Microsoft in Transition: Bloomberg West (08/23)

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Aug. 23 (Bloomberg) -- Full epsiode of "Bloomberg West." Guests: Cast's Lev Lesokhin, RealNetworks Founder Rob Glaser, Pandora CFO Mike Herring, Youtube Co-Founder Chad Hurley and Derbycon Conference's David Kennedy. (Source: Bloomberg)

. . live from pier three in san francisco, welcome to the early edition of "bloomberg west." i'm cory johnson in for him only chang.

Our focus is on technology and the future of business.

We look at the departure of michael ballmer.

What it means for the future of the software giant.

We will look at the cause of the crash of the nasdaq.

And we will spoke -- we will speak to our guest about a new video sharing platform called misfits.

First, a change of leadership coming at the world's largest software company.

Microsoft chief officer michael ballmer will retire after 15 years in the corner office.

Under his leadership, they have faced a big slump in pc sales.

They have announced a major reorganization aimed at streamlining the often byzantine organization.

In an internal memo he writes " there is never a good time for this type of transition, but now is the right time.

My original thoughts on timing would have had my return and happen in the middle of our transformation to a devices and services company empowering customers and the activities they value most." you can see that they lost nearly half their value during ballmer's tenure.

Of course he was hired at the height of the.com bubble.

I asked him about his legacy at microsoft.

Here is what he had to say.

It was never done.

Airport, your legacy -- in 30 years at microsoft, everything is a bit of hyperbole.

The launch of the ibm pc in 1981, a pretty big deal.

Windows 95. the explosion of technology which was a pretty big deal.

The launch of windows digit -- windows 8. jon, what stands out to you the most?

I think one of the knocks against microsoft is we have seen monster shipped sending world of technology.

In a lot of cases microsoft has not been the leader in those ship.

-- shifts.

Starting when steve ballmer -- steve ballmer took over in 2000. we know how powerful google has become.

As the internet was making that major move to search, it did not clue into microsoft and how big that could potentially be.

They now have decent market share with bing, but certainly not dominating market share.

And then we had this real big push toward the cloud.

This idea of virtualization of the world of servers.

What vm war e was talking about was not something we saw it ryan's talking about at the time.

The business and salesforce has been incredibly impressive.

But they were not the most impressive.

The biggest art of the story is obviously the introduction of the iphone, 2007, the move to mobile, the importance of your handheld device, whether it is a smart phone or a tablet now.

I think one of the things people will highlight is that microsoft had its own ideas, its own technology and the issue ultimately becomes can you take advantage of your size and scale?

It is interesting.

All of the big companies that have emerged -- microsoft, google, vm ware.

I wonder the executives that they do have, it is such a difficult understanding -- what are his possible successors?

In terms of the reorganization with fewer business units, we have a list of potential names to succeed steve ballmer.

There are interesting candidates.

Tony bates, who came on board after the skype acquisition.

People like julie larson green, who we see leading the charge for hardware.

Seven the della --satta na della who has been behind the push for the cloud.

These are guys who are great collaborators.

But maybe their biggest success -- maybe their biggest success might arguably be the xbox, but the guy running that business is gone.

I find that so fascinating.

You have the storyline of don leaving the company tom o'brien wings that he wanted to take on a bigger role and he did not because steve ballmer is the ceo.

Now he is trying to turn things around at zynga and now microsoft is going to be picking a new ceo.

But maybe that tells us, you know, steve ballmer has been able to plot this over the last two months.

Maybe that tells us he has someone else in mind for someone the board should an sitter in a big way.

Yeah.

Interesting stuff.

Jon erlichman, thank you very much.

We will be back with much more on this.

In fact, all of the world technology.

All over stockholding was -- stock trading was halted thanks to some kind of technology malfunction.

The network that covers the quotes and trades for the nasdaq failed.

We do not know specifically why.

And the system has been admitted to need to be more resilient.

Here is what we heard earlier today.

We always have to think in the external environment, how can we get body blows that do not impact us.

We are focused on that.

I think we as an industry are focused on that.

It is one thing for it to work for 20 years, assuming the other operators are working a certain way.

It is when the unforeseen happens that the system has to be resilient enough to handle that.

Our guest is talking about the technology behind yesterday's glitch.

When you heard about this problem, did it catch you by surprise?

Should we expect this kind of thing with the volume the nasdaq trades he stays?

Unfortunately we are almost programmed to expect these things.

For the past week we have seen three with goldman, the one in shanghai.

The last couple months, there has been more activity in terms of outages and the capital markets.

The level of complexity plus the levels of volumes that they are experiencing are starting to drive this, unfortunately.

What do we know about what actually happened and what might have been done to prevent it?

Click there is a lot that probably could have been done to at least try to prevent it, a bit more than what was done.

In terms of what happened, i think that is something the engineers at nasdaq know about at this point.

Normally by this time the situation would have been done and obviously bae systems were fixed and brought up online event three hours.

But there are 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 place of more frequently of the exchanges as well as at the major market makers.

One of the things that struck me, because i called around the trading decks -- trading desk yesterday.

No one knew what was going on.

Yet the nasdaq has spent vast fortunes to create a stock promotion machine or they have the studio down in times square and the billboards everywhere and all these ways to broadcast and convince people to buy stocks, but they were not using that to communicate what was happening yesterday.

What is your sense about why they were not explaining what was going on?

In a situation like this, my feeling is that nasdaq acted correct the.

-- correctly.

You want to take care of the market participants and treat the folks actually directly trading on the exchanges and make sure their questions are answered and that you are helping them kind of get through the process.

I think to nasdaq's credit, they handled that well as well as getting the systems up and running within a three-hour timeframe.

They did not rush it, but they did not take too long either.

From a communication standpoint they were probably right not to go to public too soon.

Today the public is talking about what happened -- i was talking to traders during the day.

Market participants to did not know what was going on.

They saw prince still happening even through the day and were not sure what was going on.

Respectfully, it does not seem like they clearly mitigated what they were doing and what was happening.

This is something that i have seen through some folks who happen to be on the trading floor.

It is not my particular area of focus on.

From what i have seen and what i have heard, a tried to communicate.

Perhaps they could have done better at that.

The area to focus on is the defensive driving point that bob alluded to earlier, the robustness and the resilience of the systems to ensure this type of situation does not happen in the first ways.

-- first lace.

Nasdaq -- you can look at them as a utility.

They provide a trading utility to the markets.

Unfortunately for utilities in general, power utilities as well, you only realize they are there when the power goes out.

Right?

I guess final weston, but the utilities are most needed when they -- i guess final question, but the utilities are most needed when they fall on their face.

Do you think this was a good direction for bob to lead the nasdaq?

I think if i were in bob's shoes or the shoes of the leadership of any of the exchanges or market makers, i would be concerned about the level to which technology issues are wrecked -- a threat to my job.

I think this is leaders are starting to take that more seriously.

They have put this issue on a development team.

Push them to go as fast as they can.

It has been more of a drag race than defensive driving.

I think that will change and they will pay attention to the technology complexity in managing issues.

Thank you very much.

We will be right back.

? welcome back to "bloomberg west." i'm cory johnson.

Let's get back to our top story.

Microsoft ceo steve ballmer will retire with any air.

Rob started his career -- will tire within a year.

Rob started his career in a variety of positions.

Good to see you with this big story.

Ballmer personally hired you, yes?

Yes, in april of 1973. a little over 30 years ago.

That is when i first met steve to review with the same intense, passionate guy.

A little more hair.

Not actually that much more actually.

He got me my first interview at microsoft when i just turned 21. what is he like -- i have interviewed him many times.

He puts on the space, this marketing face.

It is impenetrable.

What is he like to work with?

He is one of the most intense people i have gotten to know.

Super smart.

High commitment . obviously he has strengths.

The company that they and i were building is one of the titans of the technology industry 30 years later.

That's an amazing achievement.

At the same time, things change and markets evolve and microsoft -- if you look 15 years ago, it was the dominant operating system company in the dominant segment of i.t.. now you look at what is going on with mobile and tablets and easy, -- pc, and microsoft is one of three major technology companies with apple and google and the slowest growing of the three.

It has been a massive seachange.

Microsoft has been challenged.

You look at a company with $25 billion of revenue when he took over.

Very routable, tons of free cash flow.

But it is hard to ignore all of the failures in areas like search, personalization, success in mobile.

Failures under his leadership.

Microsoft has had tremendous success in the enterprise.

You have to give steve a lot of credit.

When he got to microsoft, it was just the beginning.

The enterprise database, enterprise e-mail, a lot of the back and applications.

Not sexy stuff, the big business and one of the real successes of microsoft.

The pc industry -- although it has been shrinking for the last year -- is much bigger than it was in 2000. the consumerization of i.t., the growth of mobile, the growth of tablets, the change in the way consumers get applications and services.

I think it is safe to say that other companies, newer companies -- or in the case of apple, a revitalized old company -- have been much more aggressive.

When you look at his skill set, what is steve very best that within the gross up?

Quick steve is maybe the best salesman i have ever met.

-- state is maybe the best salesman i have ever met.

He is great at firing up huge groups of people.

Obviously that is not the whole palette of skills you need, especially in a time of massive change.

You and i have talked a few times about microsoft route inability -- mike was soft's ability -- microsoft's ability to train other managers to run other companies.

Who do they have now?

Like the people who are senior members of the team are people i know in some cases casually, but in most cases i do not know them that well.

The people i know best to our amazing executives who have on aunt do great things are people like tom ridge, jeff raikes, obviously bill himself.

That is three great ceo's that i can point to and microsoft's court.

But all of them are 55 years or older.

If you are looking at what will set microsoft up for the next 10 or 20 years, you might want to go in another direction.

Who would you vote for?

It is our to say.

I think if it were going to be built, i'm guessing you knew about this change before any of us did.

He had an opportunity to assess what role he wanted to play.

That is probably already set.

Jeff has a big job you love.

Paul just got off a big job you love for a while.

I think he likes what he is doing now.

Probably someone i do not know very well.

Interesting.

As they say in tv, rob, we shall see.

Rob glaser.

Thanks a lot.

Pandora is making big investments in new products and sales.

The stock is getting killed today.

We have an exclusive with the pandora ceo on the strategy that is rattling the markets.

? welcome to "bloomberg west." i'm cory johnson.

Revelations in the debate over government surveillance -- a bloomberg explicit -- we have learned that some the purity analyst deliberately exceeded their authority to spy on americans multiple -- multiple times.

Was this spying on citizens intentional?

That is significant.

The nsa has conceded in the past the gathered information on american phone and e-mail records by mistake.

What we are talking about is nsa employees exceeding their authority liberally.

The information is documented in a new classified report prepared for lawmakers on the intelligence committee.

The ig found on average there was one case of inappropriate actions over the last decade every year.

There were very rare violations of nsa authority.

Nsa takes very seriously allegations of misconduct and cooperates fully with any investigations responding as appropriate.

Nsa have full use of contractors, eager to prevent another 9/11. we do not know the nature of the violations, but the nsa calls the violations minor.

They have had past assertions that no delinquent abuses occurred.

Here was an interview with cnn and president obama just yesterday.

I am very confident that purposefully no one is listening to e-mails.

You are confident in that?

I am confident in that.

But what i recognizes we will have to continue to improve the safeguards.

Those comments from the president will be put to the test by this latest revelation.

It certainly will add pressure on congress to consider legislative changes in the future.

Thank you very much.

Bottom of the hour every day on the market.

At matt miller, what is on the markets right now?

Let's get you caught up just in our afternoon now.

Take a look at the index is.

Let's take a look at aeropostale and cap.

We are back in two.

? welcome back to the early edition of "bloomberg west." i'm cory johnson in for emily chang.

Time for bloomberg remix, looking at the way that technology is changing the music business.

Pandora shares are at a low for the year for pandora.

We are hoping that this will drive growth.

It certainly will hurt profits for some time to come.

Good news for third quarter revenues.

A big surge in users.

We spoke to my caring earlier this morning.

I started by asking about the strength in mobile revenue shown this quarter.

We are driving mobile revenue mainly through advertising through investing in salesforce and integrations into the buying platforms that radio buyers used to buy advertising.

We have been able to extend dramatically our user base.

We have added a net one point 2 million subscribers -- 1.2 million subscribers to our service.

What is the key?

Accelerating the subscription?

There is a lot of leverage in our business.

In the last six months we have had a mobile listening cap emplaced.

In order to continue listening at 40 hours on the mobile side, you need to subscribe and that has in a big inversion factor in introducing people to the subscription side of the business.

Now we are over 3 million subscribers total.

What is the affect on -- what is the effect on gross margins?

It converts our heaviest users into subscription.

It also controls the managed content cost.

First when you went public, and looked at the business model and i thought, content cost was really a killer for these guys.

How is the mobile cost compared to the content cost?

We pay content cost not on a percentage of revenue basis but a flat fee per song, essentially.

We pay content tossed only used on the number of hours with actually pay by implementing the cap, we are limiting the cost.

Our revenue per 1000 hours or rpm has increased dramatically.

In mobile, it was over $37, whereas last quarter, it is around $21. our total gross margin year- over-year increased 900% to 43%. is there anything you can do to control content cost?

We manage our hours, but in general funding cost is a fixed cost of the business.

Right.

You are paying more than competitors?

There is a patchwork of laws the people pay, and pandora pays the statutory rate which is a fixed level.

With actually think that is beneficial to our business model in some ways because it establishes a benchmark or if we monetize greater than the level we are able to drive significant profitability.

In other words you have a high fixed cost them and you can go over it.

But presumably you would like a lower fixed cost.

Yes, but the lower fixed cost -- it is a 70% market share.

This is the only strategy that can scale.

We're talking a little bit about how that is going on with the business.

Local revenue is a big driver of the audio business.

Advertising generally is greater than 60%. our audio advertising is generally grateful -- > 60% -- greater than 60%. the local advertisers in q2 was equivalent to our total local advertising for the last fiscal year.

Is the key to that sales people?

Are you able to poach them from other places?

The key to driving local revenue is twofold.

One is integration into the buying platform that the radio advertisers at the local level used to build their market campaigns.

We have invested heavily in the integration into media ocean and strata, the main buying five forms radio uses.

It is a technological innovation.

The other piece is sales force.

We have invested aggressively in the thing our salesforce.

We are in 29 local orchids.

We have over 79 businesses.

It is paying off.

That was mike herring.

More after the break.

? welcome back to "bloomberg west." i'm cory johnson.

The men behind youtube have a new video sharing program.

This time they want to be more collaborative.

Mixbit is what it is called.

It will allow users to create and share clips anywhere up to 58 minutes long.

Emily chang spoke with youtube and mixbit founder chad hurley.

Take a listen.

Video is harder to create.

It is not a photo.

You're not going to slap a filter on it and make it look ready.

How do you create a scalable solution that allows people to tell a story more effectively and not have to move to hollywood?

It is one second larger than instagram.

How did you decide?

It was kind of arbitrary.

You just wanted to be in stir graham by one second.

At yet.

And we had to define 60 seconds before they announced.

We thought we would stick with it.

We wanted to give people some constraints.

The big insight with the social media services is to rest the button and record.

That introduces the cut.

I do think it is pretty intuitive.

It is fairly easy to use.

You can pull other videos into your own video.

You can remain anonymous if you want to.

Why remain anonymous when this photo and video posting is about identity and to a certain extent vanity?

We want to beef up the content.

I feel like social media is very isolating and somewhat selfish.

I want people to care about the content.

Why about -- why go into a market that is so saturated?

I think that there are tremendous opportunities and unfortunately i do not think anyone is doing it right.

With instagram and vine, is anyone doing it better?

They are providing some solutions.

With facebook, people primarily consume information and video through their feeds.

They need short it's of information.

For us, we are focused on people telling stories.

You stayed on it you to for quite a while after google bought it.

What do you think about how it has evolved since you left?

They have done a great job.

I have always appreciated the fact that google took a chance on us.

I stayed on board to see things through.

Really, it turned into a real business.

I do not really think youtube would be here today without their support.

Of a slain not at this scale.

From that standpoint, they have been great.

A lot of things would not be here if it were not for you to because of the stars you have created.

Exactly.

Justin bieber.

Are you proud of that one?

Of course.

What you think about channeling in a direction that you like?

I think it is necessary to have content that you can somewhat control.

It helps with advertisers.

I guess from my perspective, i do not think it is scalable.

That is why working on mixbit, getting people -- working on mixbit, getting people to collaborate on tools, storyboards and scripts, giving them inspiration, that is what we are going to do at mixbit.

That is what i always wanted to do.

But it is hard to layer on top of the system where you just have content.

It is basically just streaming, a very efficient way to host and stream information.

Do you think youtube has met its full potential under google?

Not at all.

Do you think it can reach its full potential under google?

The reach and the brand, the opportunity everyone has to dissipate on the site, to be discovered or start their own career -- to participate on the site, to be discovered or start your own career.

They do not need to go through the traditional system.

What about google buying sports content and putting that on youtube?

I think it is a strategic move for google, because they have the money to pay for the licensing.

It is hard to replicate a live event.

I believe that life sports is something -- something to be used to get a subscriber base.

You had comments about the future of television.

You think people should be able to watch anything, anywhere legally.

I was referring to the companies that license their content.

What is wrong with the way the rules are currently?

It is frustrating when you go on vacation when you cannot watch her movies on netflix or consume particular content on youtube.

That's hairy guy was the cofounder of youtube speaking to emily chang.

You can catch the full interview at bloomberg.com.

Public phone charging stations may seem convenient but they could put your personal data at risk.

We will tell you why charging kiosks are the new target of hackers.

We can watch a streaming on your tablet, own, and at bloomberg.com.

? this is the early edition of "bloomberg west." i'm cory johnson.

You can catch us later at 6:00 eastern for the later addition of "bloomberg west." amazon is testing a new wireless network that would allow connecting wireless devices to the internet.

It was a test.

Amazon has been moving deeper into wireless services for several years as it competes with apple, google, and others.

Keeping your smartphone charged -- these days there are more places than ever to charger phone from the airport to the coffee chop to the city funded kiosk.

But charging hubs could be providing actors within easy access point to your phone.

Researchers from georgia tech have created their own militias -- malicious charging station.

The researchers tested out the charges at the black hat security conference.

David, this is a crazy story.

They are hacking when you think you are getting charged.

That's right.

The black cat security conference is the pinnacle for research and what they showed was any phone that you charge into his public charging stations, they can read everything from your text messages to listen to your phone calls.

It was a pretty wicked conference.

How does the hackwork?

The charging should just electricity, not any data going into the phone?

The researchers built a small computer inside this charging device.

It looks like a normal charging device you would see it one of these public charging stations.

When they plug it in, it starts to send signals to your device that compromises it and replaces applications you have on your devices else so they can then be eavesdropped upon and look at all the communications that are happening.

Without you knowing, without you seeing, without you noticing anything different -- your phone is still charging -- they are able to hack in and look at your information without your knowledge.

Is this a data sync issue as well?

It is not the electrical charge being turned into data.

It is data on your phone, yes?

That is right.

What happens is you plug it in.

The device is recognized.

The data starts going back and forth.

At the same time, and the way that a usb device is capable of, you can be doing data and charging at the exact same time.

It looks like your computer is charging and to the attack was specifically for ios, but it is definitely doable for android devices, any smartphones.

What kind of hacks might this lead to?

What kinds of malicious activity is possible?

Inc.

What we use our cell phones to everyday -- think what we use our cell phones to everyday.

Think about a business sense where we have e-mails being sent back and forth on a regular basis.

All these cases are being monitored, eavesdropped upon with these attacks.

As we are more interconnected, we do everything.

Everything from cameras -- we are looking at victor's tweeting, all of these other things.

You look at all of these.

Download the information, grab the information.

Turn the device into a listening device.

The does go beyond phones?

Always thinking about tesla.

I wonder if the tesla could be at risk of hacking through this unusual technique?

What is nice about this -- well, not nice, but unique, it has the capability of sending data to -- just let say it is a tesla or any other kind of device.

Absolutely.

There's no question.

You could easily do something to that effect to be able to attack those and actually look at what is going on in the car.

David kennedy, thank you very much.

More coming up after the break.

? welcome back.

I'm cory johnson.

Coming up on the late addition of "bloomberg west," we will go heavy on this story, the microsoft change, the story about steve ballmer.

We will look at his successes and failures within his long career at iker soft.

Hard to imagine where the company is going next area time to check on the markets.

Matt miller joins us with everything happening on wall street.

Cory, thanks.

Let's look at the major indexes across the board.

The s&p, the dow jones industrial average, and the nasdaq all rising.

Pandora, the online radio service, or guesting the third quarter earnings will miss analysts estimates.

Down 12%. secondly microsoft, the company ceo, steve ballmer, as you may have heard, is going to retire after more than a decade at the helm.

Investors are not mourning his departure.

They are driving that stop well into the green.

And passing a light on how difficult it has been on companies like microsoft and blackberry to gain a foothold in the mobile market.

We have more on blackberry's struggles.

John, went so -- what went so wrong with the canadian company?

Two things.

They never developed apps.

They were the first company to put e-mail in everyone's pocket.

It was a great application at the time, but they never expanded beyond that.

The other thing they did was, they used to be that core enterprise device.

That was before people brought their own phones to work.

They really had that market.

They moved into consumer with devices that were not quite competitive with samsung and apple, so they really got crushed there, in my view.

What happens to the company?

It is not going away, right?

Even the president is reliant on a blackberry.

What happens to the company now?

My sense is they go private.

All the evidence points that way.

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

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