementing the costs that we incur and at the same time increasing revenues.
The cost is around year-over- year increase of 900%. is there anything you can do to manage costs?
In general, content costs are fixed to the business.
Do you pay more?
There is a patchwork of laws that manage what people pay.
Pandora pays the statutory rate which is at a fixed level.
We actually think it is beneficiary to the model because it establishes a benchmark where if we monetize greater than that level we drive significant profitability in the business.
You have a high fixed cost and you have to get over it.
A lower fixed cost is lowering the barrier to entry into the business.
There is one argument that says a higher fixed cost has actually propelled us to 70% plus market share because we're the only internet radio business business that has figured out a monetization strategy to scale.
What's going on in the business?
Local revenue has been a big driver of our audio business.
It is greater than 60% of the advertising revenue and local has been the biggest grossing.
Is the key to that salespeople?
Are you able to poach them from places they have been selling radio ads elsewhere?
The key to driving local revenue is two fold.
Integration into the buying platforms that they use at the local level to build their market campaigns.
We invested heavily in integration that the agencies use so that is one piece of it, technological innovation and the other piece of it is salesforce.
We invested aggressively in the sales capability.
We are and 29 local markets around the country.
That investment we made earlier this year is paying off.
That was mike herring, cfo of pandora.
You can see the full interview on bloomberg.com.
Google tracks your location and your e-mail but now it can track your eyes.
Find out what your glances could mean for the google bottom line.
Watch a streaming on your tablet, phone, and bloomberg.com.
? welcome back.
I'm cory johnson.
This is "bloomberg west." yes, i'm outside.
Could google glass be even creepier than we first imagined?
They have gotten a patent on pay to gaze technologies suggesting it may be used to spy for the ad industry.
National chief strategy officer explains how google glass may track users emotions through their eyes.
Google has something called the gaze tracking system which essentially allows them to track your eye movement using google glass.
They also hinted at something at pay per gaze which would charge advertisers based on people actually looking at the ads and how long.
It was describing the way in which google can tell the emotional response people can having batch can be having based on your pupils.
It makes them happier, they charge more.
You can also imagine in the future as they continue to develop glass as well as the pay per gaze content augmenting reality.
Imagine you are walking past to poletti and you look at the site and look inside.
-- as you walk past chipotl e, you could see a menu detailing the items available as well as coupons and specials.
We are at the start of what many people are calling the internet of things which has interesting implications.
An insurance company could look at how active you are using something like the nike fuel band and adjust premiums accordingly.
And they could also monitor sleeping patterns.
You can imagine a scenario in which they target people who are not drinking enough.
They do want to pay directly for engagement.
We are seeing more on facebook and twitter paying for things like likes and retweets.
What pay her gaze does is enters a business model that is potentially larger and much more interesting.
That was adam ostrow.
Stockholm-based technology company is the leader of something called gaze interaction.
I spoke to the vice president of the company about the technology it takes to track your eyes.
Basically we have a sensor that looks at your eye and shoots light added and there is a sensor that can actually track it.
With the google making moves in this arena as well it hence that there is a lot of tech on eyeballs directing the computer.
It all starts with what you are looking on.
It is your vision.
You mentioned the mouse, it was invented 40 years ago.
It allows you to tell the computer what you are looking at.
Fast-forward to 2013, you put a sensor device that now knows what you're looking at so you can interact with it.
If you want want to select something or take an action, you do not have to take a next or action to tell it explicitly.
Where do you see it being used the?
It is the next development of natural use.
3-d gesture, voice, touch.
This combination is what you will see going forward.
As i said, it really starts with a computer understanding what you're looking at.
That is why eye tracking is really a game changer.
It allows you to get that instant relationship with not just your computer or whatever the device may be going forward.
They are paying attention with what is working in advertising and i imagine there are instances where this can be utilized.
Click same thing with the mouse, you can track clicks and so forth so you can think of this in an analogous fashion.
That is how it will be utilized as well.
What kind of costs are we talking about?
There is some hardware involved.
We are the pioneers of gaze interaction and eye tracking technology.
For the last decade come a we have been getting it down to an incredibly small size so you will be seeing this embedded going forward in 2014 into smart phones and tablets.
You will not notice it is in there.
Just as there is a dot on the screen that is a web cam, it will have that kind of profile.
On the consumer perspective, you will just have this device with eye tracking technology built in.
What do you think of google's moves in this arena?
We are thrilled , as are the major oem's in this space.
Samsung recently brought out an eye tracking phone.
You are seeing not just google but everybody is now talking about what's next in terms of technology and eye tracking how the got a lot of attention.
If you are a developer, an investor, you should really pay close attention to this technology.
It's really going to be fundamental in terms of how we will interact with devices going forward.
The "bwest byte" is one number that tells us a whole lot and jon erlichman has hours today.
We are at google headquarters and the number today is 42, the number of languages you can use to search google on your phone with your voice.
English is a good one for me so here goes.
What do emily chang and cory johnson look like?
There you go.
We will have more on the changing search experience and what it means for google on an upcoming edition of." back to you.
-- edition of "bloomberg west." forget it.
Let's just watch the video one more time.
Here is steve ballmer.
We wish you well.
Developers, developers, developers!
This text has been automatically generated. It may not be 100% accurate.