Microsoft Surface Writedown: Bloomberg West (07/18)

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July 18 (Bloomberg) -- On today's "Bloomberg West" the focus is on innovation, technology, media and the future of business. Hosted by Emily Chang with Editor-at-Large Cory Johnson and Senior Correspondent Jon Erlichman from Bloomberg's San Francisco studio, it showcases the personalities, companies and trends that are transforming the global economy. (Source: Bloomberg)

Live from pier three in san francisco, welcome to the late addition of "bloomberg west." i am emily chang.

Focus is on technology and the future of his nest.

Let's get to the rundown.

Microsoft takes a $900 million write-down on the surface tablet.

Is the software giant foray into hardware a flop?

Netflix is taking a leading role in hollywood with original series like "house of cards," bringing home 14 emmy nominations.

And with a price tag of 75 thousand dollars, the tesla is not a cheap car for most.

We see how the sleek vehicles are made.

Lackluster demand for the surface tablet is dragging microsoft down.

We were -- we learned today the company took a $900 million dollar write-down for the inventory, that is the cheaper of the models.

Overall, revenue is up 10% and profit hit $5 billion but both of those numbers are short of estimates.

As windows 8 failed to generate excitement to offset the slump in p sales -- pc sales.

Marcus often is -- the cfo acknowledged that it will take a long time for microsoft's tablet business to make up for the shrinking pc business.

How bad is the report and are there any bright spots?

Cory johnson is here.

Is it efficiently a flop?

I think the bigger news is about pc sales and their decline.

And the windows division is really hurt by that.

You talk about the conference call, or about that and the suffering and the pc.

You see the pickup in the shares, almost 30% in the last, 16% in the last year.

30% this year alone.

A big move in the stock but not benefiting the business.

Sales were up this quarter because the corporate sector is strong in all sorts of things, server business, selling windows 8 two offices.

But generally speaking they are hurting because of the windows 8 launch not igniting pc sales.

And windows 8 was as big of a rollout as you can have and now it is 8.1. it just did not get the job done.

You saw a slide in the sales in terms of revenue.

You can look at the non-gap numbers, the slide in sales is really disappointing.

They thought windows 8 would launch something big.

What about the surface?

Is it a failure?

On monday, they cut the price substantially, to about $370 for the cheapest one.

The parts that they paid cost more than $300. they had to take all of that inventory on the shelves, chunks of plastic, semi conductors, whatever, they had to write down the value of all that stuff.

So they still have probably well over one billion dollars in inventory they are sitting on.

But they think they're going to start to move these things.

They did not write it off.

By lowering the prices, that is why they took the write-down.

Is there any hope for windows 8? you know, the question is, are pc sales down because windows 8 stinks or does it stink because sales are down?

It is very much a chicken and egg situation.

Certainly the launch of windows may have delayed some sales going into last year but they caught a cold and led to a fever.

I'm mixing my metaphors.

When we look at market share in terms of the flavors of operating systems, it is growing.

It is up to five percent.

Windows 7 is 44%. vista, and the mac os,@three percent, is actually growing.

It has added 140 basis points in growth in the course of the last year.

The mac os is coming on strong.

Even though windows 8 is a disappointment, more are using it now than they are mac.

Google is also out with earnings today.

The sales were up 19%. 14.1 billion dollars and profits were up 16%. $3.2 billion.

In terms of advertising, the average cost per click fell six percent as more marketers aim for mobile customers rather than desktops.

Jon erlichman is in l.a. we talked about the move to mobile.

How is it affecting google?

Obviously not good news.

This is a big deal.

It has been a big deal every quarter, for the last year, if not more.

Every time we have a conference call from this company, they get calls from analyst's about what is going on.

The simple part of the story is that as the business has moved for google, from the desktop to mobile devices, the advertising dollars are flowing there.

It is still new so figuring out what exactly, what kind of auctions they are going to have for the new advertising inventory on mobile devices, and is at lower?

Are there lower rates?

And how does that affect the business?

This is what a lot of analyst want to know.

Google has an enhanced campaign.

It is similar to what facebook has done, which is to say we want to have more say in where these ad dollars are going.

We wanted to be able to, for the people who are advertising, say some neat to go through desktop, others on a tablet, and they say they have moved about 6 million campaigns to the enhanced campaign program but it is a big thing for them to do and without going into too much detail, they are basically going to say, longer-term this is the best thing to do.

Short-term it does create some hick ups.

Larry page likes to talk big picture on earnings.

What did we hear from him?

He talked about the portfolio approach.

A lot of people want to know for a company like google to dream big and have a startup culture when it is one of the biggest in the world, he talks about the portfolio idea.

This idea that you can start small with a team of a few people who want to be part of a small team and think about the next thing and then there is also people who like being tied to the established radix, gmail, chrome, whatever.

That is how it works.

As google moves into other businesses, how does it affect the bottom-line?

And this profitability?

I think one piece of detail they shared today is making money is important if you are in business.

Your profit margins, the percentage you can make from everything you sell is important but google said today, are not thinking about it in percentage terms.

They think about moving to new areas, profitability on an absolute basis and is there a way for there to be synergy, two tight into everything we are doing right now.

Google has to think this way because search has been so profitable.

As they move into tv and phones, you're talking about less profitable businesses.

Jon erlichman in l.a., thanks.

For more on google i am joined by brian who has a hold on the share.

How serious is this number?

I take a very contrary in view on this.

I do not believe prices make a meaningful difference.

That is from years of experience.

It does not determine budget allocations.

I think you want to see higher prices rather than lower and it does impact sentiment.

But the real reason for the numbers is because they have more products to sell.

Not because of a campaign or a change in prices.

Google is unveiling new products as we speak.

There is supposed to be a change coming up.

Tell us about the change in how it will impact the bottom line.

They are not clear about how much money they make from mobile.

Very little in the way of breakdown.

This is the point , as you talked about with facebook, it does not change the amount of money they will make.

Arguably it does not impact the bottom-line.

The stuff that makes the difference is that which google does not talk about.

The fact they are the biggest seller on display advertising, they are one of the biggest players on the web.

Did that even come up?

Not once.

Would you say the verdict is google is killing it and everyone else in display advertising as well?

It really is google, google, facebook on the side, google and google.

Facebook is an island because it has so much ad inventory by itself.

Google is crushing it.

The question is, what is the right way to value it?

You have to look at the margin.

That is where people are disappointed.

Expectations are for a consistent margin.

This is implausible.

Google can't expand margins.

They have said they won't. what about some of the other stocks everybody wanted to hear about but did not get to hear about, the super phone , google glass, things like that?

We would like to hear some details.

We are never going to get a precise answer.

We're never going to hear their target is this or or the target revenue is that.

So, i think people look for anecdotes and vision in general.

I do not know if anybody is disappointed.

I think most people are jaded they will get details.

Brian wieser, thanks for joining us today on "bloomberg west." netflix is up for 14 emmys.

It is the first time and internet streaming service has a not for tv's top honors.

Is netflix taking down the networks?

This is "bloomberg west." netflix made history this morning with 14 emmys nominations.

The first time original content for online viewing has been nominated.

"house of cards" scored nine nominations, including outstanding drama series.

Kevin spacey received an acting nod.

For more let's go to jon erlichman.

You were in the room at the nominations this morning.

For people surprised about this?

14 nominations, absolutely people were surprised.

At has been in the conversation but what is so amazing is now in two months, a network television, you could hear about netflix getting all of the attention because while not all of the nominations are going to be on the broadcast, if kevin spacey were to win or jason bateman, or the "house of cards" program, it is going to get attention.

We have been seeing this in a big way that this provides validation.

The people we have spoken to today, there has been a view the high-profile talent might be willing to work with netflix or yahoo, etc.. i inc.

It is a big tail perception-wise even that -- i think it is a big deal even though we have seen the shift.

Perception is one thing, we do not know how many people are actually watching the show.

Netflix does not tell us how many are watching.

It is their proprietary right to do that, i guess.

One thing they have to do is cut deals with everybody in hollywood, for original content or existing content.

At least they know how many people are watching and that helps them in the negotiating room.

Last quarter they did get a bump from "house of cards." coming into their quarter, there was an expectation they might had upwards of one million new domestic subscribers.

They exceeded that amount.

It is not just about having these specific shows.

They can take the pr benefit from it and go back to the fact they need all sorts of stuff to keep people happy and keep them subscribers.

Jon erlichman, in l.a. here to talk more about the rise of online television is om malik . you follow netflix, you have interviewed reed hastings.

What do you think about what they have pulled off?

It is -- is it the second coming of hbo?

It is more than that.

What they are doing than what you would expect a network to do.

They are not talking about ratings, programmed appointment watching.

They are not doing any of those things.

They are saying on the internet there is only one way of watching video.

Anytime, anywhere on any device.

Predict -- producing one hit show is one thing.

Producing many is another thing.

What they are saying to the world is there is another option in showcasing your creative content.

It is called netflix.

You do not have to go to showtime or hbo to make your content reach people.

The internet delivery mechanism has finally arrived.

It is about creative content.

It is not about cat videos or pictures.

This is about a full on, proper television show in the classic hollywood sense, being brought to you over the internet.

I think that is the beauty of this model and i inc.

-- think getting nominated for 14 emmys, what they are saying it is not only the traditional players, we probably are better.

I love the netflix model.

I can binge and binge and be happy and get it over with.

What happens to the cable companies, what happens to the networks?

Is this the end of something?

They need to learn the same traits.

How to deal with this new reality, the behaviors that fluids -- netflix is influencing.

They are helping to forget about ratings.

I think they are the most insane thing in the world.

It does not make any sense.

I have no transparency how it works.

What else can you give to advertisers to attract their many?

They have a different model.

They are not advertising.

Their motto is subscription.

What is wrong with that?

I am happy to pay them $10. i can't remember giving money to my cable company without much happiness.

We will get into apple after the break.

And their approach to the tv model or the new television as we know it.

Stick around for more of om malik after the break.

? we are back now with om malik talking about the future of television and how netflix is changing things and how apple may change things.

What you think about apple's approach to this?

The ad skipping technology.

And also seems they are farther away from this than we thought.

Indeed.

I think we are hearing a lot of innuendo and rumor.

Until they come out with the service, it is not worth talking about as a fact.

I believe we will begin to see, if there will be a shifting from the idea of television to the idea of video.

I think television is a small component of this video landscape.

You are beginning to see people think about what they watch on the big screen, or on the small screen differently.

What apple is likely to do in this one, and in this television space, and his work with companies like disney, work with people like hbo to create almost a kva -- cable tv like experience.

What about google?

Also trying to get into this game and create its version of netflix.

Why do they need to do that?

They have youtube.

It is one of the biggest video platforms in the world.

They have more attention than any other service.

They are the reason why justin bieber exists.

They have a platform.

It is called youtube.

I do not why they have to try to reinvent the wheel.

It is a classic big company.

They need to look busy.

I want to ask you a last question about netflix because they are doing something different with their earnings call.

They're having a analyst and a journalist moderate.

What do you think about that?

Reed hastings is unconventional so he's doing things in an unconventional manner.

Does it bother you?

That it is not you, that somebody -- what if they get information sooner?

What difference does it make?

It takes 30 seconds to get that information.

Even if somebody gets information before us, it does not make much of a difference.

At that point it is commodity information.

It will be an interesting experiment.

Om malik, as always, good to have you on the show.

Ok, coming up, del's feature is in the air.

The computer maker postpones its eye out.

Does that mean michael dell and silverlake did not have enough support?

We will take you live, coming up.

? you are watching "bloomberg west" where we focus on the future of business.

Verizon follows t-mobile in offering a plan to allow customers to upgrade to new phones faster.

It will let customers make monthly payments for their devices and get new phones after six months if they have paid half of the retail cost.

Facebook is making acquisition overseas, buying the uk's based company.

It makes verification and analysis software that checks other software for coding errors.

The team will be joining facebook in london.

No word on the terms.

Yahoo made another acquisition.

This time buying beijing-based company that analyzes social network data.

Yahoo will be bringing the team on board.

No word on their terms.

Dell has postponed a planned shareholder vote on michael dell's takeover bid.

This morning's meeting opened and then quickly adjourned moments later.

The vote was rescheduled for july 24. cristina alesci is at their headquarters just outside of texas.

Does this mean you are back next week?

It certainly does, emily.

It means that door to door campaigns, those eligible to vote but abstained from voting, they will be lying hard -- lobbying hard to get the deal they put on the table that michael dell and silverlake put on the table and also split some of the shareholders that voted no today.

What this comes down to our $.35, believe it or not, after a year of work and negotiation.

They may be stuck for $.35. analysts saying they have no problem getting a yes vote out of some who are looking for a bump.

At the end of the day, it is unlikely michael dell and silverlake bump for 2 million reasons.

They are not picking financing from lending.

That is a big deal.

Michael dell has $15 billion.

He is unlikely to finance this bump himself.

Big reasons why that may not happen.

Moving the story forward, there is going to be some litigation over this.

They will be -- there will be some scrutiny over that.

What are the chances this ends next week?

Corrects the chances are very good.

They are not going to adjourned again unless there is a bump and then they adjourned for a longer time to get the documents in order to sign that the deal and then there will be an adjournment to vote again.

Unless a new deal emerges, next week is going to be it.

What we will likely see is a best and final statement, or at least michael dell and silverlake telling the committee they're going to stand at $13.65 and smoke out some of the shareholders today.

Obviously not great news for carl icahn who wanted to see it voted down today.

It is going to be hard for him to implement his plan.

We will be watching for you next week.

Cristina alesci from dell headquarters.

It's troubles extend beyond a shareholder vote.

It finds itself in a slumping market with global pc shipments down for five quarters.

During the second quarter of 2013, shipments fell to 76 million units, the longest the klein in the market history.

Is it all gloom and doom?

Cory johnson has more.

Gloom and doom and you come to me.

I am also joined -- he wrote a recent note that there is a glimmer of hope in the pc market.

Really?

We do not think there is a glimmer of hope.

We called back in april you would see a seven percent decline in pc units this year.

That is going to be the worst of decline on record.

That was earlier than the third- party researchers came out with.

We have been bearish since 2010. our stance remains.

I wondered earlier in the show if the release of windows eight began the stall in pc sales.

Do you think that had an effect?

They seem to be blaming pc sales instead of accepting the blame.

What is your take?

I think the pc market was already in a slump.

Microsoft had to scramble and come up with more of a mobile platform so it could be used in tablets and also used in the smartphone.

But i has not helped.

You are exactly right.

We said last october windows 8 is dead on arrival.

I met a lot of contacts last summer.

They were excited and i saw them last october and they said this does not look like it is going to take off.

The products were not even shipping with the stuff they were boasting about.

I wonder how much, not only is the business shrinking, it is getting worse.

Is that about lenovo eviscerating the profit margins of everyone else?

That is a great point.

One of our themes is the age of pc makers becoming more problem -- prominent.

Lenovo is an example of that.

Lenovo surpassing hp for the first time as the number one pc maker, we called it the beginning of the end of the hp.

I think you're going to see lenovo dominate over the next 3- 5 years.

They have a great mobile strategy and your seeing companies like asus, and other companies we can think of, getting involved in pcs.

They have scale.

I think lenovo and the smartphone business we do not talk about because they do not have a u.s. product.

They are killing in china right now.

You are exactly right.

They started ramping up a couple of years ago.

Think of where they could take that.

They could combine we use that scale, use that scale of china as they get bigger in smartphones.

It can be very detrimental to some of these companies.

What about the surface?

This inventory write-down today looks bad.

But they are being really aggressive with the pricing.

Does a surface rt, does that change the game for these guys?

Because they are still sitting on a billion dollars worth of inventory.

The surface, i just do not think -- microsoft thinks of everything as a pc.

Apple did not have that problem when they came out with the ipad.

I think the mindset is different.

Why did microsoft succeed with the xbox, it did not look like a pc.

They had a new team.

They let them do it they wanted.

A big success.

I think some of these other areas, they treat it is like a pc and it fails.

I think the surface is an example.

I do not expect them to be successful in this market at all.

Any type of mobile market, microsoft has not been able to penetrate.

I do not think that is going to change.

Brian white, thank you very much.

So, how does tesla makes its sleek electric cars?

We will have a tour coming up.

You can also watch a streaming on your tablets and bloomberg.com.

? this is "bloomberg west." i'm emily chang.

Tesla pumps out an average of 500 model s cars a week and ashley vamp got an exclusive tour to learn how the automaker is able to afford operating a car factory in silicon valley during -- silicon valley.

We are here inside of the tesla factory getting a supersecret tour.

The car is made from scratch essentially.

In the early days it was quieter.

People are busy but i have noticed a huge difference.

About 400 cars a week?

About 500. how big is the factory?

5.5 million.

We are not using the full factory yet.

But one day very soon we will use it all.

Look at all of these cars.

We could stay here an entire week.

We have had car companies in the past but people said it was too expensive.

You guys are showing it is possible.

It take -- the prices little bit higher but we are convinced by integrating a lot of the manufacturing here, we save a lot of money with logistics and the cost of having inventory over the u.s. or the world.

Hello.

You want this as a present?

Do we get a car at the end of the tour?

We have 140 robots.

You can see that side of the car moving in the air.

They are carrying it together.

It looks like a game.

These guys are never tired.

People are not used to factories.

Even for us it is cool.

Ashlee vance, you can read more about his look in this week's issue.

Retail me not goes public tomorrow, the third consumer web company to pursue an ipo.

Could the move pushed billion dollar companies like twitter or spotify to follow?

That is next on "bloomberg west ." ? this is "bloomberg west." i'm emily chang.

The software that powers 90% of the fastest supercomputers and eight out of 10 financial trades does not come from google or apple.

It is when asked -- linux.

The founder provided the first version of the software to programmers for free.

Developers embraced it and it is one of the largest operating systems in the world.

Cory johnson joins me more with how it has taken on many of the biggest players and how it is doing today.

It is the largest collaborative software development ever.

And like a windows ios, linux has no one against development.

What are the advantages of this?

Jim, today of all days, microsoft's earnings out.

Steve ballmer called it a cancer.

Was he right?

Clearly not.

We have been called a lot worse than that.

If you look over the last 15 years, just how wrong that has been proven, every day a couple million phones are activated running linux.

Every major stock market, new york, london, tokyo, linux.

Most of modern society.

The basic notion of linux is fundamentally opposed against the idea, all of those industries, microsoft has wanted a piece of it.

Whether it is television or whatever.

It has missed the boat on those things.

What linux has done is proven that collaborative development is a better and faster way to innovate.

You see microsoft are struggling with innovation and companies like netflix, their entire software -- netflix was nominated.

They were nominated 14 emmys.

They spent their money on content rather than software, which is open source, running on rented hardware.

It is an interesting case.

When you look at silicon valley or the big companies, you probably see it different in terms of the ceo of netflix or whatever.

Do you see linux, i do not want to use the word kernel, do you look at companies as basic ideas of linux?

Most successful companies leverage r&d through linux to compete.

Take a look at amazon.

Their entire shopping site, every kindle, based on linux.

Take a look at companies like google.

Their search product.

All of their android devices are based on linux.

Philosophically, the idea, mark zuckerberg as a high school student starts programming in linux and thinking about collaborative things and the idea of social networks, also on collaborative creation.

Absolutely.

Collaboration that linux has been the proof of has been so successful that when mark zuckerberg created facebook, he did not think about it.

He grabbed open source software.

I think that is now the norm for development rather than the exception.

Where are you in terms of encouraging further development, it has changed so much in terms of everything around it, how do you as a nonprofit go about encouraging development?

What is great for us is that linux and all of the technology has become an important part of society.

It is becoming the norm of how software is written.

Whether it is a kid graduating from high school or a professional programmer who gets a job because he contributed to the project a potential employer notice, we are now in the mainstream.

Which is a different place than we were 15 years ago.

Remarkable.

Jim zemlin, president of the linux foundation.

After facebook's ipo 14 months ago, to consumer internet companies have braved going on the public market.

Many of them, twitter, dropbox, have remained private, taking massive investments.

Retailmenot is bucking that trend tomorrow, going public just over $1 billion.

Could this ipo bring others out of hiding?

Here is doug macmillan.

How do we know retailmenot is not going to be any worse than groupon?

Definitely not groupon.

They have ridiculously high margins.

94%, higher than any other company in the standard & poor's index.

That is a good sign.

Investors are happy about that.

They have been around longer than groupon when it was an ipo.

They have been around four years.

They have a stud ea -- steady following of users.

Groupon went out through more of a mass.

Demographic and tried to find people that were interested in discovering new businesses.

This is targeting people who clip coupons.

Normally would have done that out of their newspaper.

They are just doing it online.

There is no cost to the sales force and they're not calling up every local business.

We will watch to see how it does.

Is there any chance it is going to get the other guys out of hiding?

Definitely.

There is a privately ready to go.

The market has shown an appetite for tech companies.

We will have to see if they are interested.

There are a lot of interesting startups in the pipeline.

You mentioned square, and the big one, twitter.

What is twitter going to go public?

We do not have any signs on that.

Definitely they have been putting the steps in place.

They have been billing and management team.

They have been getting their pitching order.

I think twitter is going to be one of many companies watching retailmenot.

Is there a risk to some of these company staying private?

Some say facebook missed its window.

That is part of the reason why it did not perform as well as expected.

-- it did not perform as well as expected.

You can operate in secrecy more.

You do not have to be in the light of the sec.

The problem is when you keep raising money at a higher and higher valuation, eventually you're going to have to justify that if you do an ipo.

That was a problem with facebook . also a problem with groupon and zynga.

Retailmenot, even though it is lower value than those companies, still over $1 billion is more than most companies on the nasdaq.

It is going to have to justify that valuation.

We will see how they do.

As always, thank you.

It is time now for the bwest i where we focus on one number that tells a lot.

Jon is in l.a. cory is in san francisco.

100 11%. the increase in apple's market share.

In the last year.

111%. market share is three percent.

So a little bit behind windows 7. but that is a really big growth for mac os 10. brian white not pulling any punches, saying windows 8 was dead on arrival.

Although i bet when it comes to the xbox, a lot of people are streaming "house of cards" through that device.

That is a positive for microsoft.

Cory, you spend a lot of time over the last few weeks covering xbox, could xbox -- could microsoft use it as a last hope?

Microsoft has a lot of things go right but their old business of desktop operating systems and consumer sales were weak.

The transition into the tablet and the phones is not great.

All right.

Thanks to all of you for joining us on this edition of "bloomberg west." we will see you back here tomorrow.

?

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

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