Microsoft's Bet on Nokia: Bloomberg West (09/03)

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Sept. 3 (Bloomberg) -- Full epsiode of "Bloomberg West." Guests: Wedge Partners' Brian Blair, IHS's Tom Dinges and Bloomberg's Cory Johnson, Paul Kedrosky, Doug MacMillan and Edmund Lee. (Source: Bloomberg)

When you are right about the spot going higher.

Another strategy that is quite a big risk is to put right.

Clients will come in or buyers will sell the put in the naked on the stock.

Which of these is more common at this point?

I wouls say thd say teh buyhe buy right, because it is less risk.

Thank you.

We will be on the markets again and 30 minutes.

? [captioned by the national captioning institute] [captioned by the national captioning institute] welcome to the early edition of "bloomberg west" where we cover the global company and media technologies that are reshaping the world.

Let's get straight to the rundown.

Just after announcing he is leaving within a year, microsoft's c.e.o. steve ballmer makes a huge, more than $7 billion deal to buy nokia's handset business but can the windows phone really compete with apple and android?

We're one week away from is next product launch.

The company sent out invites for september 10 noting this should brighten everyone's day.

And new details on twitter's road to an i.p.o. a key exec has already started talking with bankers and the company may file to go public before the end of the year.

First, to the lead.

Microsoft is pushing deeper into the hardware business, buying nokia's handset division for $7.2 billion.

It's a move by microsoft to diversify its business as slumping p.c. shipments drag down software sales as well.

Microsoft fell more than 6% at its peak.

Nokia was literally on top of the world, dominating the mobile phone market in 2008. what followed has been a spectacular fall from grace.

In china, for example, nokia's market share plummeted from 64% in 2010 to 1% this year, according to researchers.

But joining forces with microsoft, both companies hope they can reverse their phone fortunes and be stronger together but fierce companies from apple and android smartphones will make it an uphill battle.

Cory johnson is here to explain what drove this drill into the drilldown and they've been talking about this for several months, but ultimately, why did they decide to go ahead with it?

You have seen these two companies working very closely together on the exact same product.


They've already had a partnership.

And you couldn't find two companies closer than the nokia phones and the windows operating system.

Yet the change in market share.

In the u.s., nokia had over 50% market share in the u.s. in 2004 down to single digits in the u.s. now.

So non-existent, virtually in the u.s. now.

So the fortunes in phones can change.

We have seen the share price fall dramatically over the really making this deal so much cheaper for microsoft and the new lumia phones haven't reason helped them.

And that relationship between the two companies being so close, 80% of microsoft's phones were made by nokia.

Forget htc and other companies.

Running the microsoft software is so important.

This deal is $7 billion but they're going to other areas as well.

And the guidance about this deal, microsoft said it's going to cost them nearly $7 bucks million in 2014 but it will be a profitable business to the tune of $7 million in 2015. they're hoping on a lot of things.

What's the context of this given that ballmer maz announced he's leaving within the year?

A lot of people are speculating all of the people who have been suggesting that he was a longtime executive.

Forged his partnership with microsoft and run that business.

But he hasn't been able to turn microsoft around.

And he turned microsoft around?

Can anyone turn this company around?

It's got a team suggesting as internal candidates from microsoft.

So now there's a fifth.

What i would suggest is if this deal doesn't close in time, ballmer says he's going to leave in 12 months.

If this deal might not close, he was going to remain at nokia and it's unclear if he ever will go to nokia.

This is money they had tied up overseas.

There's that.

But this is a failing business.

It's a big revenue business.

So they're doing over nearly $16 billion in sales of phones.

Most of that is what they call future phones or non-smartphones or what i call dumb phones.

They have an operating loss of $1.1 billion.

But interesting about this is those feature phones could be an advantage to microsoft because going forward, the opportunity to get first-time smartphone users using microsoft's software as their first-time computing experience ever, those people are buying feature phones now, hopefully, microsoft hopes in the future, that could be a big opportunity to still make head way into the smartphone business.

Now, we're going to hear directly from microsoft's c.e.o. steve ballmer about this deal which comes as we said, just after he announced he will be leaving microsoft within the year.

Bloomberg's tom keene started by asking ball her how he expects to gain mobile market share.

Take a listen.

This acquisition of the nokia mobile phone business is about accelerating our share position, by accelerating and improve being our agility and innovation, being able to put a clear, concise communication for one brand into the market brand, one brand, one voice and being able to be very agile in our business strategies and tactics to go to market.

I'm excited about what we've accomplished in the two and a half years that we built this partnership with nokia.

And we're extremely glad to do this acquisition as a way to further accelerate our position with windows phones.

When you look at windows phones by doing this transaction, are you going to push away the others that have used the windows platform?

Are they going to say forget about it?

If microsoft is going to have nokia, we're not going to use them?

Well, nokia counts for well over 80% of the windows phone volume today.

We are in the position to accelerate through this acquisition.

Certainly, acceleration in windows phone is only good for windows tablets and p.c.'s are are partners in the window and p.c. tablets that i have all talked to seemed quite enthusiastic about this acquisition because what's good for phone should be good for tablet and p.c. you've seen so much struggles in hardware.

You know you've been a pinata of the business.

With that said, as you move forward with this transaction, does that bring to an end any debate about separating your consumer division off from your enterprise division?

Well, we're certainly focused on being a devices and services company that focuses in on the high value activities for consumers and for businesses.

And that's the strategy that we're on, that our board has endorsed.

There's a huge transformation.

We're very glad to be acquiring the talented team at nokia that is really world-class at hardware engineering, manufacturing, supply chain, hardware distribution.

And we think this gives us extra muscle, in fact, as we move forward, down that path.

There's no debating in our board.

We're aligned in our strategy.

In moving forward.

It's a big transformation but that's kind of what you need to do in the technology business to move forward.

We're pleased over the there's a 33 years i've been at microsoft, we've continuously moved forward, improved our positions, improved our profitability.

We served over a billion people around the world.

We make close to $30 billion to profit.

We're proud of what we've accomplished.

That was microsoft c.e.o. steve ballmer with tom keene.

And we'll have much more on microsoft and what the future of the company could look like with nokia next.

You can also watch us streaming on your tablet phones and

Welcome back to bloomberg west.

I'm emily chang.

Google announced its android operating system called kit kat after nestle's popular chocolate and wafer candy bar.

Haven't had within of those in a long time.

Of course, it is google's tradition to name new versions of android after different kinds of candy.

Necessarily and google are partnering in a branding deal meant to combine technology while catering to the needs of consumers.

I want to get back to our top story.

Microsoft has agreed to buy novak's hand -- nokia's handset unit for $7 billion.

Could this acquisition revive growth and ain't novation.

With us from san diego is an early stage mentor and investor.

And my partner, cory johnson back with us.

The twitter here went crazy last night after news of this deal broke.

My favorite tweet of the evening, nokia, no problems.

Do you agree?

Not really.

There's a bunch of things that are worth looking at.

It's obvious the attraction on both sides.

There's a really -- it's tough to make the case that these two organizations other than their financial need for one another in somewhat of a strategic need have a great cultural fit.

This is a strongly and proudly finish engineering driven organization and then we have sort of a classically pacific northwest software company in microsoft.

And trying to move 30,000 employees is tough.

One of the challenge is going to try to make that cultural fit work, leaving aside the difficulty that microsoft has had historically in many hardware products.

They're going to have to rely on nokia to drive most of the process to bring hardware to markets.

I don't see anything that reassures me to be able to make that fit be any more than one plus one to something close to two but not quite.

Are they really going to be stronger together or could they be weaker?

Their argument is that -- i mean, i listened to the two conference calls and their argument is that if they get some gain in market share, they'll get $40 a profit.

But that means you've got to get those gains in market shares.

And their argument as to how they're going to get there is by offering really cheap phones in developing markets that people's first computing experience and first smartphone experience is in a place where the growth that's happening is in their phones.

I saw a chat by china this morning that market share in china has only plummeted 64% in just three years ago to 1% today they're losing in emerging markets spectacularly.



And not only that, this whole idea of nokia product to bring them up to a food chain to more expensive markets hasn't really worked in these developing markets.

So it's not clear what change is going forward by putting windows operating system on these devices.

It's much more challenging than that and i think more likely scenario that plays out is they become a low cost provider that continues to lose a significant amount of money and then struggles being a third player behind google and apple in all developed markets.

That's probably the most realistic scenario which does not generate material profit which is helps to explain why microsoft shareholders are skeptical about the deal today.

What do you make of them buying nokia and not blackberry, for example?

It's interesting because it suggests that they really see this as a consumer opportunity for them.

Blackberry will be a cheap and quick way to get in what is that they are not already there.

The things that blackberry is the best at are things that microsoft is even stronger at.

Maybe blackberry is not a opportunity to them but this is a company that has with one notable exception, the xbox, really struggled in the hardware.

Hard wares are a very difficult business.

You can see from their inventory off the surface, they have difficulty getting this right.

They han had the same kinds of problems lately but they've had those problems big time over the course of the last decade.

Paul, what are your thoughts about who should lead microsoft after ballmer leaves?

Steven love has been talked about as a much more likely internal candidate.

Some outside candidates being discussed, cheryl shan berg.

Who do you think is the right american to lead this company?

I hate them all.

I think one of them almost certainly will become the candidate -- i don't think any of them, in part because it's the corrupting influence of having been at microsoft for so long.

Anyone who had any capacity to make material change would have felt stifled and completely suffer inside of this organization.

So they couldn't have lasted two or three years so you don't want anyone who's been there for any material length of time because they can survive in a structure that suffocates innovation and leaves it somewhere in the back room to die with middle managers.

And you want is somebody from the outside.

I would love to see rita hastings come in there.

I don't think it will happen.

There's a lot of interesting people who could be strong c.e.o.'s and make change and probably end up doing significant asset sales of this company but none of them are people who spent any time inside the organization and i think they're people are strong operational experience dealing with asset sales and breaking up pieces of this company so large.

What do you think of cheryl stan berg?

She's a great marquee candidate and i think it would be fantastic from the standpoint of what it represents in terms of the industry and what can be done with a company like microsoft but i don't think she would bring to that deal making experience that the new candidate would have.

Where they're going in there and saying i'm fully prepared to break these things up in three pieces and really he's test them.

I don't see her as that person.

I really don't. all right.

Thank you both for weighing in.


Twitter is in talks with banks to handle its i.p.o.'s. how soon could the motorcycle blogging giant go next?

That is next on "bloomberg west." this is "bloomberg west" on bloomberg television and radio.

I'm emily chang.

In one of the biggest deals in a decade, verizon is getting full control of the most profitable u.s. mobile carrier.

The company has agreed to pay vodafone for its 45% stake in verizon priceless.

Profit from the unit can now go into verizon to help take on growing competition.

The company say they expect the deal to close early next year.

It's one of the most anticipated upcoming tech i.p.o.'s. twitter has started talking to banks about handling its public offering with direct knowledge.

And the company it waiting on third quarter financial results before deciding whether to go public this year or next year.

Doug, what's the timeline now as far as you know?

Now that we have some new information and tell us about that.

Lox like they've been making a lot of practice steps towards an i.p.o. right now, they're focused on what are financials look like and what does this curve look like when we begin to sell this thing to potential investors.

There's a lot being made about the mobile piece not being in place in facebook.

Twitter will have a lot of revenue from mobile devices but i think they want to wait and make sure they have the right kind of growth curve in place.

Could it be this year?

So they may file this year.

Unlikely, they're going to hold an i.p.o. this year.

They are waiting their third quarter results before deciding whether to file this year or next.

When you start looking at the calendar, there's not that many good months in the year left to hold an i.p.o. itself.

It would be difficult for them to get through the process, back and forth process with the f.c.c. so quickly, mike, twitter c.f.o., tell me about his experience.


We spent a lot of time talking about him.

He manages to keep a low profile while negotiating some of the biggest deals over the past technology in decades.

He was present when microsoft and steve ballmer tried to take over yahoo!. they rebuffed that deal notoriously.

He was there for zynga's i.p.o. so, some interesting roles he's had, votes kind of unsuccessful deals in the history of technology but i think he's known as a trusted lieutenant.

This is the top kind of names in technology.

I know you will be closely following all of his movements.

Thank you.

It's time for on the markets.

We have a strong start to the session today but since then, it has melted away.

The dow has melted.

Just a fraction of where they were earlier in the session.

Concerns about syria heating up after john boehner said he would support president obama's push to have strikes there.

First, herb life.

It's not rising much but it's turned around.

He's taking a 5% take in the nutritional supplement company.

And j.c. penney.

The hedge fund is low.

More "bloomberg west" next.

This is the early edition of " bloomberg west." and you can catch us at our later time.

President obama is urging congress to take a prompt vote authorizing military action against syria.

After meeting today with top leaders from both parties, house speaker john boehner and house minority leader nancy pelosi joined the president in the call to action.

After u.s. intelligence report last week found that pro- government forces had used chemical weapons.

Dennis rodman is back in north korea.

He told the associate rest the purpose of this visit is to display his friendship for north koreas leader kim jong-un while also showing people around the world that americans can get along with north korea.

He also added that he wants to start a basketball league in the country.

American idol's upcoming judging panel has been revealed.

It will once again include jennifer lopez as well as former mentor harry connick junior and that too will join keith urban who is back for another season and former judge randy jackson will also return but just as an in-house mentor.

Apple has officially sent out invitations for a special event on september 10. that is one week from today.

It is expected to reveal a new iphone and it is scheduled to start at 10 a.m. in cupertino and the invitation shows multicolored circles.

With us now from stamford, connecticut is brian blair.

Thanks so much for joining us today despite your wake boarding accident.

I'm good.

What do you make of the in that tatian and the polka dots.

Are there any clues?

Absolutely, we know we are going to see a new iphone probably called the 5c that will be offered in four or five colors and that is what that is hinting at.

A lot of parts are leaking from the supply chain in asia and that will be the focus of the event, this new plastic backed iphone 5c. where will apple price this?

That will be what we will find out.

The apple event is coming one week after samsung's event which is happening tomorrow.

We are expecting them to announce a new tablet as well is a smart watch.

Is the apple announcement going to pale in comparison?

I think it will be the other way around.

Samsung will do this galaxy gear watch, a smart watch, i think it will get a lot of publicity this week.

Everybody is really focused on what apple will do on the iphone side.

Samsung will have their day in the sun.

Samsung is doing their event around the apple event.

Apple has had these events going on for years in september but the story of the month will be some new iphone, something we have not seen from apple with color and moving downstream in price and this fingerprint sensor will be a big part of the story next week from apple.

What do you make of the fact that this event is in cupertino, not san francisco.

It represents a shift.

They have been doing a lot of their things right in san francisco.

It allows them to control the whole environment and control the list of people who come and keep more control over the demonstration area when they do it in their home base.

When they finished building that new space ship headquarters in cupertino, this will have a big affect.

Apple has been known for its fantastic events but samsung, their latest event flopped.

They had broadway actors onstage.

It was sort of tone deaf.

What are you expecting from samsung tomorrow?

How do they improve from last time?

The event they held was odd.

Everybody thought it was strange.

I was there and i thought it was weird.

They got enough negative feedback from that that they will do something more streamlined and simple, hopefully something that focuses on the functionality of this aleksei dear smart watch and tells us -- the functionality of this galaxy gear smart watch.

All the artistry around the event is not what's important.

Consumers care about what the devices do and how will it make their life easier?

Speaking of smart phones, we are talking about microsoft buying nokia.

You cover blackberry and so many of these companies, what do you make of this deal?

Will they be stronger together?

This is microsoft throwing a a light preserver at nokia before they drown.

They are doing it in an effort to avoid their own iceberg.

Microsoft is heading toward nice perk with the decline of the pc sector so these companies need each other.

I think of there some real hope for microsoft.

In order to put out a great product, you have to control the hardware and the software.

We have seen that from apple.

The integration has been a rate strength of there's and google by motorola mobility has the same thing.

In order for microsoft to be successful in smart phones and tablets and wearable computing, they need they need to have this integrated hardware/software effort.

I am bullish on this venture.

We will probably not see it for a year or so, the results.

Who should leave microsoft?

I don't know.

E il don't think is the right guy.

Op i don't think it has to be a big name.

It has to be somebody that has a vision of the world of technology beyond the pc industry.

Steve jobs referred to the post- pc era and we are in it now.

You can see it in the emergence of wearable computing.

We need someone with the youthful version of where these markets are heading.

Somebody who is willing to not look at the pc side but is willing to look forward for them.

Brian blair of wage partners, thank you for joining us.

We will be right back.

You can also catch us at our later time.

After a month, the cbs/time warner feud is over and the two companies inked a deal yesterday bringing the cbs shows back to more than 3 million customers in new york, la, dallas and other markets.

The cable company agreed to pay more for the right to transmit the cbs signal but below the two dollar per subscriber that cbs wanted.

Who is the winner?

Who wins here?

If you had to pick a winner, i think cbs is the one who came out on top.

Content is still king.

They did not get the two dollars they were looking for but they came pretty close.

They retained their digital rights meaning the ability for them to sell their content which they have been doing.

They will continue to do that without too many hurdles from time warner cable.

The details were not really disclosed but we are hearing the time warner cable also got some things on their end of the deal in terms of digital rights and what can be streamed.

That is what they were looking for.

They were looking for more back from cbs in terms of having some of the stuff they are selling to netflix.

Cbs said it was their stuff and they wanted to sell it the way they wanted.

It looks like they came out on top.

Do consumers lose?

They are the ones paying their cable bill to get cbs and the other networks.

They also had to suffer not having cbs during that time.

It is the end of the summer so there were not major things they were missing out on.

Looks like consumers are always losing out.

That means it's the cable companies who are bearing the brunt of consumers anger.

Cbs is always one step removed in terms of the programmers.

You are not paying these guys, you are paying your cable provider and that is ultimately why they look more like the losers.

What does this mean for future contract negotiations?

Digital rights will be the important element to any of these deals.

In terms of the economics of the network wanting more money from the distributors, that tends to get worked out.

In terms of the two dollars, time warner cable came close early on.

It was more what they had rights to.

It came down to digital rights and that means content will continue to win or come in at a stronger position.

The sticking point will be about digital rights and what you can sell and when.

Edmund lee, thanks so much.

One thing that played a big role in this feud is the way new platforms like netflix and others are changing the way people watch tv.

It is something cbs ceo les moonves mentioned in a memo to his staff.

How much will subscribers pay?

John erlichman has more.

The way we watch television is changing.

Forget flat screens.

Many of us turn to tablets or smartphones to watch tv.

No cable?

No problem.

With an internet connection and a streaming player, you can watch netflix or hulu or amazon.

As consumers are concerned about paying higher cable bills, they will push back on the cable providers and say they don't want to pay higher bills for a bundle of channels.

The president of 21st century fox recently called a la carte a fantasy.

Will consumers agree if apple unveils a smart own style tv where channels are more like apps and consider the view of advertisers.

Apel by the bundle.

A don't know what they want inside that own the wind till they have it.

Once they have a, they realize they don't need 80% of it.

Advertisers will benefit if the bundle is more targeted.

Everyone is playing nice right now.

Apple is adding channels like hbo.

To its set-top box.

The younger demographics are getting more and more used to watching shows when they want and where they want on whatever device they want to that is a challenge for the pay-tv operators.

Still i had, google makes its new moto x phone and the u.s. but it does not add as much to the price as you might have thought, that is next.

? this is the early addition of " bloomberg west." amazon founder jeff bezos says he is ready for a new golden era at " the washington post." he said he is eager to start conducting experiments to see what works.

Making smart phones in the u.s. versus overseas proves to be less expensive than one might think.

A new report from ihs sews the magic -- shows the manufacturing cost for the new moto x phone is not much more expensive -- expensive than phones made in china.

It is interesting and goes against conventional logic.

This goes against the basic notion that manufacturing in the u.s. is too expensive.

You have to make consumer electronics in china.

Very much so, what is unique is when you look at our parliamentary analysis we have done, we have come up with a cost estimate on the labor side is roughly about $12. we have done a lot of these tear downs over the years on smartphones on the labor cost is usually three dollars-$20 and that is using much lower costs based in chinese labor.

This is right in the middle, about $12 of they found ways to engineer costs out in other ways.

It's interesting how it compares to the material costs.

It compares to apple and samsung and this is right in the middle.

These are the comparisons and this is surprising.

The components are still from china or wherever?

They are standard because these are the same vendors you will find in every handset.

They will come from the same vendors of memory and suppliers.

Through a lot of experience and in an attempt to do something pretty cool, google and the motorola team partnering with flextronics have looked at what to do to reengineer the process that we would've used in china where labor is a certain cost and texas you will pay higher.

Flextronics in the u.s. does a lot of assembly overseas.


Talk about the methodology and how you figure out what certain pieces cost.

In a tear down, we take the device -- we have models we have developed over the years that assume what the per piece part cost is to put that product onto a circuit board and assemble the product together and how much labor is involved in actually putting the product together and how much labor is involved in testing the product.

What we don't include are some of the other ancillary costs.

How do you tease out the manufacturing costs?

I have taken these phones apart with your guys.

You cannot see the manufacturing process.

You can see the result.

Through the team we've got, a significant number of engineers who have experience in manufacturing, we will look at the pieces that are there and make the assumptions based on the models we have used for years that we have refined and say this is how much we believe this should cost to actually insert, in other words, manufacture this part of the product.

We take those various chips that are there and the display and the packaging and say this is what we believe they stem our models.

Is there one take away that flextronics and motorola have figured out?

It is one that does not get a lot of rest which is the product itself is focused for the u.s. market and it is about speed.

It is about getting the product on a customized basis to the customer as fast as we can.

In this highly competitive market, you are starting to see a lot of other companies rethink if they have to build things and one major region.

It has been china now maybe because we have learned lessons and it is not cheap to manufacture there anymore, maybe speed to the customer is a cost that overshadows the cost of the incremental cost because labor is higher.

Thank you very much.

Thank you, we will be right back in just a moment.

? welcome back.

Samsung is releasing new products in new york tomorrow and we will be there live to show you the new galaxy gear smart watch and tablet and anything else you need to know.

You can watch our coverage on " bloomberg west" it is 56 pass the error which means we are on the markets.

Stocks remain mixed at this hour.

We have concerns over syria and when strikes could happen counterbalancing positive economic data we had this morning.

That at an estimated numbers on manufacturing construction spending and better manufacturing data out of china.

We have a mixed market at the moment.

If you look at how this is reading through to treasuries, the better than estimated economic data is leading some traders to speculate that we could see that tapering happen sooner rather than later with yields dumping up on that speculation.

We have been keeping an eye on currencies, specifically the euro, which is trading at a one- month low against the dollar.

For more on the euro, we are joined by michael mckee.

We had seen a pretty good run for the euro over the longer- term and then it gave it up over the past month.

You look at the fundamentals and it's about the rate differential.

Things are moving back in the other direction.

The europeans seemed to have much lower interest rates than the united states.

Now it looks as though we are going the other way.

We are seeing not only a change in the sentiment about tapering in september but better than previous growth in the united states and you can see that in the ism data today with u.s. and the great britain much stronger than the rest of the eurozone.

You are looking at much stronger returns in the united states.

As taper talk heats up, you have seen a move away from emerging- market currencies which means less reserve building, furor euros needed so that is weighing on the market.

Does this have to do with the clean and dirty shirt idea that

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


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