♪ >> live from pier 3, welcome to "bloomberg west." i am cory johnson in for emily chang. we have more on the largest internet outage ever. one of the topics we will cover. the chinese internet outage has cut off access for hundreds of millions of people. was this the work of super-hackers, or china's own censorship machine?

and the pace of the tech sector expansion. we will hear about lenovo's plan to buy the server for $2.3 billion. but regulators question the just-announced a deal. not off-line during its outage, alibaba cost billions. will this scare off investors? hundreds of millions of chinese consumers and businesses themselves without much access to the web. this lasted at least 45 minutes but took as many as eight hours to refresh service. .orgs and .nets were out of business, alibaba and baidu were unavailable. this was linked to an obscure company in wyoming.

who is responsible for this? the chinese government blames this on a hack attack. but others say the chinese government caused this outage itself trying to block content. on skype from germany is our bloomberg correspondent who covers cyber security. this obscure web address in wyoming, this is a very fringe aspect of this, the traffic that all of these consumers and businesses were trying to do ended up going to wyoming. >> it was going to an anti-censorship server. what the chinese government was doing, they had the service on their mind. they had the anti-censorship service they wanted to block. this is a service that normally would be blocked in china. something got mixed up and rather than being blocked from the site, all traffic was redirected to the

anti-censorship server. this is a funny mixup in a way. >> talk about how big of a deal that this was and how they did such a good job of looking out for this? >> i suspect that 500 million people are able to access the internet, either by browser or mobile phone or whatever device that they use. those people who are independently accessing the chinese website, or the china website -- >> did you say 500 million people were unable to get online? >> i suspect that that number of people are unable to access the websites in china. >> this is about as big an outage as the internet can have. >> i suspect that, yes. >> talk about how big of a deal this is in the way that the

internet is used in china, and the things it is used for. >> the internet in china is used exactly the same way as it is in other countries in the western economy. we chat with other people, so everything, probably did not work well at that good moment. >> have we ever seen anything like this before on the internet? >> not really and i hope not to see it again. i hope to see a few tiny issues but nothing that big. >> what is it about the way that china -- who is responsible for this? >> the chinese government has come out and said that this is the result of hacking. more likely it is the effect of china attacking itself.

china is just an island on the internet, nothing gets there or leaves without the government having some awareness of that. that is different from how the internet you -- work's in the united states where it is much more fragile. the idea that this was a hacking attack, is it possible the nsa was in the chinese censorship machine? >> their structure is completely different? >> this is completely isolated. nothing goes in or out without the chinese government knowing about it. with centralized control, you run the risk of that backfiring on you. that seems to be the case. >> you broke this story. how did you determine what had happened? >> this was mainly an accident. a customer called me in the morning, i suspected that google analytics had an issue in china, and i directly tweeted to whoever -- if they had an issue in china.

but then i cross checked with the monitoring infrastructure, it was not working. and i finally found some benchmarks that we ran in china, completely, everything was not working. that got me into digging more into details. >> there is a big effect. in all of the u.s. traded technologies, they do most of their business on the internet. this is between 45 minutes and eight hours off-line, this is a serious impediment. >> the chinese companies, and for every company, paypal -- you can pay with paypal in china. they are not shown to people --

the business that affects these companies that have money to be shown in china were not shown in china. this is a huge amount of business that didn't work at that moment. >> it is about trust and how people use the internet. emily chang talked about this one. they talk about operating outside of the walls of the great firewall of china. but if more of these outages happen, companies and consumers who have choices will make them to get around that. >> there is a risk in this -- rich irony in this incident, all the traffic was directed at service, and you can control the internet to a very large degree. but there are tools that allow you to get around that. vpn services.

there are ways around censorship. as much control as china has around internet, in cases like this you can see how sometimes these controls backfire. >> thank you very well, and thanks to hiko spec. next, how lenovo's deal with ibm may already be in jeopardy because of this big chinese outage. ♪

>> this is "bloomberg west," i am cory johnson. microsoft is looking for a new ceo, but sales were higher under steve ballmer. the profit is only up three percent, at $6.6 billion. but the best-performing segment,

devices -- the xbox one launch saw a 61% jump in sales. and gains in the web software, the online cloud service helped offset windows which, one year ago, microsoft launched windows 8. turning back to that massive internet outage in china, news that broke early this morning that lenovo, agreed to by the low end server unit, for $2.3 billion. the biggest acquisition since funding the brand in the first place. via skype, our guest from germany and another joining me from new york. crawford, let me start with you. i was surprised by the low price for lenovo. i wonder what that means in terms of, there is nobody that wanted to buy this except for chinese companies.

crawford, your thoughts? i am not hearing crawford. let me turn to you, cristina alesci. what are your sources telling you about the lenovo deal and trying to make changes in the regulator's opinion about whether they will want to allow this business to be sold to china? >> the deal was announced but the next big hurdle is obviously going to the committee on foreign investments in the u.s. and getting clearance from regulators on this review. anything that raises questions about china's government's involvement in technology and internet areas is going to highlight the fact that the government is very much involved. it could create a little bit of a hiccup for them, but let's keep a couple of things in mind. at the end of the day, ibm and lenovo will say that this is not

critical technology that they are dealing with. very much a commodity, in a sense. you are surprised at the low price for this deal because nobody really wants this business. they will argue that this is not critical technology. the other thing is that lenovo and ibm went to this process, when ibm sold them the pc business and they were improved with conditions attached. there were some things that lenovo had to give up in that deal to get that review. let's not forget, the u.s. wants foreign investment. they want china to come -- the current administration has been asking chinese companies to come in and create more opportunities to invest. those are the things working in favor of signing off on the deal, but this current outage does raise more headlines and questions about china's

involvement. >> when you talk about the price for this deal, i wonder, it really does suggest that there were not a lot of other bidders. hewlett-packard is about 4.5 times the sales, this unit went for about five times the sales. >> this deal had been talked about for a while, all of these technology companies, these older technology companies, are struggling with the idea that they have to get out of hardware and become software. >> did you just call me older? >> i said you are no better, you are wiser. this is emblematic of what every single old-line hardware company, i was actually referring to old technology, not your age. ibm is going through this process, when they really need

to go through this process. ibm has saved itself from death a couple of times here. they are trying to reinvent themselves again so it is critical that they shed this. investors are not valuing going deeper into software and services where the potential growth may be. lenovo, this does not do much in increasing their margins but at the end of the day lenovo needs to grow, too. >> i saw signs from the lenovo president -- and crawford is going back into this. given the news about the internet outage, and the great firewall of china, the company that looms large to me is the

battle between huawei and sysco -- the company that is probably the background of that firewall of china. >> they would definitely except the consideration approval of the deal but at the end of the day, i think this is good news for dell and hewlett-packard. in addition to other entry-level server manufacturers, the bottom line is that this probably includes government business in the united states going to somewhere else. and when you get through that, lenovo ends up in a way to grow and i disagree a little bit because it can be added to that margin. i think that when you are on the square on the board where lenovo is, even when you net out the government district, lenovo wins.

they get a license to manufacture and they get to move up the ladder in terms of customer profile and margin. >> crawford, you bring up a good point. this is actually a customer of the ibm server business. they are raising some concerns but what i am hearing is that the department of defense has a great firewall when it comes to this and they will not be able, even if this is under control of a chinese company at the end of the day, there will be massive firewalls. that would not allow any kind of hackers or snoopers to get to the source codes so that would not really be an issue. i agree with you, they may lose the department of defense business going forward. >> i would tend to agree. >> with that, crawford del prete, in agreement, along with cristina alesci. what kind of impact will this

massive internet outage cap on -- have on the social media websites in china at? we will talk about the breakdown, up next on "bloomberg west." ♪

>> this is "bloomberg west." i am cory johnson. the massive internet blackout in china, how did this affect social websites? michael is in new york and our senior correspondent jon erlichman in los angeles. when you look at the world of twitter and facebook, a giant part of the world is off-limits for them. that is china.

how does this affect the largest social media brand to grow in the biggest open market? >> i don't think that this has an effect. executives from facebook and twitter, one question that kept coming up was about china, and their response was straightforward. we are not there, and this is not a huge focus for us. there are other areas we are going for. it is complicated to be there, and they are not there, they want to divert back attention. global digital marketing, this is global in 2 ways. global and china. a lot of these companies really market independently of the global digital organization because of all these changes, and the different set cultures. >> let me follow up with that. when a brand looks at working with alibaba or baidu, does that change after today knowing that

they won't have the access that they want to get to where they will have access at all, trying to have more direct contact? >> i was on e-mail earlier today with my friends in china, asking about the marketing perspective. their response for a small sample with three people was really, none. we will be back online and life will return to normal. we are not changing programs dramatically and we are spending a lot of time talking about things that won't have a long-term effect on our business. the critical difference again is how these big companies work in marketing campaigns. facebook and twitter do global deals but global deals outside of china because they are not there. the chinese marketing organizations have a lot of control over how they market to consumers in their country. >> john, does this give facebook

and twitter ragging writes about -- bragging rights about technological prowess? >> i think that today, they actually have this opportunity, even if there is an immediate opportunity for them to jump in, to champion their platform. any technology company prides themselves on always being on, always running. in the case of wei wau earlier -- pronounced it in my kadian voice, thisamerican is the reality. we freak out when twitter or facebook have a hiccup or even a few minutes, and you are talking about possibly not being able to get on their for a few hours. this is a big deal. it opens the door for what facebook and twitter are, potentially.

aside from the ipo and the politics surrounding it. and a challenge to get in those markets. >> how do global brands deal with the censorship of their potential chinese consumers? >> they really focus on doing local marketing in china. the marketing in china is unique. they connect with customers in that market. a lot of the decision-makers in new york have limited or not any knowledge with how the process takes shape. they work on building materials for the laws of the land, the same way as when we are talking about canada and the u.s., they have their own advertising standards and their own local rules and just like other countries, people operate within them and find ways to market to consumers. >> they don't mind the censorship, but i don't know if the consumers feel the same way.

jon erlichman and michael, thank you very much. how is the expansion into the chinese tech sector affecting -- the global supply chain? we will talk to one of the largest wholesale distributors in the world. next. ♪

>> you are watching "bloomberg west," markets, innovation and the future of business. i'm cory johnson in for emily chang. hp plan to make products for palm patents -- but now qualcomm has bought this out, with 4500 patents including the ipack and the bitphone. microsoft is going to let 400 put their customers personal data overseas due to concerns about the nsa's

surveillance program. this was announced in davos today. microsoft only turns over information after government request and due process of law. the hollywood studio, chris cook, the president of sony pictures technology has been let go as this is merged with sony entertainment. sony has pledged to cut $250 million in expenses this year. world's largest wholesale tech provider has been in china for more than 15 years. china is one of the top five countries where they work. 80 cities in china all with ingram micro offices. i'm glad to see you. i would be happy to talk to any day, but on a day when china is such a focus with this internet outage, you guys have been doing business in china for so long. how is doing business where there is so much government censorship, how does being a technology company feel

different ?england michael's has -- feel different? >> we try to keep in touch with the customers with the suppliers and the vendors. we focus on the market. when you look at the market, we have been successful there for more than 50 years, with the acquisition of a local company and local managers who understand how the dynamic works. and not being the manufacturer but being the intermediary between the manufacturers. we focus on what the market plans are -- >> there is a lot of concern, globally about the slowdown in buying in china. how do you see business in china right now? >> we see the same and over the last two or three years we have seen 20% growth in the china market. this has slowed down, but it has slowed dowfrom 20%. some quarters we were flat, frankly. we have been communicating but

there are adjustments. that market is so poorly penetrated that the long-term trend -- >> you are seeing no growth in china? >> we have seen over the last two quarters, the slowdown that is due to the tablets and smartphone cycle. not fundamentals on the i.t. sector. >> this is quite relevant to both the wild west story, the the storyei story, about censorship and government control technology, and lenovo. is this much more focused on chinese companies? >> it is more focused on chinese companies and that is what we are focused on, the focus on the chinese market. of course, new manufacturers are coming up, chinese manufacturers are working outside. we have been working with lenovo for many years, very successful around the world and in china. this opportunity with the new ibm potential deal, we have seen

that before, and it has worked very well. we are not concerned long-term, because things could happen that are different. but in the long-term of the last 15 years, we have not seen the ups and downs. >> you are partnered with cisco -- sysco, john was on the phone and he said the nsa prison program has -- the nsa program has hurt sales in china. do you see that with other manufacturers? >> i think they have innovation in a situation that happened in the u.s. this is a very targeted area in those products. i think that the challenge that they have is very specific to that technology. other technologies have much less of a problem in those areas. we are not seeing that today in the business world. >> one of my big picture thesis ideas for this year is the migration to the cloud, is

causing some companies to build up hardware. i just think i am right, but i also look at the news of the internet outage yesterday, i wondered if there could be separate, public clouds where china will have its own cloud in the rest of the world. >> our view of the cloud, even though there is a shift in the customer base and the hardware that is available to service everyone, without having to buy, there is a transfer that is happening but there are many other opportunities that can now be hosted on the cloud. the opportunity is much more larger now with the cloud availability, than it used to be before. >> i don't believe that. if so many companies, can build themselves on the cloud, and other companies turn to the cloud to buy their own structure, they are not all

going to build their own -- their own separate capacity. >> what we are forgetting is new businesses are appearing because of the cloud, that did not exist before. let me give you an example. now that you can put all of your pictures or videos on the cloud, does that mean that there will be storage in your handheld device that is going down because this is all transferred to the cloud? absolutely not. >> and this makes up for the lack of growth in back offices? >> this will make a lot more saving for this potential transfer. >> you are on the board of amazon.com. one of the largest businesses in the cloud. you must see that firsthand. >> absolutely. in the creation of new businesses and business models, because of the cloud, by far it overcompensates the potential transfers from on premise, the public.

>> really interesting stuff. alain monet, it is good to have you with us. thank you very much. be sure to tune into the bloomberg special "titans at the table: in the loop." betty liu speaking with bill gates and former new york mayor michael bloomberg. they are tackling the idea that poverty cannot be eradicated. tune in right here tonight on bloomberg television. will the chinese internet outage scare away investors from big new deals like the alibaba ipo? you can follow us on your phone and at bloomberg.com. ♪

>> i am am cory johnson. this is "bloomberg west." tune in on bloomberg.com or apple tv. you know it, we are there. millions in china were affected by the internet outage. it posed a risk to business there and business here.

what about investment and chinese companies and the upcoming alibaba ipo and others? i'm joined by leslie picker and brian fox, who covers web audit confirmations. leslie, i will start with you. the alibaba ipo is considered a big story but they were out of business for a few hours yesterday. >> that is a big spotlight on alibaba, looking at potential risks when this company goes public and whether or not they should. being out of commission should be impactful to this office. -- to their profits. if you are a u.s. investor who is not used to these issues it may make you think twice. >> i also wonder, the same day as all of this there is news

about the auditors and new changes as well as a judge saying that the chinese auditors cannot audit some of these companies now. >> they have been suspended for six months, this will certainly be appealed by those firms but today, what you have is a situation where the accounting firms don't have the ability in china to hand over their work to the fcc and this is going to be a -- the you see a kobe -- usaob? >> the pcaob? for those of us who are not accounting geeks. this is all about risks. you see this huge risk in china, that the center has been inadvertently turning off the chinese internet company. >> they can and what you are dealing with is you have the chinese government, the state that can do just about anything they want and we have seen that come into play as they pretty

much thumbed their nose at u.s. regulators who said, if you are listed on the u.s. stock exchange, you need to follow the u.s. stock exchange rules. today they failed to do that and there will be a suspension for six months for those firms for their inability to hand over those work files to the regulators. >> leslie, you don't know this, but before i have this job i was a portfolio manager and a short seller. one way i would find crummy chinese stocks, i would look at the auditors and the companies that they audit. how big is this decision? >> companies listed here are going to be very skeptical of companies due to these auditing speculations. in terms of chinese companies already in the pipeline, this will cause them to delay. hiring an auditor is very expensive, and hiring another one if you are ready to go

public now seems out of the question. either pull it and go somewhere else or delay this or six months until the ban is hopefully lifted. >> brian, it is fairly interesting to have the judge rules but not the fcc, which lets companies be traded in the u.s. to u.s. investors but not follow the basic rules about auditing. >> you are right. part of what the fcc was trying to do is maintain diplomatic relations. had they suspended the trading on those stocks or those accounting firms from auditing at those companies, what you have is the ability for those stocks to be removed and be listed from u.s. stock exchanges, which would create a big diplomatic issue. one that the fcc was trying to avoid that this was the last straw. they had been warning the chinese regulators that it was time to share the work files.

you have firms in china that are listed on public stock exchanges that don't have to follow what the sec has laid out for them. >> not a different set of rules, but less rules. if the football game had more rules on one side than the other, -- if we see this outage with a new series of risks, new paragraphs in filings for thisompanies, and you accounting problem pushing out the ipo, could this be bad news for the listing fees? that could change both parts of publicly traded companies. >> missing fees and customers looking to use china -- and take advantage of that, the u.s. investors may not be able to take advantage of this. china opened up the ipo market recently. >> if they don't get those

listings, it hurts the earnings of those companies. a big impact. leslie picker, bloomberg reporter, and brian fox, the founder and president of confirmation.com. as we had to break, a look at what is coming up tomorrow. emily chang is in los angeles, stalking john at the cloud service with macklemore -- and chinese web control could show what is left for millions of americans. how does the great chinese firewall work and what impact will this have on chinese society? that question is next on "bloomberg west." ♪

>> welcome back. i am cory johnson, this is

"bloomberg west." you can check our early edition at 10:00 a.m. on the east coast. the government of china may try to block an ip address or add new web control according to censorship monitor gracefire.com. how does this work and how does this impact the chinese citizens who are supposed to be censored? jordan robertson is with us and we are also joined by steven weber from the uc berkeley school of information, right across the bay behind me. stephen, let me start with you. the goal of this is to keep chinese citizens from seeing everything that is out there on the internet. are chinese citizens patently aware of all of this? >> they know perfectly well, they go to particular websites, they get that police person who shows up and says that they are not supposed to be at this website. they are aware that the internet is censored.

but the question is, how much of a difference does it make at this point, and there is no evidence that there is a brewing sense of resentment among the chinese public, i really want my government to change that policy. they are getting a lot of benefits even in the face of the great firewall. >> jordan, the great firewall is a technological wonder. but i wonder, in terms of the parallel internet that is there -- and the social network that is there, i wonder how they are valuable when the great wall is shutting them down? >> the folks in china have a lot of ways to get what they want. when we talk about who is involved in creating the great firewall of china, we were talking about some of silicon valley's biggest companies. networking equipment can be used for good or evil. for good or for censorship.

the value of companies that are censored by the great firewall tends to go up, based on the fact that they exist in the firewall. >> can i ask you to give me an overview of how we should imagine social networking is like in china? >> you have to investigate what is going on on the level of the people and the companies. the chinese government has offered this to those who are providing the telecom capabilities, you folks can do whatever you want, you can make as much money as you possibly

can, as long as you don't pose a threat to the cumminist party and for the economy. this is actually a bargain that has served everyone's interests quite well in china over the last 20 years. a lot of us in the west would look at that bargain and say, this is not acceptable to the way that we think about the internet. but at the moment there are few but hardly millions or billions of chinese that say that this bargain is a good one. right now, everyone is pretty board. -- pretty much on board. >> i see with the entrepreneurs get and the communist party gets, but i don't see what the people of china get out of that. what benefit is this censorship infrastructure? >> for their perspective they have to understand this is relative. society and communication networks are vastly more open and better now than they have been in 40 or 50 years. censorship for them is actually a small percentage of what they are doing on a daily basis. if you spend time in beijing or shanghai, the internet is everywhere. there are a few websites you

can't reach but from our perspective it may seem like a big deal -- but from their perspective, so what? >> jordan, you know so much more about hacking than most people ever will. if you look at the manpower required to maintain this level of censorship, which likely brought down the chinese internet for three hours or an hour or whatever, how difficult will it be to maintain this as the internet continues to grow? >> this is a cat and mouse game. this is a human infrastructure. there are human beings who are being provocative. there is a high level of human involvement but there is a lot of subjective human involvement involved and it takes constant surveillance, and constant vigilance. i think of the great firewall as less of an absolutely secure system and more like a newspaper firewall, this kind of side channel -- you get subscriptions

and you can get behind a newspaper firewall. that is how the chinese firewall works. that is one reason that society has not been unbolted lately -- against this.d there are ways that if you are technologically sophisticated you can get around it. that changes the unrest of those who might be revoked by the system. >> can we expect this kind of thing to happen or with the chinese government back away from looking at these descriptions, because it is hurting business in china at? >> i think the chinese government, they are first and foremost interested in maintaining the power of the communist party. to the extent they see that as a threat, they will try to clamp down. they do their job pretty well. they are more likely to tighten up rather than open up.

>> that is unrefreshing news. steven weber at uc berkeley across the bay, and -- we focus -- and jordan robertson. we focus on one number that tells us a whole lot. here with that number is jon erlichman in los angeles. >> for you, i have 2. 2 days after ellen degeneres's show is in the united states, it will be available in china. she announced a big deal as warner bros. struck a deal with sohu, the hulu in china, will be airing these episodes a couple of days after. the only difference is subtitles. i am not clear about this. i am wondering why this is called the happy lady dance hour. she does like to dance, but there you go. >> it was also one of the titles for "bloomberg west." but no. there will be more bloomberg west tomorrow afternoon. ♪ >> the following is a paid

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