World Economic Forum and Apple Vs. Supreme Court

From Bahart where Innovation, Money and Power Collie in Silicon Vallet Nbon.

This is Bloomberg Technology with Caroline Hyde and Ed.

Ludlove Ourmed Ludlow in San Francisco. Caroline hides off this week. This is Bloomberg Technology coming up on the program. Full coverage from the World Economic Forum as tech heavyweights to send on Davos. We hear from Sam Altman, Satya Nadella, Marc Benioff, and many more. Plus the US Supreme Court rejects Apple's bid for an epic app store review. Details ahead on the decision that will likely affects billions of dollars in revenue for the iPhone maker, and Microsoft is

ED, thanks for having me this morning as always. Yes, So let me explain Epic Games.

Apple.

They were in this major lawsuit a few years ago over the app store Apple one.

Most of the lawsuit right.

Apple One in the sense they were not designated of minoppoly. But there was one little car about that Apple lost on and that was known as a steering provision. The idea where the judge rule that Apple should allow developers to include a button inside of their applications to point users external to the app store to complete their transactions. Now, why is that such a big deal, Because primarily applications downloaded via the app Store.

To the iPhone or the iPad have to use.

Apple's INAPT billing system that takes between a fifteen percent and a thirty percent cut.

In fact, the majority of Apple services.

Revenue likely comes from transactions and in app purchases made through the app store, and Apple had been appealing that for the last several months, all the way up to the Supreme Court. Epic had also been appealing their losses in that initial trial in California up to the Supreme Court. Today Tuesday, the Supreme Court decided they're not going to high here either side.

So that means Epic's not going to get what they want. They want Apple to open up the app store completely in the US.

They want them to be designated as an antitrust violator as a monopoly.

Apple is not getting what they want.

Their appeal here has failed for that carve out for the external button for in app purchases. Were going to have to wait and see Apple's response here to see when they're going to implement this and exactly how. The interesting other tidbit year is March seventh is when the Digital Markets Act comes into place. The Digital Markets Act is in the European Union. This is going to require

We'll have to wait and see.

But either way, not great news for Apple this morning nor Epic.

Yeah.

We had the European Commission Executive Vice President Margareta Vestla on with me live last Friday, and her message was, well, I'm meeting with Tim Cook. That meeting happened. You know, you have to comply by March seventh. And what she told me was she was going to explain to Tim Cook and other CEOs how they could comply. Let's get

Right.

Just explain if I'm an iPhone user what I might see going forward.

Yeah, So, if you're an iPhone user right now, and let's say I'll use Fortnite as an example. Let's say Fortnite was stole the app store. You want to buy a new character, you want to buy a bundle.

So you click that.

Maybe it's priced at ten dollars, and traditionally what you would have to do is use your app store credentials you get to pop up through the app Store. You would approve it with touch ID, your pastor base ID. It's ten dollars. Seven dollars of that would go to the developer.

Three dollars a go to Apple.

Now, when this comes into effect that button, maybe you'll be able.

To go to a website to finish the transaction.

Maybe you'll use Stripe for example, and the vast majority in that case of the revenue will then go to the developer. Stripe charges maybe three and four percent, Maybe it goes PayPal. They take a few percentage points. So it's going to mean less revenue for Apple, more revenue for the developer. Now there is a scenario here where even if apps can point developers to collect payments outside of the app Store, Apple could still have a method to collect that caament from the developer.

Maybe the developer at the end of each month needs to write Apple a check.

This is something they've done with dating apps in the Netherlands that has required a similar rule.

But Apple is still trying to collect that money.

Instead of charging a thirty percent fee, they charge something like twenty six or twenty seven percent to taking out that processing feed from there too, So it is going to be very interesting to see how Apple implements this. I would imagine, as they should, they will implement it in the way that's the most advantageous to their bottom lie.

All right, Bloomberg's Mark Gum and our chief correspondent who leads our coverage of Apple, thank you very much. A pretty complex story. All right, Let's go back to markets and our top stories, because on this Tuesday, they're inextricably linked. Joining us. Erika Klouer, portfolio manager for the Pgmen and Technology Fund Jennison Associates, a one hundred and eighty six billion dollar active asset manager that takes a bottom up, fundamental,

Sure well, thank you so much for having me. You know, Apple has been a long time holding of Jennison Associates, and we look at the business as one that is extraordinarily sticky. Companies who use Apple products and consumers who use Apple products tend to have a difficult time switching over to other platforms. As a result, the sustainability of the services business is incredibly attractive. Certainly, if you look on the hardware side of the part of the business,

Erica. The other big story of the morning which we have to discuss is FED speak. In fact, it will probably be the speak of the week, and FED Governor Waller is kind of front and center, basically saying the FED may need to cut rates this year, emphasis on this year, depending on inflation, but there is no need to go as deep or as fast as historically a FED might have done. How does that inform your view of the technology sector.

Sure well, Jennison is a bottoms up research house and so we tend to look at companies over a longer period of time. Looking at the duration is the sustainability

Two of your biggest holdings are in Nvidia and I believe also Broadcom. You know, we go back to that Magnificent seven discussion of last year. Are those solely AI stories to your mind?

Great question. We at Jennison Associates have owned in Vidia since twenty sixteen and broadcome about the same time period, and the reason for the duration of those holdings is that we look to those companies as key enablers within artificial intelligence deployment. Certainly in Nvidia is more of a

Another name that you hold is AMD. The stock currently up almost eight percent, putting it on track for its biggest jump since early December. A lot of analysts have been updating their price targets on this name. I sat down with Lisa Sue when they kind of fully launched the MII three hundred X and started to really build up their AI story and boost their forecasts. It's the same quest question, do you see AMD as an AI play or something broader?

Well, As you point out, AMD is one of the top holdings that Jennison Associates, and the reason for that is not only do we think that the company has a very viable and important product portfolio to address the AI opportunities, but we also look to the PC segment, which may not be getting so much attention as AI does today because it's not as exciting. It's a more

Eric I think one thing that many of this names having common other than the sort of battleground for high performance GPU, is exposure to China. And there is the policy side of this, where the US has clear export controls and restrictions of technology to China, and then there's the politics side of it. And I believe that one of China's vice premieres this morning was trying to say, like, look, we need open access to technology. Is an investor, where do you position yourself within that?

This is a great question. I would say that the biggest concern that we have at Jennison at this point is the strain on relations with China visa the ability for there to be technology innovation. Undoubtedly, the world is much more globally interconnected with regards to technology deployment, innovation and supply chain. With there being so much more, frankly tension between the US and China, this is an area

Erica Klaud, portfolio manager for the PGM Jennison Technology Fund. A lot of covered ground there, very wide knowledge based, great discussion. Good to have you on the program. Now coming up, we're going to get more from Davos. That's coming up next here this is Bloomberg Technology. Okay, it's time for talking tech and first stop Saudi Arabia's Sovereign Wealth Fund, the public Investment Funds plans make big investments in both the semiductor and space industries this year. That's

I think there's a lot at stake at this election. I think elections are you know, huge deals. I believe that America is going to be fine no matter what happens in this election. I believe that AI is going to be fine no matter what happens in this election, and we will have to work very hard to make it so. But this is not you know, no one wants to set up here and like hear me rant

Not there are political figures in the US and around the world like Donald Trump who have successfully tapped into a feeling of dislocation, anger of the working class.

If the feeling of it, you know, exacerbbaiting inequality or technology leaving people behind. Is there the danger that you know, AI furthers those trends.

Yes, for sure.

I think that's something to think about. But one of the things that surprised us very pleasantly on the upside, because you know, when you start building a technology, you start doing research, you kind of say, well, we'll follow where the science leads us. And when you put a product. You'll say, this is going to co above with society and will follow where users lead.

Us, but it's not. You get to steer it, but only somewhat.

There's some which is just like, this is what the technology can do, this is how people want to use it, and this is what it's capable of. And this has been much more of a tool than I think we expected. It is not yet and again in the future it'll it'll get better, but it's not yet like replacing jobs in the way or to the degree that people thought

As you've watched the technology develop, have you both changed your views on how significant the job dislocation and disruption will be as AGI comes into focus.

You know, you hear a coder say, okay, I'm like, two times won't productive, three times won't productive whatever then they used to be, and I can never code again without this tool. You mostly hear that from the younger ones. But it turns out, and I think this will be true for a lot of industries. The world just needs a lot more code than we have people to write right now. And so it's not like we run out of demand. It's that people can.

Just do more. Expectations go up, but ability goes up. To That was open Ais Sam Outman. Let's stick with Davos. Bradstone also caught up with Salesforce CEO Mark Benioff to discuss the kinds of disruptive changes we can expect with AI. Have listened.

I think this idea that companies like open ai or Microsoft and others want to create digital people that can do all kinds of tasks that we do. You know, will they be taxed to, how they'll be regulated, what are the dangers involved? All of these kind of important questions. At the same time, we want to have these incredible benefits of AI that we're all experiencing better healthcare, better education,

Today and what will determine whether a company can be successful with AI or not.

How long will it be until I come to Davos to be interviewed by the Bloomberg AI. That's what I really want to know.

I replace Well, maybe you know.

I mean, we've been doing this together for a long time, right, what a couple decades?

A few decades?

I'm not that old, but okay, but you know what I mean.

Where it's like, you know, I don't know when we get to this point where there's not just all of us in the but there's an AI as well participating in this conversation and then work about to create digital people, digital salespeople, digital service people, digital marketing people.

That was Salesforce CEO and chair Mark Benioff explaining that my boss, Bradstone and maybe me one day will be replaced by AI. Let's see quick check in on the markets. We're soft the three tens and one percent on the Nazak one hundred, but megacaps are doing some of the work to lift up the index, one of those names being Microsoft. It's pared some of its earlier gains in the session, but we are up three tents of one percent.

Yeah, more than a yeah, this is a significant step. I mean, we've been kind of on a whirldwind with Microsoft Copilot. We've had now over five billion chats with people using AI and their daily lives. And so today we take the next step by bringing more features and expanding.

More capabilities for people.

First in the Copilot that we offer broadly, we're going to enable new capabilities with a premium subscription called Microsoft Copilot Pro, and that gives creators, researchers, writers, analyst programmers, the ability to have the very latest AI models, but also the ability to have AI within Microsoft apps now for the very first time, so they can use it an outlook, they can use it in Word to write documents because in PowerPoint, and we're providing premium things like

We're also going to make.

It available to businesses of all sides, so small businesses can now get access to Copilot and Microsoft to stepot.

Yes, a really simple question that investors have had and industry andsts have always had is these tools are fantastic. How do they help you make money alongside how you traditionally sell office tools direct to the consumer or to smaller businesses away from the enterprise business.

Yeah, there's really a couple of different ways ed you know, And I would say first and foremost is really early in the stages, but the biggest software market because it is the online advertising business, the search business, and we've clearly seen now with AI and with Microsoft Copilot that that is changing and we're seeing more people come to use our services, whether it's Copilot, whether it's Mircsoft, edge Mark, stoft being or Grown and Share and soil that advertising

I always think about the education side of this usef You know, there are people that will have always used Excel or word, you know, in the course of their daily life for their their business. But we kind of make the assumption in the first instance that all of us will find a copilot tool intuitive, we'll just know how to use it. And I wondered if your experience

It's a great question, ed.

I mean, we're clearly in the early days, and so in some cases, for some people it's immediately inuitive, just like people learned to use two thumbs when they were a smartphone came out, and for other of us it takes a little bit more time to pick it up. But in general, it is quite intuitive. You know the fact that you can essentially use plain English, use you know,

You know.

I've had a bunch of examples where I've been able to take my son had to get an MRI for his shoulder.

I didn't understand all of it.

I put it into our copilot and it came back with plain English. I was able to help create an image of a design I wanted to do to do a part of our remodel on the house, and that just made that instantaneous. And as you find those magical scenarios, you just kind of naturally want to seek it out and use it more. Kind of like the early days of search, where people didn't know quite how of search, and now people are quite fascile with it.

I am really interested in the seme or small business part this equation because we're kind of debating, well, or will we not have a recession, what is the health of the small and medium sized business, particularly in North America, but globally. You know, it can be a big decision to invest in a piece of software or a piece of infrastructure. How do you see that rollout with SMEs and what's the feedback been in the first instance?

Yeah, I mean it's a great question.

I mean, the history of the world is really two things to drive growth, it's population growth and productivity enhancement that'll drive GDP. You know, for the growth here, the ability to have AI within Microsoft Office Apps, which is the key tool for how businesses operate. We think there's great opportunity there, great benefits. You know, what we've seen so far in what we've launched with copile It for our enterprise customers is on average they're saving about a half an hour a week to an.

Hour that's so valuable.

Seventy seven percent of them say they would never go back. I believe we can do that here, and today's announcements so profound because of all businesses, ninety nine point nine percent of them are small businesses. So we really do see an opportunity here and I think it can help a lot with some of the world challenges. Like you talked about because I think this productivity will lead to more GDP growth and will be a benefit for everybody who can access the technology.

If I'm looking down on my screen on the Bloomberg terminal and I've got all of the world's most valuable companies listed, and number one right now is Microsoft and number two is app Or something that happened Friday. From a marketcap perspective, it was something we were waiting for. It's been a ride over the last twelve months. The

Well, look, I think the first thing everyone here at Microsoft we're very humble about the opportunity in front of us, the work we have to do to meet our customer needs, and so I would say more than anything, we're really focused on what is this magical opportunity for AI. And I think that is to your point, that's what's led to I think people seeing the opportunity that this company can do, and we're you know, we're very focused on

We have today.

Use Off Meddi, Microsoft's exective vice president. It's great to have you on the program. It's good to catch up, and happy new year to you. Into twenty twenty four. Now let's head back to Davos and well useless boss. Microsoft CEO City and Nadella joined Bloomberg's Brad Stone for a conversation about the relationship between Microsoft and Open Ai in the aftermath of what was a tumultuous November for the AI company. Have a listen to this.

You're going to go into any partnership. First of all, there is independence in a partners There are two different companies answerable to two sets of different stakeholders with different interests. So therefore you have to then create a commercial partnership in it that is mutually beneficial. So that's why I think partnerships where you enter into partnerships where one side is trying to take advantage of the other is not

It's not about one model.

We care deeply about having the best frontier model, which happens to be for example today GPD four. But we also have mixed straw as a models. As a service inside of Azure, we use Lama in places, we have PI, which is the best SLM from Microsoft. So there is going to be diversity of capability and models that we will have that we will invest in. But we will partner very way deeply with open Ai.

What is the right operating model for a company like open Ai.

I mean, currently it's.

A capped for profit company owned by a nonprofit, a very unorthodox arrangement probably contributed to some of the drama and instability in November.

Have they figured it out yet?

Are you comfortable now that you've got a partner with a stable operator model you're talking to Sam later, I.

Am, and I will ask you that as well for your opinion.

He needs to answer that question and his board obviously, and I'm sure they're working through it.

Look, I always say this, which is we.

Invest did we partnered when they were whatever they were and whatever they are today right in terms of being a cap profit, nonprofit what have you?

So I'm comfortable.

I have no issues with any structure. What we just want is good stability. And as I said, we don't even need like I'm not even interested in a board seat, or we don't need control.

We definitely don't have control.

We have no We just want to have a good commercial partnership and we want to be investors in the entity in even the way they're structured. So what I would like is good governance and real stability.

That's it.

I was Citia Nadella, CEO of Microsoft now coming up as the generative AI talk of the town in Davos is underway. We're gonna have more on exactly that, look at the investing side in startups and private markets. Excel partner Sarah Olison coming up next. This is blind DAK Technology.

What we're doing is we're addressing some of the most profound social challenges with AI in ways that are transformative. So to give you an a couple of examples, I think that one of the extraordinary places for all of us, and we've heard a lot about it here over lunch, is healthcare. And part of the reason is it's the ability with AI to aggregate so much data that you can actually have a level of diagnosis that is better than what specialists can do.

How is alphabet president CFO and CIO roof Porat there commenting on the future of AI and a conversation with David Rubinstein at Bloomberg House in Davos. Let's talk more about the impact of AI generative AI in particular. In today's VC Spotlight with Sarah Edelson, partner Excel. She focuses on early stage consumer enterprise and AI companies firm and we've kind of swat places in a way you usually hear, but you're in New York City exactly.

You're hosting in your lovely studio, So thank you for having me.

No, it's it's always good to have the firm on the show. Here's the thing. The questions always are we over hyping all of this? So start the show at nine am Pacific time, and by ten am Pacific time, I've said the words AI a thousand times. Your thesis seems to be based on the opposite, that we are not over hyping this at all.

Yeah, I think that's right. I think from our perspective, if anything, it's under hyped, which I know is hard to imagine with how many times, even just sitting here in the studio before this segment, I've heard AI countless times.

You know, when an event like Davos is on, you know you have Satya Nadella, Microsoft roof parat of Alphabet Paarent of Google, Sam Altman of open Ai. There's still an argument that at least leadership in the field of artificial intelligence as it relates to the building of large language models of generative AI is dominated by the big few. And so there's a question mark about some of the names we're showing right now, right some of your portfolio

Yeah, I think you know, access to this technology is only getting easier and easier. I think over the past year we watched as some of the building blocks were a little more rudimentary, and now the interface to engage with it is getting easier and easier, and so I think that's a really incredible time for startups to be building in this space.

So I don't think it's that all.

Something that only the big guys have the opportunity. I think there's a lot of opportunity for the small ones. One of those names on that board is Scale, which a company we invested in back in twenty sixteen. It's really the data engine for every large language.

Model out there.

And you know, that was an incredibly small team just a few years ago, and now it's an enormous business that's really fundamental to this space. So there's definitely opportunity for new businesses in this category.

What I find very interesting about those leading in the space is the capital needs. You know, there is still a heavy spend on compute and talent. You know, as an investor in a scale, how much does that concern you or do you think about the capital needs of a company like that.

Yeah, I think it really depends on the business model and it's about right sizing the investment for the opportunity.

But I think something.

That's really exciting is that a lot of the conversation over the past year was about these enormous generalized models, and I think what we're beginning to see is these more specialized applications for particular enterprise opportunities.

You don't need to.

Mine all the world's data, all the world's knowledge to do a particular job very well, but doing a particular job very well can mean enormous value to a business, and so I'm really excited about opportunities within the enterprise applying more specialized AI to really have a big impact on their bottom line.

Sarah, I just got back from cs Las Vegas and one of the conversations I had was with Lorel CEO Nico Lamuse, and it was about the use of AI in the hardware context for analyzing your skin and the thesis that Lorel presents is that that can really boost sales because your chance of conversion is really high when you have a data set driven by AI, you can really convince the consumer. You are in New York City because of the National Retail Federation, so join those dots as well. Retail and AI.

Absolutely, I mean I had a similar experience probably to you at cees where walking the halls of NRF. It is incredibly a buzz with the applications of AI within retail and commerce. I'm here supporting one of my investments, which is a company called Syrup. They're focused on inventory optimization for brand so getting the right item to the right place at the right time. This is sort of the holy grail for retail. It's what really drives margin if you can sell more while producing less.

It also improves the.

Sustainability and what has historically been a really wasteful category. And it's just a perfect example of what I was just describing of a very specialized AI application to solve an incredibly gnarly enterprise challenge, and they're improving forecast north of forty percent with some of their customers. That's really going to drive the bottom line. They're working with folks like Reformation, Abercrombie and Fitch.

So it's just a.

Perfect example of how AI is really going to transform every category in business. And I think retail is an enormous one and it's been really exciting to be here at NRF.

You know, almost ten years ago, I remember being in Europe speeding to Felipe Literari of Excel. You know, you're affirm that I've known for a long time across like precede right to very late growth stage, and I want to know right now where the focus of the activity is or the opportunity in AI. If there is still you know, new companies being formed that are being opportunistic to enter the space.

Oh man, there's activity at every stage. I'm biased because I do early stage investing and so I spend a majority of my time you know, at seed in Series A, but also honestly meeting sort of pre founders. You know, that's really been the ethos of Excel is we want to be the first partner and that may be when you're just dreaming up something and if it's possible. So

Sarah ed or some partner at Excel normally inn SF today in New York City. Great to have you.

It's annoying here.

Thank you. One of YouTube's biggest stars has posted his first video on X. Billionaire Elon Musk celebrated the move by reposting a video created by mister Beast, who has two hundred and thirty million plus YouTube subscribers. The YouTube star posted on X quote, I'm curious how much AD revenue a video on X would make, so I'm re uploading this to test it will share ad rev next week. And I know that Linda Yakarino, the CEO of X, behind the scenes at CS was doing a lot with

Yeah. I think it's kind of incredible that, you know, we're just a few weeks removed from this guy talking about you know, advertising excuse me, advertisers blackmailing him at at X. I don't think it's a stretch to say that's kind of what he's doing here with with Tesla. He's saying that if he doesn't own more of the company, he will essentially take his work on AI elsewhere, which is incredible for a few reasons.

The fact that he's.

Already started a separate AI company called Xai, and the fact that he's been working on AI in robotics at Tesla for years now. He's you know, talked about the company being more than just a carmaker being a leader in real world AI, as he puts it. And so you know, it's really kind of of incredible what we've seen play out just in the last few days on ex of our places.

All right, Bloomberg's great Drew Doll out of London, thank you so much. That does it for this edition of Bloomberg Technology Short Week. But we're not short of news. Don't forget to check out our podcast wherever you get your podcasts, Iheartspotify and on Apple, as well as the Bloomberg platforms. From a rainy SF and a snowy New York City, this is Bloomberg Technology.