Apple Too Dependent on iPhone Cycle, Needs AI, Software: Gillis

up tech earnings here on this Friday morning. I'm looking at the big a's Apple, Amazon alphabet and to help break down some of these earnings with me, we have in studio with us Colin Gillis. He's the director of research at s Our Partners. Colin, I want to start with alphabet. Of course, that's Google's parents. I was reading a few of the analyst notes this morning and it's just incredible. You have a company in the twentie year

still posting top line revenue growth of twenty percent. Where do you see Google still continuing to grow in the future. Is it in the Google Cloud or is there something else Hi, Taylor. So, you know, a remarkable two thousand and seventeen for Google. This is the first year at the company cracked one billion dollars in total revenue and

to still be growing north is an incredible feat. Now as an investment, the thing we love most about Google is that you can see where the immediate near term revenue is gonna come from, right, it's core search business. But you can also see where future growth is going to come from, right whether it's their Android platform, whether it's YouTube, whether it's their YouTube TV platform, whether it's UM,

their way Mo driverless cars. So there's multiple areas including, like you mentioned, their cloud business, which cracked one billion dollars in revenue for the December quarter. Tell people what is the cloud business? And why does it matter whether I use Amazon's Web services, which is their cloud business, or whether I use Google's cloud business or someone else's cloud business like Microsoft. Sure, And that's a fantastic question, pain, because you know, the the leader in the cloud is

Amazon and it's AWS. And you know, if you want to put in perspective, they do more business in the cloud then all the other competitors combined, right through the north of five billion dollars. Plus it grew tremendously for Amazon on the fourth quarter. Growth actually picked back up again north of you over a year. So it's computing cycles. Why do you need to have local resources when you can have massive computing cycles available to you that you

can tap into as needed. So it's just like why own a car then leave it parked in a garage, right when you could just have a car whenever you want to drive one, and the resources get shared among different customers, right, And that's the concept of the public cloud. Now, the lip side is that even though this is going to be a massive business, that it may become a commodity like a utility, and that there will be price

compression coming in over time. But suffice to say, the book of business is going to be so large that whoever captures the majority of it, it's going to be lucrative, no matter what the margin. So saying that even if it becomes a commodity, it's gonna be a ways before that happens, and the amount of money that they can make on that road is so big and so consistent that the competitive issues don't really come into play. Correct, That's right, I mean, you know, competitive issues always come

into a play to a certain degree. But but again, you know, even a I mean, it's not like Microsoft's cloud is that much more expensive or that much better than the cloud that you would use if you were going to go to Amazon. Ultimately, you know that there are some pains to switching, but the switching barriers will

continue to be reduced. Let me think about you know, when you use your search engine, right, most people use Google, right, but the actual switching costs to move to bing is relatively low, right and and but yet people don't really switch yet. Um, but that may happen in the future down the road. So again it's a area of growth. But I would also focus more on what's happening at YouTube.

There's been a little concern about some of the videos that you just tell this story about, because we were talking just before you came in here about younger people. And when I mean younger people, these are the consumers of the future. They do not seem to know what NBC, ABC and CBS are, correct, They know all about YouTube and they just watch those videos all day long. That's right.

So when we sit down my ten year old son, you know, we try to figure out what program you know is where, right, it's either Netflix or it's Amazon, or it's on YouTube. And we also use YouTube TV to get our live TV. And it has the unlimited DVR storage cloud storage, so you can record any programs. Right.

So it's really it's a fantastic offering. And if they can start to if Google can start to monetize television to the same degree that they've monetized YouTube to, right, that's a could be a very lucrative driver for them and the idea of content consumption. It's completely changed. The brands have completely moved in. The company that's nowhere to be seen in any of this, of course, is Apple. Right, You've got Amazon in there, You've got Google in there,

You've got Netflix in there, but Apples zero. You mentioned Amazon. I want to touch on that quickly. Why you have why we have you here? You talked about it's the first time the companies generated over a billion dollars in quarterly profit. I've been asking this question. You're part of my poll. Is Amazon getting too big? Where they're starting to enter into a lot of different industries. We have whole foods. Now, at what point did they start to dry? Uh?

You know, attract regulators perhaps, sure. I mean, you know what's interesting is we used to talk about the competition between Apple and Google, and back when Android was first launching, and Eric Schmidt, who was the CEO of Google, used to be on Apple's board. And but now the battle that's much more interesting is Alphabet versus Amazon, because these two companies are colliding on multiple points, including advertising, including

smart homes. You see Amazon pushing into many facets of technology, right, and the purchase of whole foods is a great example that they're trying to get into groceries. They want to get into medicine. Um, they're in your house with Alexa, in our house with Alexa exactly right, And so you know that's always a concern, but in terms of government regulation, but that's a concern for any of these companies that

we're discussing in technology. These are major forces and what Jeff Bezos is chasing after is a very big picture in terms of how much of your consumer dollars he wants to capture, which is basically all of it. Okay, if you got the chance to sit down with Tim Cook, the chief executive of Apple, and he said, look, I'm interested in your thoughts about what do you think we ought to be doing so that five years from now we're still part of the conversation. What would you suggest?

I would just uh that Mr Cook consider taking more risks, and he's been a very um careful steward of Apple, but I think that that may wind up catching up to them. So when we sit down and we have the various you know, home assistants, right, we've got Google Home, We've got Alexa devices, Uh, Apple is just so far behind an AI and I would have them focus more in that area. And I would also consider apples software

skills and prowess. Um. I think they're fantastic hardware company, but I think the software you know is not innovative and frequently is lackluster. And so right now, right as you know, concerned of the iPhone supercycle is sort of you know, storry that thesis is falling apart. All that's really left is you know, cap structure and and and debt you know share every purchasing right uh, and dividends and so a cap structure play is not necessarily a

fantastic investment thesis is an investment thesis. But if the iPhone cycle, you know, falls apart. Then Apple, that's so many sound of revenue. Apple is not in a position to replace that easily. Yeah, does that mean going out and making acquisitions? And take a look at our f a function free cash flow fifty billion dollars. What do they do with the cash? Yeah, I mean it's a great question. And you know they're returning it to shareholders, right,

and that the excitement. The biggest piece of news that came from the Ernis call was net cash zero. Right. Apple has pledged to return all of its cash or to deploy all of its cash, right, whether that's stock we purchases or dividends. Thanks very much, Colin gillis a pleasure, Director of research for Chatham Road Partners see our partners. Congratulations on your new venture. Much appreciate it, and we appreciate your coming in and sharing your knowledge with us.

Good morning. This is Bloomberg Radio. I'm Taylor Riggs filling in for Lisa abrama Witz. You know, Pim, like you were mentioning, We've got a lot of news this week concerning more developments in the investigation of Russian meddling in the presidential election. To walk us through all of this, where we stand. Where we go from here is Clint Watts.

He's a senior fellow at the Foreign Policy Research Institute. Clint, you know, broadly speaking here, just to start us off, do tech companies need to do more to prevent more Russian meddling in our election? Have they done enough? Yeah? So, they've made some drastic improvements over the last year. I think Facebook has been quite transparent. They brought out a lot of the issues they seem to have tracted down fairly quickly, and they've moved more aggressively in other elections

around the world. But the biggest thing that all the social media companies should be required to do by law is to say what the sources of political and social issue advertising. It's standard for radio like this, it's standard for television, print, And because this layer of of attribution is not there in social media, it makes it much easier for foreign power to influence the US audiences. All right, let's just move on to what is going to be perhaps a most watched memo at least of the weekend.

And this has to do with the memo that was put together by GOP staffers on the House Intelligence Committee having to do with the FBI's investigation into Russian meddling in the U S elections. What is your thoughts? But what do you believe is in that memo? I imagine what they're trying to do is selectively pull information out of the authorization the application for a Foreign Intelligence Surveillance Act warrant, which connects the dossier to justifications for that application.

You're gonna have to tell people, remind them that dossier and the people involved, because when you said to use selective information, it has to do with eavesdropping on a Trump campaign foreign policy aid Carter Page. Right, So the target of the application for the search war was Carter Page, who was named by the Trump team as one of his foreign policy advisors and who had shown up actually in Moscow, you know, doing a talk during the run up to the election. What this application did was it

asked for surveillance on him. And in that application, what I think will probably come out is that they cited the dossier. This is the x m I six UH Steal dossier, which brought forth lots of raw reporting and was put up on buzzbeed and essentially it asserted that Russia was trying to you know, win the election for Trump and to suppress Clinton. Uh. In the run up, that dossier has been under great contention in the House

Intelligence Committee. They have really fought it the rasci of it because the Clinton campaign funded it at one point was also refunded, initially funded by a traditionally Republican opposition research group. And so they're trying to steer this into a conspiracy that the FBI and the spies application. We're trying to push Clinton forward and suppress Trump going into the election, and this this plays the president's narrative of

a witch hunt Clinton. I want to ask this week, President Trump said he may authorize a release of the memo that's not redacted. Are there any risk to national security if the memo is released it doesn't have redactions to it. Yeah. I think there's risk in two ways. So with regards to redactions, if it discloses sources or methods, this really hurts us in terms of our intelligence capability around the world. Will it will disclose how we went or how we use that information or where we get

it from. Even broader than that, this has never happened before in our history. It would be the selective leaking out of classified information. From you know, surveillance applications. So just imagine the tidal wave of disclosures that could be

used for political purposes by either party moving forward. Uh, somebody could go and dig into any application written by any agent going back many years, pull a piece of information out for political purposes, and then either use it to attack that investigation the investigator, or to try and

undermine uh, you know, judicial processes writ large. So it's very dangerous for the country in the sense that we just saw a fight for FIS a reauthorization a few weeks ago, so we could use this tool in the pursuit of terrorists, you know, and uh, foreign intelligence efforts. So it's pretty damaging to the institutions of democracy, and it seems like a very short run political plan for

would ultimately be a long run disaster for the country. Okay, but let me just play Devil's advocate here in the world in which there is wiki leaks, in the world in which everything that you commit to any kind of digital repository is pretty much available to a hacker. Who on the other side, who's the who's the on the other side that doesn't already know all this? It's isn't it the public, the American people that don't know. I don't really think that's the case. I mean, this goes

through a very rigorous process. The FIZER process just internally to the FBI or any investigator gative agency is exhausting, so it usually takes weeks or months to even put that package together. It then goes to a series of judges who then review it and and explore it and see if there's validity to it. So we have processes

in place. The public giving a snippet out of what might be a sixty page or one page application even uh probably doesn't have the context to understand it, or has any context around the FIA process and what's trying to be done. So I put it in the same as wiki leaks, which is these disclosures are selective. They often omit tons of context. I don't think the public

is informed. I really think they're confused in the end. Alright, So if they're if they're confusing two things, what do you think the ramifications are going to be if the memo is actually released, which their GOP seems to think it's going to happen, You know, ultimately it will lead to outcry by one side or the other. You know, we've seen this with both political group But what would happen? I mean, I'm just curious, like what physically will happen.

I understand that there will be a lot of shouting uh, and you know the Sunday talk shows will be all full of this, But is there anything that will happen? Just give you about ten seconds. Anything happened to the U S Intelligence agencies? Yeah, you're going to see a withdrawal, retraction of investigations and the fact that investigators can't trust the systems which they're using to bring their cases forward.

They'll feel ambushed from both sides politically, and they're going to have a hard time moving forward with investigations, particularly in political corruption cases on the criminal side and foreign counter intelligence cases on the national security side. Thank you very much. Clint Watts is a senior fellow at the Farm Policy Research Institute. I'm Taylor Riggs filling in for Lisa Abramowitz. I'm also sitting next to him. We are eagerly awaiting Sunday the Super Bowl. Pim do you watch

the Super Bowl? You're watching for the game for the ads. I probably will watch the ads more than I will watch the game. But that's just because well, our next guest might like that answer. Let's bring him in now, nat Ives, he's the ad Age executive editor. He is joining this now. Uh Na, okay, you have to help me out here. Are super Bowl ads still as expensive as they are even with all the cord cutters and

the millennials who are seemingly not uh not watching? Absolutely, the Super Bowl ad prices can fluctuate a little bit, but they're basically on and upward, grind to plateau. You're not going to see anything commensurate with the drops in regular TV ratings in super Bowl prices because of super Bowl ratings don't drop the way the rest of td TV does. Super Bowl doesn't drop the way the rest of the NFL does. Even super Bowl defies gravity, and

the ad presses stay there too. Not What can I get for five million dollars if I happen to have some spare cash and I'd like to use it during the Super Bowl, That'll buy you thirty seconds. But remember that five million is not actually going to be enough in most cases. NBC is going to say thirty thirty seconds will cost you five million, But the cost to do that deal. Will let you do that deal only if you also agree to spend a lot of money with us during the Olympics and the rest of the year.

How much, I don't know. It depends these You know, anasor bush In for example, has been a sponsor for so long that it's got all kinds of deals that are grandfathered in. That's going to be a different situation than somebody who walks up for the first time, knocks on NBC's door and says, hey, can I buy an ad? Now? I always wonder this if the ad sales depend on who is playing? For example, do I want to buy this year because the Patriots made it into the Super Bowl?

For example? It's fascinating. We always look at how the matchups are shaking out to see how the ratings are going to do during the playoffs, but it stops there. I mean, it's not great news for anybody. If too small market teams that never got national attention during the season and don't have wide followings meet in the Super Bowl, that doesn't help. But it also doesn't seem to hurt that much. It's really more about the quality of the game, and um that's unpredictable, and for the most part in

recent years the games have been pretty close. Last year we had our first overtime game, so again, the ratings don't depend on factors that ordinarily would lift or tank an ordinary football game or TV broadcast. Have you seen many of the ads that are scheduled to be broadcast during the Super Bowl? I have, and for better or worse, so have many Americans. These are pre released, of course, as they have been for many years. Doubt that, not to say they all have, but a significant portion of

them have. So I've seen some funny ads. I've seen more funny ads. It's been interesting to try to infer what the trends are going to be this year and compare them to last year. We don't have a complete picture yet. There will be surprises on game day, but we know a lot already now. And I wonder about the motivation for these companies. I mean, what's different about the Super Bowl is people actually look forward to watching them.

I don't want to fast forward through them. So if I'm a company and I'm thinking about buying ad space, do I actually expect more people to buy my product or do I just want to be in the hype and be in the know and what's being talked about the next day. There's a couple of goals, and one is probably your legit business goal. I need to sell more of my widgets or cars or printers or what have you. Or I need to drive awareness of a product that nobody knows exists, or I need to speak

to a very specific audience. And this is, for whatever reason, a good way to do it, real business goals. The other part of it, though, is the pr game, where everybody wants to polish their halo, get their company's name or their product name on the tip of the tongue. You want to become something closer to a household dame if you're in the Super Bowl. That's why you've seen from time to time a superglue company show up at

the Super Bowl. You know they did it once. It was their entire year's ad budget, and uh they say it worked okay, but they didn't come back. Others are playing the twofold game. Really. They want to get the buzz of being discussed in the press the way that we had Adage and everybody else in the business press are are doing right now. Um and then hopefully also sell some product. You know, it's funny. The pre release strategy is slightly controversial because it takes some of the

surprise out of the game. But in the case of one this year, pringles you know people people buy snacks for the Super Bowl. Pre rereleasing their ad might have literally increased sales for Super Bowl Sunday. Let's go to just some of the ads. Quickly, give me your thoughts about them. The eminem spot. It's the first and three years. It stars Danny DeVito. Give me about ten seconds on that. I mean, I like it, okay, uh, I can see how Danny DeVito is a funny way to say, you know,

don't eat me. Um, it's just a it's a weird gimmick the Eminem's have where the spokes candies are all edible and are mildly concerned about it, but not totally concerned. Alright. Ten seconds on Kiano reeves with square space. This is controversial in our office. I like it better than some others. This is Kiano just standing on a motorcycle and appearing to kind of take off at the end. What can I say. I think it's a little bit different. Um.

Others here disagree. All right, and finally let me get your thoughts on avocados. Avocados from Mexico is consistently funny. Each year they bring you a little inn yet that makes you laugh, and they do it again this year, and they work in a selling proposition or at least a serving suggestion, which might do the same job. All right, thanks very much. By the way, who do you think is gonna win? Probably the pets? Oh sorry, Mark, Well

careful there Na, all right, thanks very much. Natives as executive editor at Age and he can be followed on Twitter at nat I get ready for a Super Bowl fifty two. Joining us now to tell us all about Deutsche Bank, is y'aman owneran. He's our senior writer when it comes to banks. And yeahmen, I know that you are the author of the book about Zombie Banks, which is a great read. Is Deutsche Bank going to become a zombie bank? That's an interesting point you just raised.

Was not among the zombies that I wrote about in in two thousand eleven when my book was published, Um German banks had a chapter in there and and commerced by was was the biggest zombie all the landest bunks that that collapsed during the crisis were but but not Dotsche Bank. Now Dotche Bank is looking much worse than all these other guys who finally really nursed all their

wounds and and recovered. But Dotches crisis came much later, right in the European crisis two thousand and ten eleven, all the different uh uh you know, government government debt

crisis that rapped one after another. So Europe euro fell apart much later than than US did, and and it it was its second crisis, but that hurt touch him more and now does still struggling and that and that's why you know, earnings constantly upset, you know, quarter after quarter, and turnaround plans are not really you know, going anywhere. So that I mean, so in a way it's become a zombie. It's not as zombie as the as the other German banks war because it didn't lose the big

numbers that really brought them down during the ISIS. But it's been losing money and and what's worse, it's not making money and and that doesn't really that doesn't really work when you're such a big bank globally and your competitors are doing much better. Yeah, you talk about the turnaround plan. We note that the shares are down about five point three percent this morning. I wonder how impatient

are investors getting with the CEO? John crying does he even have the time left that he needs to enact the turnaround plan. Well, you know, just a quarter ago, there were there were actually lots of rumors that the crime was on the way out because the turnaround wasn't working. Things weren't going well. Then they reported, you know, third quarter numbers that weren't that bad there it looked a little more promising, so the rumors died down, but the

fourth quarter is bad again. So every time, you know, people are disappointed. These these rumors come around because the rumors are based on some kind of unease among the biggest investors you know, and some of them you know, then go on the record saying, well, now he's okay, we're we're okay with the CEO, but clearly some aren't, and on behind the scenes they are raising those concerns and saying when are we going to see the depositive results?

So what are the division? Maybe you could break break down the details force and and share like, okay, so what are they really great at? What do they need to improve and what should they get rid of? Well, you know what dotsche Bank has been great at historically traditionally is trading. There are a big training powerhouse just

like Goldman, sax Now and and Goldman. As we've talked during US earnings trading what though everything fixed income most but but everything really but equity stood fixed income and equities. They're they're training powerhouse there, you know, like Goldman, and Goldman has also suffered in trading. But when you looked at for example, last year's and last quarters Goldman figures and everybody talked about this, their investment banking side, non

trading side was doing great. They were writing, underwriting dead underwriting equity thirty per an up and everybody was like, how can you not translate into this into trading as well? And they you know, they were struggling the CFO CEO. But with trading is down constantly and on the writing is down and m n A is unchanged. I mean, like you want to see something good and it's not there and mean, and this has been happening for for several years now, which means they've been losing market share.

You know, everybody's fick trading numbers are bad this year, but last year US banks especially you know, and even the French banks so great thick improvement now didn't. So what happens is when everybody else has a good year and has so so year, they're losing market share. So they've lost market share constantly in trading. Now, they've lost market share in in in other investment banking activities, underwriting,

uh stock spots. So so all the things they were really good at, which is really their investment bank, they have been bleeding. And that's that's not good. Uh. Quickly, just to wrap it up, I want to talk about if they're still able to attract and retain talent. We heard from the CEO this morning. They said he was more on the generous side with bonuses. Is that to retain talent, right, I mean? And that that's what they had to do. Um. You know, they didn't paid bonuses

last year, which means they had to. They couldn't keep doing that because you lose a lot of people. So that's why expenses didn't come down as they targeted. UM, which also hurts the bottom line. But you know, they have to keep their traders and their investment bankers. Then they had to play bonuses. Thank you very much. Yeah, I'm an owner on He is our senior writer when it comes to banks and wrote a great book on zombie banks. I urge you to check it out. Thanks

for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, sound Cloud, or whatever podcast platform you prefer. I'm Pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa abramowits one before the podcast. You can always catch us worldwide on Blueberg Radio