Netflix's House of Cards?: Bloomberg West (07/22)

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July 22 (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 f22om Bloomberg's San Francisco studio, it showcases the personalities, companies and trends that are transforming the global economy. (Source: Bloomberg)

. . live in san francisco, welcome to the early edition of "bloomberg west." our focus is innovation, technology, and the future of business.

Selling more than a billion dollars of yahoo!

Shares back to the company, hoping to oust scott thompson in favor of marissa mayer.

Apple to extend its own developer web site after a hacker tried to steal personal information.

Now is a race against the clock as apple raises to overhaul the site.

Netflix bets big on original contact -- content.

When it comes to the bottom line, is netflix really building a house of cards?

Reshaping the board at yahoo!, putting marissa mayer in the corner office, but now dan loeb is slashing his stake in the company.


Is buying back 40 million shares.

The shares were bought in one fell swoop, priced at friday's close.

Dan loeb is also resigning from the board, as are the two directors.

Last year, loeb led a proxy fight which a venture led to the port of marissa mayer.

Jon erlichman has the exclusive details on what is happening behind the scenes in recent days leading up to the stock sale.

Jon, what are you hearing about what is going on, how this happened?

We understand this came together relatively quickly.

Dan loeb became an investor to create some shareholder value.

That happened in a big way, since he vested, the stock has more than doubled.

Third point has already sold a significant amount of yahoo!

Stock, a part of 9 million shares, so as far as this the bill goes, there are windows when investors and investors have an opportunity to sell.

That window opened up last week.

He approached the company and wanted to sell stock.

The company , based on conversations from friday, had an idea of a buy back as it had with no room under its current program.

Not to use all their buyback money on buying back from third point, but just enough to bring his stake down to a certain level which basically allows everyone to make a clean break, and for him to walk away from the border directors.

They cooked at $1.9 billion buyback like that.

I wonder what this means for these three board members peewit them leaving, the biggest shareholder backing away, what does this mean for marissa mayer?

It creates a big opportunity, actually.

When it comes to the relationship between dan loeb and marissa mayer, we are told it is a good one, but they were two people with big ideas.

It was not uncommon for them to have long debates about the direction for the company.

She no longer need to have those conversations.

Now you have a seven-person board, so room to add a couple of members which she can add to have influence over.

And remember, there is an interim care.

-- chair.


Is working with a search firm to find a permanent chair, but up to this point, there is not any main candidate.

There is still a lot of positioning that will happen.

She will have a say in that.

Dan loeb on the board with his cohorts, and they get the share buyback, the bentley share back -- eventually sell back to the company.

What will he do, going forward?

I do not think this is an overly complicated story.

If yahoo!

Was trading at $30 last week, who knows if he would have wanted to make this move.

The same-store would have been true for the rest of yahoo!


It makes it easier for him to sell more stock.

If it does not continue to climb, do not be surprised for him to hold on a bit longer.

Apple's developer website is down today after a hacker tried to steal personal information about the company's developers.

After apple detected the breach, they may decide unavailable to engineers.

Apple says sensitive data was unscripted.

-- and corrected -- encrypted.

What exactly is the company doing to prevent another attack?

With me is the ceo of a cyber security firm that hacks into companies to reveal their security vulnerabilities.

Apple holds may be one of the largest piles of customer information anywhere on the internet.

This is a developer information.

Why would a hacker want to get that?

The object that is a good question.

The most basic answer is that the developers are key to all of the users.

If you can hack a developer, you may have access to tens of thousands of developers.

If i hacked into someone doing scientific calculations for a scientific program for the iphone, that might be an interesting application for me to trojan to get to some users.

In this case, when they say they discovered the intrusion, it looked like somebody sent them a note that said they were able to do this kind of work.

Historically, apple has had a bad relationship with the independents security community, and this is a clear example of how they made some missteps, and it cost them some money.

While we think of the developers website as key, it was built by a third party, and when they found a vulnerability, they now have to shut it down as they redo the whole thing.

A third party hacker community?

There is an independent community of security people out there who thought invulnerability is in all sorts of things.

One of my friends is one of these things.

He announced they found a vulnerability in apple network, and they shut him out of the process for about a year or more.

This is not something you would expect from a tech giant like apple.

Google and facebook tried to hire you.

That has changed quite a bit, too.

Companies like microsoft and facebook used to have a small reward, but now they are offering big cash for people who can find vulnerabilities.

And you are talking specifically about google and microsoft, who have been very aggressive in courting the security community.

They realize, deep down, it is cheaper and more effective.

Apple is on the other side of the story, goes as far as it can to alienate the security community.

I do not know why you would think they would do that.

They seem to go their own way in all kinds of business relationships.

Any indication that they would change the way they are doing things, responding to this awareness, suggesting a different way to do things in the future?

This shows they have not changed a lot, but we have a conference every year here in miami, and they do send people to that.

They are active in sort of infiltrating the security community, but certainly not rewarding them quite yet.

This is like the we will not negotiate with terrorists, and but when everyone else is, maybe not the worst thing to do.

There is a threat to their developer website, all of their web sites, to everything they do.

Some interesting information.

Anything they can do to help lock that downed would be an amazing value to them.

In some cases, they go the wrong direction here.

Thank you.

Still ahead, netflix is ditching its traditional conference call for a live video q&a. we will tell you what you can expect from the unusual earnings.

You can also watch us streaming on your tablet, phone, and on

? netflix made any history last week scored 14 nominations for its original series, the first time any show made specifically for a streaming service had been nominated, but they will get a degree today after the report after the bell.

Jon erlichman has more on what to expect.

Your absolute, unquestioning loyalty.

In the original show "house of cards" kevin spacey plays a very ambitious politician.

Read hastings, the founder of netflix, it is an ambitious guy, too.

He built a dvd mail business then basically sank blockbuster, and saw a future in streaming video.

And is working.

Netflix it could end its seventh quarter with more than 30 million streaming subscribers in the u.s., but hastings wants more.

He wants to boost services to 90 million.

Compare that to hbo and cinemax, both owned by time warner.

But hastings really wants is for users to think of netflix as they do hbo, as its own tv network.

That is better the original shows come in.

But "house of cards" and "our best to development" -- " arrested development" do not come cheap.

For more on what to expect from netflix this afternoon, we have a guest from los angeles.

Michael covers netflix and has an underperform rating on its shares.

More importantly, they have posters on the wall about his predictions about the death of the company.

This is really weird but there do with the conference call.

Why are they doing this, what do you make of it?

I think having a journalist is not as a novel and different as having an analyst.

The weird part of it is that they picked somebody out of the crowd of netflix lubbers to moderate.

I think he is supposed to appear impartial, but it would be difficult for him to do that.

To enter your question, i think they are trying to turn their earnings call from a news event into a media event.

It is getting coverage by the very nature of the format of the call.

You are covered it more because they have a sell sign analyst, and one of your former colleagues as moderator.

We all find it odd.

In fact, it will stifle questions.

Someone who has a critical question cannot be sure if the question will be asked.

I have no problem with a journalist.

She does not have a recommendation on the shares, she will not leave the call and say go buy or sell netflix.

I do have a problem with one of my competitors excepting the assignment.

It does make him appear to be less impartial.

To be fair, rich greenfield does good work, has a buy rating on the stock, but he does need to justify to the people that trade through his firm.

And again, he has been right.

Props to him.

I have been wrong and i have no shortage of people that seek my opinion appearing with management is an implicit endorsement of management.

Rich has been explicit and what they're doing, so i do not think there is a conflict, i think there is just an appearance of impropriety.

Do you think the quality of the questions -- i want to get to the questions -- but will the question be worse?

I have a lot of respect for my competitors at other networks, but i wonder if a journalist can ask the same questions as a financial analyst, and will it be as tough?

I wrote in my review that i thought it would stifle the dialogue and discussion.

Julia reach out to me on friday to ask for questions and promised me that she would ask, so we will see.

I had four tough questions, so we will see.

Is there a pattern here with netflix of changing the goal posts, restricting information when it may offer in later on.

Other companies give less detailed informations.

Amazon is notorious.

Netflix gives out metrics that are convenient, and stop giving them out when there are no longer convenient, so we do not know about churn, the size of their streaming library.

So, yes, these are the guys that posted on facebook when they hit a billion hours of streaming, and they flaunted it, they let the sec, and investigate, and ultimately won.

I do not think there is a big wrong with a video conference call.

I think that is great.

Nothing even wrong with having a journalist there.

But it makes a partial analyst look bad, and it may stifle dialogue.

The guys that are looking to ask the questions are afraid that rich will keep a good questions out, or keep them for himself.

Normally, i do not have to ask for permission to ask a question.

No kidding.

Let's get to the tough questions.

What are some of the tough question you want answered?

I hate to blow it for julia, but i am asking about the disparity for net income and cash flow, and i want to know what the investment in streaming content is, when it turns around.

When is the duration of their investment?

Second, i calculate the gaap to be over $2 a share, so when do we hit the tps line?

How long does it take to get through the income statement?

I wonder how long we should expect free cash flow to continue.

Finally, i ask about the rights to their original content.

How long are those rights?

We all know that they do not own the content.

How long is the window to exploit it, what is the cost if they choose to extend the window, and is the renewal option exclusive?

Those are questions that they have never answer that i think they should.

We will see if they tell us what that actually costs.

Michael, good stuff.

Thank you.

When edward snowden meet details of the so-called prism surveillance program, one security company came of that was not a household name.

? new evidence today that high and smartphone markets may be waning.

The average price has plunged more than 16% since the beginning of last year, according to idc.

That is threatening growth and profit margins at companies like samsung and apple, who reports tomorrow.

An analyst at pacific crest downgraded apple to a hold earlier this year, looking smart for doing so.

Andy, what is it about apple's business that worries you?

Deflation is kind of a natural part of the technology cycle.

This is a company that has avoided it for the most of the last decade because of how strong their product cycle has been.

What informed us of the downgrade is you are seeing saturation in the high end smartphone market and early signs of the high end tablet market.

Typically when that happens, prices come down and volumes lowe's, which is a bad combination.

I was looking at this, looking at the numbers, and there has not been much price cutting for the product because they have added features.

We're entering into a refresh cycle, a new cycle for the phone potentially this year.

Can they hold off prices, or is the pressure from samsung too much and they will have to cut prices?

It is ironic given the downgrade, i think they can hold prices.

There retention rates are still extraordinarily high.

Their hold on the rich global consumer is still high.

A lot of discussion about a low- cost phone.

I would be surprised if the new phones they come out with are priced materially differently than the one they have now.

I think they can do that and continue to gain share of the high end, moving significantly down market is something that typically does not work.

There are less profits there than above.

When you look at the growth -- the raw numbers of how many phones they have sold is just stunning in its growth over the last five years.

I wonder how much of that is geographic, and will it come to an end?

Most rich people in the world, i guess, live in aid limited number of geographies.

So geographic in that sense.

The bottom line is, on a global basis, it costs more than more people can afford.

So your total addressable market is limited.

They can bring out a lower-cost products and try to get more people.

Usually in technology that does not work.

You can ask nokia and rim, or they can try to dominate the high end and capture as much as they can.

We think they should do the latter.

I saw the black.

Berry z10 to down at costco, an added bounce in the iphone at all.

Now for a look at what is happening on the markets every half hour, dominic chu.

Take a look at the overall market's. it is greenish across the board.

We are watching three different companies here.

Mcdonald's, halliburton, hasbro.

All moving on earnings-related items.

You will want to pay attention to these three stocks into the afternoon session.

We will be back in 30 minutes.

This is the early edition of "bloomberg west." you can also catch us at a later time at 3:00 eastern.

Now for a look at the headlines out of technology.

A powerful earthquake has rocked northeast china.

At least 80 people are dead and hundreds more hurt.

The magnitude 6.6 earthquake also triggered landslides.

A surprise dip in the sale of previously owned homes.

The national association of realtors said sales fell 1.2% in june.

Economists say tight inventories and rising interest rates are likely behind the drop.

Sales fell mostly in the northeast and eastern regions.

Tour de france winnder chris fromme says that is when will stand the test of time.

Google, facebook, apple, you probably recognize most of the companies.

Edward snowden named as participants and the classified as a program prism, but he also pointed to paltalk, a video- chatting service.

So why with the nsa be monitoring them?

The company's c e " is with me now.

Were you surprised when you saw this information, the suggestion that you were cooperating with the end as a? yes, we were.

We actually go through the extra length to secure our privacy and information.

What is it that the nsa wants with your information?

I have no idea.

We are a group video chat platform.

The primary exchange our people interacting with and chat rooms and video.

If any inbound increase takes place, it goes through us first.

Presumably, you have been contacted for little things.

When you get a subpoena or something, you respond.

Has that happened?

I have been here for just seven months.

It has not happened as far as i know since i have been here.

So you have not had a single subpoena in the seven months that you have been there?

To my knowledge, no.

My primary focus is how we are moving forward and leveraging our technology and patents to take the company to its next opportunities, so i have not been actively involved with the law firm.

Let's talk about that.

Where is your footprint, how is your business different to someone similar to yours?

There are not that many similar.

You have another communication tools like sy kype, tango.

What we have that differentiates us is the ability to support a limited number of corporate broadcasts within a single environment.

There was a suggestion that you had a particularly strong business in the middle east, and that was one of the reasons why prism was so interested in information you had.

Is that an error that has had a lot of success?

If you think of any large global conglomerate, facebook, twitter, skype, we all have global footprints.

It happens in the oil-rich countries of the middle east, we have a strong paying consumer base, but the majority of our users are english-speaking, european, and to rub the world.

Tell me about your revenue streams.

We have a subscription model, which is alive and well.

We have virtual currency, like you would have seemed at zynga and other providers.

And we have advertisements.

Has the explosion of mobile helped to in terms of growing the business?

I wonder, as you push into mobile, where are the opportunities, and how does that change the business?

We have a client like skype, and we need to move into a browser environment to widen our product.

Second, we are starting to invent content into the platform.

If you think about link in, you to come in twitter, what tis people together is not whether or not they know each other, but the association's they can have around different content and interests.

The third thing is, we need to be across multiple environments.

Whether people are on their phone, tablet, or pc, they need to be able to communicate across all of them.

In terms of environment, are you looking at the android, apple?

Today, we just released our tablet app.

We have both a free and paid version.

Many iterations on those products to come.

Everyone knows that android is caught up in unit sales.

They have a huge international footprint.

At the same time, we are also on ios.

We released on both platforms at once.

We will be on the candle by next week.

It is all about scale.

The ceo of paltalk , thank you.

Coming up next, we go inside a limestone cave hundreds of feet below kansas to show you how one company is protecting your data.

You can also watch us streaming on your tablet, phone, and on

? this is the early edition of "bloomberg west." you can also catch us at a later time at 6:00 eastern.

A big fight could take a cbs off the air and some of the biggest cities in the u.s. cbs is asking time warner for subscription fees six times others.

Jon erlichman spoke with rbc capital analyst david bank about what we can expect to see from this latest fight.

I think what is happening is we are rerating to an entirely new level.

Previously, a lot of those battles were fought.

I thought was, let's get to $1 sub.

We have gotten there and now we are beginning a new round of let's give it to two dollars a sub.

This idea that cbs once a 600% premium for its content.

You see a headline like that and you think it is interesting.

Is it a fair comment?

On some level there is something technically correct about it, but it is very misleading.

What the statement refers to is the existence of a number of much older agreements that had not really been marked to current market conditions, versus what cbs was asking for.

I do not think they are asking for a 600% increase over typical market value for more recent deals, but i do think there are probably some deals right now that are in existence that are at that kind of lull.

In your research, you talked about cbs having a programming budget well into the billions.

We talk about how netflix is spending money on content, how cable channels are developing these great shows, but the networks spend a lot of money, and that is what they're looking for, money back for all the money they are spending.

I would put it into more specific terms.

If you take a top-10 network like tnt, usa, fx, those are networks earning summer in the range of $1 a sub.

They typically have a budget within the 500 million to $1 billion a year.

Cbs has a budget of something like $4 billion a year.

That is really the primary difference.

Look at how much more investment and content is going in with basically no increase commoditization.

That is what the broadcasters are arguing.

At the same time, if these sites continue and the tv as threatened, you get blackouts' again.

Does that result in more people saying, forget it, i am going to netflix or hulu.

? at the end of the day, these networks have the largest audiences in the ecosystem.

They also have the sports program that you cannot substitute on netflix.

I think there is the potential for a blackout.

That was rbc capital posit david bank.

Returning to the great depths.

One company is going to great depths to keep user data safe in the cloud.

Richard falkenrath has more.

It is not the first place you would expect to find a cloud.

How far underground are we?

2,500 feet.

Here is the head of tavern technologies, and he calls this cave home.

With natural disasters and the reason tornadoes and threatening to wipe out above ground dissenters, an increasing number of data services companies are moving their operations underground.

Iron mountain was one of the first.

The company has been storing their data in a mine in pennsylvania since 1998. infobunker is inside a former air force bunker in iowa.

Protection from natural disasters, cavern says that the benefits of moving underground are many.

It is almost impossible to put together a more cost- effective operation.

We have the lowest operating costs, and with equipment being the same as above ground, we have a 20-point spread on the markets.

One of many advantages for their clients.

And the cave temperature is 60 degrees, making: servers much more cost-efficient.

Cavern says their operating costs are 30% lower than above- ground operations.

Limestone walls are five times stronger than traditional concrete to protect against earthquakes or bombs.

And individual data suites are protected by individual programs.

It however, there is one threat that 100 tons are brought cannot do anything about.

A hacker with an ax to grind.

That was richard falkenrath.

Still ahead, find out how two stanford students are helping to close the country's shortfall of software engineers.

You can also watch us streaming on your tablet, phone, and on

? software giant s a p will end its dual chief executive structure next year.

Bill mcdermott will become the sole leader.

The company said in a statement -- distribution will be discussed in the coming months.

Last year, two 19-year-old stanford students decided to start a conference that would inspire growth to take their first computer science class.

Their initiative has reached hundreds of students across the u.s. and abroad.

The pair also interviewed a number of influential female engineers in silicon valley for a documentary being made today.

With us in seattle is someone who took the summer off from their microsoft internship.

Thank you for being with us.

How this idea come to abe?

We entered stanford as a non- technical major.

We have no idea what the field was like.

Then we were encouraged to take our first computer science class due to an engineering undergraduate requirement, and we absolutely fell in love with the discipline.

We realized what ever wanted to do in the world, we could have a greater impact doing so by having computer science in our tool kit.

So we realize that we grew up not having any role models and people who looked like us doing the same thing, who were trailblazer in this field and influencing the field.

We wanted to create a conversation, number one, on stanford, and then wanted to build up to the nation.

We realized there was a greater need nationally.

She + +, a play on words of the programming language c + +. you are a smart person going to stanford.

Why didn't you take computer size before that, what is it about computer science that is a turnoff for women?

Number one, i did not even have the computer science class offered in my high school.

I had no idea it was even a disciplined.

I grow on the east coast and a lot of my family comes from a very professionalized background, so i did not have much exposure to anyone in that field, and i did not the massive potential behind it.

The big crux of the issue is that there are not about role models presented to young girls now.

Not enough young girls who can look up and say, i can be like that person 10 years down the line, and have those young girls aspire to be like that and think creatively at a young age.

There is another barrier in general in that the stereotypes of the suit.

Computer scientists.

Kind of the nerdy, social network stare type where you are in the basement coding all day, wearing a sweatshirt and an energy drink in your hand.

And it is dudes.

The image is always dudes doing the programming.


It is a world of birds and girls do not feel like they can have a say or influence in it.

Just kind of on the surface.

Computer science has a lot more to do than just the surface level technical aspect.

It has to do with logic, rigor, and creativity.

There is so much more thinking and applications involved in it, rub and the daunting lines of code on the computer screen.

You have gotten a big reaction from silicon valley heavyweights?


A lot of silicon valley people have reacted to this?


We have had venture capitalists in about a support our cause because they are looking for more female founders, the more technical founders, expand upon an entirely untapped market.

Technologists, computer companies are looking for female talent as well.

Number one in general, in 2020, 1.4 million jobs and only 30% of computer science graduates today will be able to fill those jobs.

So we are not tapping into the complete potential.

Great stuff.

She++ co-founder.

We will be right back after this.

? welcome back.

I am cory johnson.

Coming up on the late edition of "bloomberg west," pm in the east, a threat to giants like apple and samsung?

We will be talking at 3:00, 6:00 p.m. eastern, but time now for on the markets, a look at what is moving in the markets.

Dom chu joins us.

What is up?

You can see major u.s. at the indexes are pretty much as flat as they can be, with the s&p, the dow, and nasdaq posting marginal gains or losses.

Overall, we are seeing with currencies, some of those currencies moving, as well.

The euro showing a little bit of strength against the u.s. dollar, the dollar falling against the japanese yen.

The pound sterling is up against the dollar.

On the commodities side, check out what is going on there.

Moves in crude-oil, down over 1% for nymex crude.

Gold futures posting a gain.

And there is a move up in gold.

And looking at the macro economy, we have got some housing data, because existing home sales came in showing an unexpected drop.

With us is an economics editor, michael.

There is all kinds of housing data out.

How important are the existing home sales in the big scheme of things?

We do not know why they went down.

The good news is they did not go down all of that much.

As you can see, they only went down 1%. there is still in over 5 million annual sales rate, and that is the good news.

The other possibility, and everyone was looking at this, perhaps the rise in mortgage rates recently had something to do with it.

The problem with that theory is that two months ago, things were going very, very well.

So that should not be a problem either, unless you did not

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


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