The Google of China: Bloomberg West (10/28)

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Oct. 28 (Bloomberg) -- Full episode of "Bloomberg West." Guests: Baidu Co-Founder, Chairman and CEO Robin Li, Senior Managing Director at ISI Group Brian Marshall, Bloomberg’s Cliff Edwards and Ari Levy. (Source: Bloomberg)

? live from pier three in san francisco, welcome to the early edition of "bloomberg west." i am emily chang in her focus is on innovation, technology, and the future of business.

Often called the google of china, baidu is the world's fifth most visited website and china's most popular search engine.

I sat down for a rare and exclusive interview with the company's founder and ceo.

Did apple make a mistake and releasing two separate iphones at the same time?

The company reports earnings later state and we will take a look at what to expect.

Twitter executives kick off the investor roadshow today as the company to visit more than seven cities over the next seven days and one likely area of concern for potential investors is the company's rising operational costs.

Apple is the world's largest company by market cap and today we get a better indication of how business is going as they report for recorder -- fourth- quarter earnings after the bell.

We are looking for how the new iphones are selling, the iphone 5 5s and c were released on september 27 we have a little more than a months worth of sales.

Investors are are wondering if tim cook will announce anything with the 147 billion dollar cash pile.

He has been getting pressure from activist investor carl icahn to buy back more shares.

Let's get straight to jon erlichman who is in los angeles.

It's helpful to know how many phones they are selling an apple told us the of iphones are selling pretty well, 9 million in the first weekend.

The challenge with the core like this is up it comes before the holiday season.

Apple has been rolling a lot of these new devices on the iphones to the ipads in an effort to secure some strong sales for the holidays.

Some might view this as a wait and see quarter and that's why there could likely be attention on the apple cash pile especially as you highlighted with carl icahn pushing for a $150 billion stock buyback.

We will find out how many iphones were sold in the core and find out how much cash was generated from the apple operations.

Those numbers are absolutely monstrous.

This company generated in the neighborhood of $53 billion in cash from operations over the last four quarters.

Even if you take up the capital expenditures, you're talking about $43 billion in pre--- in free cash flow.

It is a cash machine and no doubt tim cook will get questions about what they plan to do with that cash.

Part of what they do at the cash is spending on updating products like the ipad?

Yes, if you think about what happened in this same court last year, one of the takeaways was the company had higher operating expenses because they were rolling out these new devices for the holidays.

They have two new iphones, two new ipads, a couple of mac book pro and another for the desktop so they have had a ton of stuff lately.

There is a big expense with that and there is the expense tied to the unknowns, the stuff apple has been working on.

You wonder if tim cook in the apple executives will share any details on how much cash goes into that if they don't want to necessarily spend all their cash on stock buyback.

We will see what they say later.

Thank you.

For more on what to expect from apple, let's get to new york where brian marshall is standing by, the senior managing director of isi group and he has a price target of $600 brits what are you looking for today?

They preannounced the quarter positively so we think it will be good.

We think it will be realistic.

We think we will see nice earnings acceleration as well as iphone so we are expecting mid 50 millions.

Of iphones sold in the third quarter and we think 22 million ipads.

Collectively, these two product families are present 85% of the company's gross profits.

It's about these two portfolios and the guidance of what they expect.

I think it will be positive after the call.

We have been hearing that apple is selling the 5s more than 2 to 1. will we get any call them the difference between these two phones selling?

Probably not, they might say that we cannot make enough of the 5s. i think they will have positive commentary on the 5c which is the lower end version.

At the end of the day, it is having more success internationally where per capita rates are lower than domestic.

I think people take a u.s.- centric approach when they think about the iphone 5c. it is doing fine internationally but the demand is a little lackluster in the states.

Is that good enough for apple?

Obviously, we're dealing with the company that suffers from the law of large numbers.

The biggest market they are involved in is a 2 billion unit cell phone market.

There's only so much penetration they can have at the high-end.

They generate so much profit off this one market.

They are doing fine and that means great things like north of $40 billion of annual free cash flow.

Expectations are fairly moderated despite the positive announcement.

We think the stock will get to $600 fairly soon.

For the first time in recent history, we have a solid product refresh cycle coupled with improving technicals.

The 10-day is higher than the 50 hi -- day moving average.

]the stars are kind of aligning in with apple.

What about china?

We know their market share is slipping and they are being encroached upon by low-cost competitors.

They have phones that look like iphones.

We are hearing anecdotally that people in china still want the 5s if they are going to buy anything.

Are you concerned about the apple market share in china?

Not really, china is a huge market and we will probably have china mobile start lighting up the iphone here in the near term.

They have almost 200 million subs off of their 800 million sub base.

It is a huge market opportunity.

Chinese consumers want high and.

I think that they want the 5s and it will be interesting to see how many can afford it.

It will be interesting to see how well the iphone 5c does in china.

A couple of months ago, we were probably thinking it would do better than it had done but hopefully we can get a little bit of color over the next quarter on the uptake in china.

There was a little bit of disappointment that apple did not reveal more at the ipad unveiling last week.

You think innovation at apple is alive and well.

What are you expecting and when?

Is it a tv or smart watch?

I think they could probably do both but it is unlikely they do an itv because of the dynamics of the market.

You don't think apple will come out with a tv set?

They could but are they going to make 20% gross margins?

It's going to be a fraction.

It has to be some sort of compelling reason that the carrier like a cable company would actually subsidize the product rate we don't see that happening.

Apple makes its money from high- end carrier subsidies as well as the resell of nanflash.

Based on a $200 billion revenue stream, it does not move the needle from a profit standpoint even if they can replicate the success of the iphone 5 years in.

If they have 10% of the market, the market is probably 150 million units.

You are selling 15 million units at maybe 2000 dollars so maybe $30 billion revenue, those are probably low margins.

It will barely add five percent to the bottom line.

Strategically, i don't know.

It remains to be seen.

I watched a 250 million market but it will probably not move the needle.

If they had a 10% share five years in, i think the company suffers from the law of large numbers.

Their success will be dictated on whether or not they continue to grow materially on the iphone as well as the ipad.

That's were you thinking innovation would come from?

I think so.

The ipad air blew us away.

When i put it in my hands, i was expecting to buy the ipad mini with the retina screen.

The chip is not powerful enough so i wanted to buy the new one.

After i test the ipad air, i felt maybe i will migrate to the larger canvas.

At only one pound, it is like in your hand and you get the extra screen area.

It is a phenomenal product.

You think the biggest risks to apple right now is maintaining and retaining talent.

Tell me about that.

Accompanies lifeblood is its employees.

In technology, you are innovating either through external m&a or internal r&d . it comes down to maintaining/retaining your people.

That's a huge item that apple has on its place.

After steve jobs is no longer with us, the company has to do a good job on the r&d . that is something we monitor as closely as possible.

Brian marshall, thank you.

We will be all over apple on the late show today.

Coming up, the twitter operating costs are rising faster than revenue so find out how their rocky relationship with outside developers is driving costs up next on "liebert west." ? this is "bloomberg west," on bloomberg television, streaming on your phone, your tablet, and bloomberg.com.

Samsung is hosting its first global development developers concert -- conference.

It is stepping up its effort to compete with apple.

For more on the conference, let me blink -- bring in cliff edwards.

I think they really feel because they are so tied to the google android operating system and there are so many other competitors there, it needs a way to stand out.

They need to have stuff on top of the operating system that is samsung only that makes people want to buy samsung product.

How do developers feel about samsung?

What challenges do they face?

The big challenge they face is the challenge everybody faces which is -- people go where the market is.

They go where the most sales are going to be.

That usually ios first and then android and they try to -- it is a shotgun approach.

Samsung is trying to marry devices of a want you to be able to use your samsung phone to turn on stuff on your television or use your phone to play games and bring those games your television when you get home.

Tim cook has said that apple paid $13 billion to developers.

How does that compare to samsung?

Are they paying that much?

No, they want to.

They are going to focus at this conference on spending money marketing and supporting you and they want developers to know that we are a cash cow and will spend some of that on you.

I believe they signed a deal with the nba?

That's a huge win for them.

It is a marketing thing.

You will know samsung but when you see celebrities and stars and whatnot using the devices, you definitely think that maybe you should, too.

What does that mean for apple?

Apple does not make a push for these type of things.

They are pleasantly surprised they say when these types of devices are used by stars and whatnot.

They are like your buddy else may say if you want to use our stuff, but it.

Cliff edwards, we will watch for your reporting on this developers conference today.

Twitter kicks off its 10 day road show today starting with a stop in philadelphia.

The company will have to woo investors by pointing to the 230 million users that brands are eager to reach.

The twitter focus on ad sales could pose a problem.

The companies operate in costs are growing faster than revenue because of restrictions on outside developers.

By shutting out the startups and programmers, twitter has to depend on its own talent to create new products and services him and driving up costs.

The r&d spending jump from last year.

Is this business model sustainable for twitter?

Let me bring in ari levy.

Explain how twitter is different in this situation than apple, google, and facebook when it comes to outside developers?

If you look at the others, you are talking about portals.

Games and outside apps come to their applications in order to spread -- to get users.

Twitter does not have that effect.

People come to twitter to look at messages and share messages and what other people are saying they have not a good out -- but they have not figured out how people will spend money.

Because of that, twitter has had to focus on advertising almost of the exclusion of everything else.

They don't want to let other people get a piece of that advertising revenue until they figure out their own business model.

Facebook, google, and apple have relied on outside developers to keep their own cost down.

Is what twitter is doing sustainable?

It is certainly a risk in that you have to continue to pay developers and incentivize them to stay.

In silicon valley, developers are incredibly expensive.

Investors are betting on this company.

They should be betting on long- term growth.

What the developers will bring to twitter is escape velocity.

They will figure these things out before anyone else can.

By spending so much money on r&d, they will scare away a lot of competition.

They said we will spend half of our revenue on research and development and no other companies willing to do that.

Part of that cost goes into actual talent, the people they are hiring.

At any other tech company successfully had a similar model?

Typically where you see high r&d costs at emerging tech companies are on the enterprise side like his miss software.

They spent a lot on r&d and sales and marketing.

They have to know their product for big corporations as well as get into their hands.

These are the types of products where you cannot see any level of failure.

You don't see a lot of examples on the consumer side of company spending half of the revenue on r&d. ari levy, thank you.

We will be covering the roadshow starting today in philadelphia.

He helped build baidu into the fifth largest website in the world part i spoke to robin li in my exclusive interview coming up next on "bloomberg west." ? this is the early edition of "bloomberg west." when you think of satellites in space, you probably think of large cumbersome and somewhat older technology.

Not anymore.

Phone sat is looking to disrupt the industry.

Ashley vance went to their research center in mountain view to get a closer look.

Most people think of the satellite is this enormous thing going around the earth.

Space is getting more commercial, electronics are getting better.

We have all these massive facilities and we have this team of guys in the lab working on these tiny diy satellites.

They are extremely simple satellites.

They are easy to integrate inside rockets.

Nobody has been doing diy satellites and actually getting that up into space.

It was a sketchy idea a few years ago.

Big entities are saying you can do something cheaply.

There are organizations that send so much stuff into space.

We have commercial companies going into space now.

How do you guys get a ride on these spaceships?

I guess we had type.

-- i guess we hitchhike.

The definition of a cube sat is $3500 in pieces and a battery case.

It's like a regular smartphone.

Them have a radio.

It basically just turns on and off.

How long does i keep it alive for?

About 10 days.

We have a mainframe -- we have what would have been a mainframe computer 20 years ago.

We are leveraging billions of dollars that companies are investing in these tiny phones and we can turn them into space.

It is time for "on the markets." let's take a look at where stocks are trading now.

Things have turned decidedly green.

I take that back, the nasdaq is down less than one point.

It has been mixed today on worse than estimated economic data this morning.

Let's look at a couple of stocks.

Netflix has reached a deal with cbs to offer all eight seasons of " dexter." the first four seasons will be available to netflix by the end of the week.

Not much benefit in the stock.

Netflix wants to show more shows that are offered on television.

We are also watching berger king that had a whopper of an earnings report.

It had a dividend increase in those shares are benefiting.

We will be "on the markets" in 30 minutes.

Thank you.

Still ahead, google, microsoft, and yahoo wanted to buy this company but the ceo said no and now it's one of the world's most visited websites.

My exclusive interview with baidu ceo robin li is next.

? this is a early edition of "bloomberg west" and you can catch us at our later time as well.

The deal a's are mounting for the new federal health insurance website after another glitch.

This time, the verizon data center that supplies tax information to the federal and state health care changes went down after a failure in a networking component for the company says it's working to fix the problem as soon as possible.

President obama will meet with ceo's tomorrow to talk about cyber security issues.

The ceo's will be from a wide range of industry including it, finance, defense, and energy.

It is part of an ongoing dialogue on cybersecurity.

Thousands are without power and millions of commuters have been told to stay home after a major storm battered southern england.

It had maximum winds of 100 miles per hour, causing dozens of trees to fall onto rail lines and dozens of flights were also canceled.

At least two deaths are being blamed on the storm.

We turn now to baidu, the world's fifth most visited website and china's most popular search engine.

How much does the rest of the world actually know about the google of china?

Here is an introduction.

China is home to one of the world's fastest-growing economies and a $173 billion tech industry.

Some 600 million users are online in one of the countries most other websites is by do.

It is known to the rest of the world as the google of china.

Founded in the year 2000 baidu is now the number one search engine in china.

It went public in 2005 and shares jumped on opening day.

Eight years later, it is worth more than $50 billion and has fended off takeover options from google, microsoft, and yahoo.

Baidu has been a great growth story over the last eight years print is well-positioned to benefit from the chinese internet market.

Baidu is following its uses from desk top to mobile.

It strengthened its push into smart phones and tablets with a $1.9 billion deal to buy the chinese app store 91 wireless, the most expensive acquisition announced a chinese tech company.

One of the few websites bigger than baidu is facebook.

Over the years, robin li has become friends with mark zuckerberg.

What mark zuckerberg made his first tour to china in 2010, 1 of his first option was the baidu headquarters in beijing.

Facebook remains blocked in china and there have been reports the social network could reenter the country through a joint venture with baidu.

China's own social networks have grown so big in the meantime that li says it is too late now.

For more on baidu, i sat down with the ceo, chairman, and founder robin li in a rare and exclusive interview.

We talked about the company's early days and i started by asking how hard it was to turn down a billion-dollar acquisition offer from google, microsoft, and yahoo tummy tuck.

It was not easy.

In the early days, before we went up like them we had investors.

They were basic glee u.s. investors.

They respected and admired the large tech giants here.

When there was a possibility to cash out at a price higher than they had expected, i would not blame them to think about it.

For me, i knew that we had much brighter future than most people have thought about.

I tried very hard to convince my investors don't sell, i will make a better return for you.

It is not just about my ego or the future of the company.

I had to tell them in a way that can be beneficial to them and the best way to be beneficial is to make more money for them.

You came up with the idea of search in silicon valley in the 1990s at the same time google was coming up with google separately.

Yes, i call it link analysis.

They call it something different.

It is the same or a similar idea.

I came to that idea when i worked in new jersey and that technology became the gold standard for all the search engines.

I know you were educated partially in the united states and after graduating, you bought a biography about bill gates?

That's right.

Is there a person or company that has inspired you along the way?

Is there someone you look up to most in the world of technology?

I would say bill gates is probably the only person.

I was imaginary and studied computers.

Microsoft was the most powerful internet -- technology company, software company at that time.

His story was widely reported back in china.

When i came to this country, for the first couple of years, i tried really hard to become familiar with getting good grades.

After graduation, i realized it is time for me to get to know more about entrepreneurs and know more about the opportunities that america can provide for software engineers like me and bill gates was the role model for that.

Why not stay in the united states and build baidu here?

Why move back to china?

I thought about it.

If there were good opportunities here, i would have stayed here.

For the first few years after my graduation, i lived in new jersey.

At that time, but that about starting my own company but just to be safe, i wanted to work for a company for a few years and make some money so that if i started my own company without income for a few years, i could still live.

An insurance policy?

Exactly, also i wanted to get a green card so i could legally work your for a very long time.

I work for a company for quite a few years.

Then i realized that companies on the east coast don't appreciate technology that much.

They think the most valuable people are the reporters, the financial experts, the traders, those kind of people.

I had a passion on technology so i tried to convince my boss to do a search engine.

They thought that was not our business.

We cannot do that.

I wanted to work for a few years, i did not start the company.

It was also not that easy to find venture capital on the east coast in new jersey.

In the summer of 1997, i decided to move to silicon valley.

At that time, that was a good search engine.

I really loved seeing that i could contribute to search technology.

The moment you do something that can be beneficial to millions of people -- in the early days, your wife was instrumental to give you the nudge to go for it.

Yes, the late 1990s internet bubble, i was an engineer and my wife knew i had good technology and could do things a lot better.

She asked me if i could find a company that's better than infoseek, like the next ebay or yahoo.

I thought about it and i realized that maybe a better way to do that is to found a company by myself instead of finding the next yahoo or ebay.

Or the next amazon.

I said i will start my own company so i started to look for all kinds of opportunities.

That was the baidu ceo robinli and be sure to watch as all this week for more of my exclusive interview.

Tomorrow, we will discuss the apple strategy in china and why its market share is slipping and whether the iphone has lost its cool.

That is all this week this week on "bloomberg west." next, we'll take a bike ride with a task rabbit delivery person.

You can also watch us on bloomberg television, streaming on your phone, your tablet, and bloomberg.com.

? this is the early edition of "bloomberg west" and you can also catch a center later time.

Errands and chores are time consuming but there are also a host of companies using technology to change that.

We will focus this week on the sharing economy which helps get almost anything you want with the help of an app but is not -- it is not just high-tech companies.

Task rabbit helps you with any task you can think of.

Helmet on, seat set -- it's just another day at the office for justin.

On an average day, i might do between 15-25 deliveries.

He is a professional errand runner, doing chores for people.

They use a website called task rabbit printed works like an online marketplace for odd jobs, everything from furniture assembly to to housekeeping, to sushi delivery.

Rice's range from a few dollars up to hundreds and task rabbit takes it out of each transaction.

When i started this company back in boston in 2008, things like collaborative consumption or the sharing economy did not exist.

Technology has a mustard -- ushered in a new issue of sharing.

Startups let you rent out your car and another lets you rent out a room in your house and a vegan rent a bicycle, you can that on spin lister.

How big can this get?

We are connecting people to share free time and the special skills, to rethink what work means to them.

That's a completely different take on the labor market.

Task rabbit is operating in 15 u.s. cities and plans to expand abroad.

It recently launched a new program targeting businesses that need temporary workers.

They can hire on a temporary ongoing basis task brevet to come into their office by the week, the month -- only 10% of task rabbit m ploy ease -- employees earn enough to support themselves and the rest are part-time.

On a typical day, justin says he earns a few hundred dollars for it is test today is picking up as he juices and delivering cookies and even buying a diaper bag for an expectant mother.

I can do whatever i want as long as i stay professional on the task, i am re-. -- i am free.

Stay tuned all week long for our sharing economy series.

Tomorrow we will profile the ridesharing service lift.

Aerio has been criticized for capturing free tv signals.

Can some of the providers be joining in on this?

We will bring you details on that next.

? this is "bloomberg west peer ," on bloomberg television, streaming on your phone, your tablet, and bloomberg.com.

. is google building a floating data center in the waters behind me?

There is speculation that building on a barge will become a floating data center for google.

That's according tocnet.

Kpix is reporting that the building is a floating marketing center for the upcoming google glass launch.

We will investigate that and bring you the answer.

If you cannot beat them, join them.

Pay-tv giants are all weighing the idea of starting and aerio- like streaming service.

Aerio has been criticized by the cable industry and is locked in a court battle with cbs and other media companies over the legality of its service.

For more on this and what it means for the top cable players, jon erlichman is back.

How big of an impact could this have ? a lot of people are asking that question.

When we broke this story late friday, the markets had closed and today, the markets are reacting in some ways if you look at what happened with the companies that are publicly traded that own tv stations.

Sinclair is an example.

Tv stations benefit from the retransmission fees we have seen climbing in recent years.

People are trying to figure out the story and what it means.

The back story is that aserio is like the modern-day rabbit years rolling out of service across the country, giving people access to the basic channels you would be able to get in each region and the broadcasters don't like that because aserioaerio does not pay them fees.

They've gone to court and the broadcasters are petitioning the supreme court.

For the pay-tv providers like direct tv or time warner cable, they are watching that closely.

They've got to figure out what it means for them if aerio is ultimately successful in court.

Could they do the same kind of thing and have their own same type of service and avoid paying some of the retransmission fees they are frustrated with paying that have been climbing in recent years.

That is basically the story on their watching that case closely.

What about someone like comcast that owns nbc and benefits from those retransmission fees?

Comcast finds itself in a tricky position.

On the one hand, comcast enjoys the best of both worlds.

Sometimes the cable business is not a strong and he can lean on the content side of his business with nbc and vice versa.

Nbc has benefited dramatically like other broadcasters from retransmission fees.

Comcast has to think about where it's positioning will be.

We know that traditionally, the cable industry tends to move in the same direction together.

A lot of moving parts and you wonder if we are headed toward some kind of pay-tv armageddon.

Jon erlichman, thank you.

We will have more of "bloomberg west." ? welcome back, coming up on the late addition of "bloomberg west," samsung is supplying tvs and smart runs to basketball superstars through a new $100 million deal.

We will tell you more about why the nba is taking technology courtside on the late show at 3 p.m. pacific.

It is time now for "on the markets." julie hyman is in new york.

We've got apple trading a little higher ahead of the earnings report.

There has been news with apple recently, not just earnings, but first the iphone refresh, the ipad refresh and now getting the numbers after the bell.

We are looking for quarterly rise in iphone sales after last month's release of new model so we will check on exactly what the company has to say.

We are looking at sohu.com, the third largest web or call in china is expecting a loss of $65 million.

As for the broader market, we are seeing a mixed to little changed session.

We had a couple of worse than expected economic reports but most traders are looking toward the fed to maybe give some sort of hints as to what will happen in terms of tapering.

We have seen the s&p 500 and the dow jones this year hit new record highs print smaller stocks are actually doing better.

They are outperforming larger companies that could potentially be a good sign for the economy.

Joining me to explain is whitney kislinga.

We are seeing industries like the russell 2000 do better than the big caps.

What is driving that trend?

It is fundamentally driven.

Earnings have been better than anticipated compared to the large-cap stocks.

Smaller companies tend to be less multinational.

Lately that has been a good thing.

Exactly, the ideas there is a barometer for the economy so when small caps outperform, it signals investors think the u.s. economy is going to be doing better and you are seeing that in the way the earnings have done.

What have we seen historically when small caps outperformed large caps?

What happens following that?

We see better economic performance and growth and we actually see stocks rally a little bit more area if there is a bull market going, that extends for another couple of years.

We tend to see the small cap do better in the early stages.

Right, we have had 4.5 years of a bull market and it's happening in but we have also had a very slow economic recovery so maybe this is a signal that the u.s. economy will pick up a little bit more, finally.

You talk to people who are skeptics.

Why don't some people buy into this theory?

In the past couple of months with the economic data report, you see a slowdown in jobs growth and there is a couple of reports out today signaling the economy may not be doing well.

There is a contrast between what report shows and what investors think about the future for the small cap and u.s. economy.

In this case, past history may not predict future results.

Thank you.

We will be "on the markets"

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

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