♪ >> live from pier three in san francisco, welcome to "bloomberg west." where we cover the future of business and innovative technology. i am emily chang. president obama has a new plan to curb and hopes it is workable. it would end the collection of american phone records. is it enough to ease concerns in the tech community? we will have much more on that, later in the hour. today, a benchmark from one of

the biggest names in tech capital. he led early investments in twitter, google, and snap jet. ask him ifg to valuations are too high right now. first, apple scores a victory over samsung in the global patent fight in japan. a judge ruled that the -- apple iphone, 4s, did not infringe on the communication patent. san francisco is out basing silicon valley when it comes to tech job growth. they saw 57% growth in tech jobs from 20 10 to 2013. santa clara saw just a 14% increase. those numbers coming from state figures. companies like twitter, yelp, salesforce, and a wave of startups set up shop in san francisco. king, maker candy crush, is expected to start trading

tomorrow. they previously set up at $21 per share to 24 dollars per atre, valuing the company $17 billion at the highest. it would be significantly cheaper than others, like zynga and china interactive. first, our lead story of the day. cory johnson is here with me in the studio. fox revealed its filing for its ipo. it had filed secretly under the jobs act. we have gotten a lot of numbers about sales, marketing revenue, $125 million over the last year. to $171 million in the same time, also posting a big net loss of $168 million. both the loss and the marketing numbers are bigger than the actual sales numbers. >> first of all, the way the company looks at things, the way that it values itself, reading

the filings there is great detail on how they value the stock options they gave employees. and they talk a lot about sales growth and sales growth numbers. the growth numbers look pretty good. last quarter they had 39 million in the quarter. steadily growing. that said, the rate of growth, the revenue growth rate, that is slowing down. do think that sequential is the right way to look at this. not year-over-year. principally it is a business where not every account days for two years worth of service. yes, that marketing cost was eye-popping. >> let's talk about that. here at true ventures, what do you think of that marketing number? it is really high. does that show that customer churn is happening faster than we think? >> i think it has less to do with boxes and it is wider in

the market trend. most of these companies are trying to go from, you know, premium models to a pay model or a big enterprise model. the cost is so much higher. from that perspective it will take a little bit for them to catch up. >> to that point we have a chart right now that demonstrates exactly what the marketing as percentage of revenue is. it is a fairly amazing thing, to go 173% of revenues spent on marketing. last quarter, right before they got into the ipo, when they were preparing for the ipo, they dialed it back a little bit. it raises this great x essential question. not about the existence of god, but close. does advertising work? if it works, you should not have to spend that much money to grow revenue. what would happen if they turned that on the market now? if they stop spending money on

marketing, you have an issue here. something else here, this is the sales growth as it compares to marketing. sales should be growing faster than marketing. generally speaking that has been happening, although not a lot until the recent quarter when they dialed it back. generally speaking, sales have been growing faster than marketing costs, but not a lot. they have the pedal to the metal on spending without a real boost in sales growth. >> are these numbers good or not so good? about this yesterday. the house of horrors. >> house of horrors? >> that is right. >> venture capitalism, writer and -- >> i do have some once in a while. you didn't notice? >> go on, house of horrors. , you also have

to look at how they have had many fortune 1000 companies. once you are into those accounts, you will not get designs out. you will get market share and you will be buying more storage, more space, and more services from this country -- company. the challenge is to kind of get past and look into the future. potentially the future is what you will be investing in. look at where they are going. they have the ring on their back. cyclical trends are in their favor. they have a lot of work to do, but that does not mean that you should throw out the baby with the bathwater. >> let's do a comparison between box and drop box. maybe a $2 million valuation. box has eight board members. dropbox only brought in one outside board member in addition

to the founders. is dropbox that much of a better business? >> sorry to jump there, but i think that dropbox is more focused on individuals and smaller workgroups. where people do things on their own. if you look at box, they are trying to go after big enterprise customers. that is an expensive business. at the same time, their approach is that this is the approach i have used, getting in through consumers and growing the business from that standpoint. that both of those companies are on a slightly different timescale. mostly because they are focused exclusively on the consumer. >> what about the difference between arron leavy andrew house and? at the end of this, they only own four percent of his company. b f j owns 25%.

we do know that he has managed to maintain a significant amount of control if you take a look at the board. >> the key there is that he owns 4.1% of the company and he is still at it, which kind of tells you that that is the ceo who is a missionary ceo. the guy that you want to back. clearly he is not in it for the short term game. i have gotten to know him for nearly a decade. >> two decades? >> the company was founded in 2005. >> almost a decade. a mission, right? this is a missionary approach to business. like those before him, he is laying down a new kind of path for these dumb bunnies to succeed and develop businesses. a lot of what they have done was not known. either by consumer companies or enterprise companies. they made a lot of mistakes.

>> they talk about that in the filing, how their pricing structure has changed. percent, he is going to control the company. he is going to have 10 votes over every regular person. he is not giving up the reins, even though his percentage of ownership is not as big as some ceos. >> one of the most interesting things about fox, -- box, and we don't talk about this much, all for founders are still there. you have got blood on the floor at other companies, but somehow they have all stuck together. >> i think they are also outsiders. they have a chip on their shoulders, as i was pointing out yesterday. adam is the kind of guy you want on your team. [laughter] >> we will see. >> right now it is a money loser.

>> you are the one who said house of cards. always a happy ending to every house of cards move as well. >> well, we will be watching. thank you, as always, for stopping by today. still ahead, he is known for backing twitter when the company had just 25 employees. us next.ton joins you can watch us streaming on your phone and tablet. bloomberg.com and on apple tv. ♪

>> i am emily chang. this is "bloomberg west." megadeals are happening and other startups are raising mega rounds of funding. private equity firms, hedge funds, mutual funds, pouring money into silicon valley at an unprecedented rate. the latest example is blackrock, leading an investment in corn chip works just two months after a big word he'll for dropbox.

peter sits on the board of fortune works -- fortune works -- hortonworks. jon erlichman is also with us from l.a.. so, these mega rounds of funding, there have been what, 11 nine figure rounds this year? >> yes. >> how did you make the decision to make -- raise more money as opposed to going public? >> we have a fiduciary responsibility to make sure the company is ready to go public. we are finding such pressure from public market investors and hedge funds to participate early , they fight for ipo when they realize they could go directly to the company. it allows us to build a company that has the foundation to be not a groupon or zynga in the public market, where we have predictability in the performance of six court orders.

we know what the future looks like. a have also started relationship with our long-term capital base. the company gets to know them, they are engaged. it puts real pressure on the traditional market, because there is a new actor in the late stage occupied by these public investors. >> your partner was on a couple of weeks ago saying that there are ridiculous amounts of capital chasing deals right now. do you think it is ridiculous? and do you think it is all bubbly? being a child of the last bubble tom i saw what happened to companies when capital is free. you start to take routes to customers that in many cases are not durable. the challenge that we have as directors when we have a flood of capital is to try to maintain fiduciary responsibility and discipline the muscle memory or having an economic model that

works when capital is not free. the question at the top for us is less capital availability, because you need to, competitively, have access to it. what do you do in terms of how it affects your business building for the long-term? that becomes a big problem when you have to face this underlying model without free capital. it won't work. if there is a structural problem of not generating long-term returns for the investors. this is the issue right now. in spite of that there are some extraordinary companies that deserve these valuations. and there are a bunch that don't. as the market gets more fraught, we will wind up pushing the boundaries. >> which ones don't deserve a category? >> this can be a question of competitive advantage. can the economic model support increasing returns to scale? something that we obsess on is leverage in the market model. if you are spending more per quarter to acquire customers,

successively that is a massive red flag. those to me stand out in the don't category. but at the moment, everyone thinks that growth equals valuation. so, that is the game on the field and the game that in some cases should not be played but is because the model is unsupported. >> here in los angeles, you have snap chat. a company benchmark is invested in. they got a lot of headlines when they said thanks but no thanks to facebook. i spoke to entrepreneurs around that time who said that they would have liked to have seen the sale of that is this as a validation of the l.a. market. what do you think about selling as opposed to the longer road or going public down the road and how that helps to validate a market, silicon beach or silicon valley? >> i would have the opposite respective if i was in l.a. the single most important thing

is building an iconic company. every great company, going back face an opportunity to sell early. when they were given a multibillion-dollar offer that they rejected because there had -- because they have their gaze on the horizon. it is the biggest problem i see in new york, there is a much more short-term mindset around monetization. the valley has this belief, this background purpose to build the next google. you cannot build the next google if you sell before you release it -- realize your potential. in engaging their horizons, they are looking at what the full potential looks like. as investors, that is the game that we play. we worked shoulder to shoulder with the seams so that they can realize their full potential. along that road, your convention gets challenged. there is a number that is put in front of you that is irrationally large tom a you'd have to stay irrational to stay independent.

the best thing is that they will get theirs, but you cannot do that if you sell it. right, john, let's continue this conversation after a quick break. more with peter next about the landscape in social. ♪

back to "bloomberg west." we are back with peter fenton from benchmark." an early investor in twitter, benchmark, take it away john. >> we are talking about different areas where companies l.a., new york, or silicon valley, you have obviously made the decision to relocate from san francisco to silicon valley. now that you have done that, how

are you measuring success? what has it done for the benchmark ran? became anancisco epicenter post the success of salesforce as a place to build tech companies. the reasons for that are fascinating to us. a somewhat unintended consequence, some notoriety around those google buses, but it gave young engineers the option to live in seven cisco and take the bus. given the choice of living in suburbia or the city as a young engineer, you picked the city. that started the process. from a benchmark standpoint, we were shoulder to shoulder with entrepreneurs, measuring success by time with companies. for all of us in the partnership that has gone up meaningfully by being in san francisco. looking at two thirds of our investments over the last five and there is something

going on that is not resolved between the technology industry integrating more deeply into historic san francisco. it is something that we are now obsessed with, because it has created tension, as you would expect with one community being hyper successful and the rest of the broader community needs to be brought into that success, which is a real opportunity for our industry. >> let's talk about one of the nearby companies often mentioned in terms of your success, twitter. we talk about that here in los angeles as well because of the ties to television, the oscars, ellen. thehave talked to us about ties between twitter and television for a long time. in terms of twitter versus had tok, at -- if you pick one is the second screen, which alternately wins? >> i do not think it is an either/or in that sense. twitter has always been compared

to facebook in a way that misses the uniqueness of what twitter has built. it is utility, an invention is a company, where their model is like a human powered network, much like others that we now use in our daily life. twitter has established itself as a parallel channel. we are not taking away hours. we are not trying to measure time on site. we are trying to be a parallel, if you will, complementary channel to television. facebook has a different model. they both have a role to play. twitter has been very symbolic and the content industry in terms of staying engaged with an online experience, amplifying through the success of what twitter is doing. wax when it comes to the twitter of social, facebook, instagram, snapshot, does someone win? how does this involve? what is the dominant social network years from now? >> the question that we ask is

the chewing gum question. if you lose your flavor after six, or pick your timeframe, it is a question of durability. --p chat is an example of was this a fad? there are fads in the industry. >> but you took a chance and it worked. >> it gets to the old saying, the medium is the message. the tools that we create create us as much as we create them. snap chat has created a flourishing set of human behavior that did not exist before. the carefree, you are in control of your emotions, reflecting them to your friends in a private way, to me that is a different experience from what existed before. we are big believers in the plurality of these networks, where if you look at your phone or is not one app that does everything. increasingly there are purpose built apps. allows for anthat

emerging ecosystem. >> your fenton, a benchmark, -- peter fenton, a benchmark, thank you -- of benchmark, thank you for stopping by. ♪

>> you're watching "bloomberg west." been 10 months since edward snowden first release details of the bulk data collection programs. policy leaders on -- unveiled a bill on capitol hill as president obama spoke and mentioned his own proposal to come in a matter of days. is this bill the major rollback of the nsa that telecom was looking for? or is this not enough? >> it depends on who you ask.

by no means is this a total rollback, but the change in approach is significant enough that it should ease concerns over the current practices. what the house bill is proposing would put an end to that and would keep the records within the phone companies. instead of the nsa free-for-all that we have had, the government would need to issue specific directives requesting data and the searches would stay within u.s. carriers. by no means is this a total rollback, but it is a big change and because we are talking about different means to the same end, what mike rogers, one of the authors of the bill says, the means are different enough to balance security and privacy concerns. >> we think we have found a way to end the bulk collection of and stillmetadata provide a mechanism to protect the united states and track

those terrorists who are calling in to the united states to commit acts of terror. >> so, there you have it. they think they have found a way to sort of solved the privacy versus security question. of course, we are going to dissect this bill in the days to come, but that is what we have for now. >> what about the president's plan? what about his timeline? >> that is right, this comes as the white house is supposed to announce that it will also be unveiling its own legislative proposal. it is expected to look much like a house bill. president obama speaking in the hague gave us a preview. take a listen. confident that it allows us to do what is necessary in order to deal with the dangers of a terrorist attack, doing so in a way that addresses the concerns that people have raised. i am looking forward to working with congress to make sure that

we go ahead and pass the enabling legislation quickly so that we can get on with the business of effective law enforcement. toso, the president wants move this quickly. the order authorizes the current nsa phone program expiring at 5 p.m. on friday. the president is expected to renew that legal authority for another three months to give them time to hash this all out. emily? >> all right. speaking of security, really fascinating study out today about the number of hack attacks being sold on the black market. other half ofhe the equation, where we always talk about personal security issues and occasional business issues. the other half of it, what drives it? what pays for it? it is fairly interesting in a lot of ways. it is not one master criminal out there trying to gather stuff

for some kind of purpose, but rather it is people trying to create a market lace for information that would have value. >> with more details on that story, cyber criminals from the u.s. to russia and the ukraine, buying and selling services for hacking. some of the tools sell for up to $300,000 according to a new report from juniper networks, looking into how these markets are set up and managed. the lead author of the report, lillian, joins us now from los angeles. so, what are the most common things sold? how much do they cost? >> there are a range of products on these black market. they range from products that enable initial access to get onto a target box to actual payloads that get sent onto the target. infrastructure to make sure that attacks can happen as they are supposed to. as a service model, if you

cannot do it yourself, hire someone to do it for you. once you take back the stolen data or information, the service is to turn the money or stolen data into cash. slate is diverse and really depends on what particular person or entity it is trying to go after. >> apple, i mean give us one example of the most sort of crazy thing or surprising thing that you saw on the black market . >> 10 years, 15 years ago, the markets for cyber crime and stolen data were from protests -- were composed of ad hoc groups of individuals motivated by ego and notoriety. they just wanted to get onto systems. now these markets are composed of highly organized, highly sophisticated groups, often connected with traditional crime

groups. the infrastructure is set up for them. there is a very specific hierarchy and tear of who does what and when and where. for anyone to get involved and there really is a low cost to enter. --ething like target >> please, go on. >> sure, thank you. something like target, where 7 million user accounts were stolen, the data from that appeared within days on black market sites. it is almost instantaneous. the hackers find these tools? when i search on google for cyber attack tools, i find this study. how do they find these things? >> there are different tiers of access. there are google guides for how to buy and sell the cards or how to use exploit kits. youtube videos and guides that

tell you how to do this. are places onre the open internet that you, i, or anyone could go to. tiers, the sophisticated where the most sophisticated tools and freshest data is available are in more closed off sites. more around the dark net. something behind encryption and anonymity capabilities. in order to get access to those, reputation and abetting matters a great deal. you really need that in order to get this kind of access. >> lillian, what are authorities doing to crack down on these kinds of networks? these guys are obviously expert at hiding themselves. how can governments chase them? i know that there are cross-border issues as well. >> absolutely. these markets are empowering cyber crime and cyber criminals. this is absolutely something we need to think about more.

now that we have the landscape of what these markets look like, which was the intention of this report and research that we did, what should we do? we wanted to get a copy has of understanding, so we spoke to folks that range from academics to security researchers, law enforcement personnel reporters, and even those directly involved in these marketplaces. we have learned that law-enforcement is really getting better. years last 10 years to 15 , more digital natives are entering law enforcement. they are more savvy with technology. there are better partnerships and cross pollination's between groups and organizations. law enforcement is getting better. because it is so easy to get involved, more cyber criminals are getting involved. there is a little bit more action that can be seen.

also, criminals are going after bigger targets. these are great things that we need to be aware of and thinking about, law enforcement is getting better. randena, at the corporation. fascinating study. thank you for breaking it down for us. partnerships at google glass that could give it broader appeal, still ahead on "bloomberg west. a --." ♪

"bloombergback to west." google is hoping to make a google glass more stylish. they have teamed up with the group that owns oakley and ray-ban sunglasses brands. they hoping to distribute new versions of group -- of google glass. it is expected to be available to mainstream consumers later this year. now for more on our weeklong

series on the role of architectural design today. as he sits in front of the new bay bridge, which you cross every day. >> once in a while. >> what do you think of it? >> it is all right, it is interesting. it is growing on me. >> it is more open. i like that. >> i remember the design proposals of the time. it is interesting, jerry brown had opposed this bridge over design issues. principally his biggest concern was design issues. othercycle lanes or any things like costs, but in his it was design. it shows this growing and interesting concerned with design these days that was not around 10 or 15 years ago. >> it is so critical to building things. here to discuss more with us,

you guys design buildings, cars, smart phones. you were involved in the shanghai towers. tesla. when it comes to design problems, are these all different problems? or are the principles and approaches the same? >> it is a good point. it is a process. most people think of design as shape and style. a process. it as it is a way of dealing with complex situations. an mba has one variable, but design is a team sport. it is a process that you can apply to anything. >> what do you think about the bay bridge?

>> at think it is amazing. whether you think the style is great or not, i think it is fabulous. the design works with a highly ambiguous situation. there were nine inches of slop that it could move before it failed, this can move nine feet. the elements that make it gorgeous are the circuit breakers. >> and it is a fascinating use of light, using it to illuminate itself. i feel like bridge design has generally been in this country spectacular. there are great bridges throughout the midwest. generally speaking, i am interested in the reasons for great designs.

20 years ago, pcs were idiots. they were this formal color. what is different? >> it all comes down to competition. looking at the world today, design is the differentiator. motorola, those kinds of companies in the 80's, it was customer service that would differentiate. it was all about cost. you can only take those variables so far. the margins are razor thin when you go out on cost. design is limitless. being able to differentiate in this market, if you look at the markets today, capital is nearly free. marketing your britt -- your business is an expensive. global competition is immense. the product has to stand up for itself.

>> the bay area is great. we have that kind of team sport. in the valley you have lots of , like the nest, and interesting example. everything from analytics to type functionality. form and function all-in-one. >> that is right. it is about making those expensive,t is too there are too many competitors. >> thank you so much for stopping by and sharing your process with us. coming up, the battle of area and tv broadcasters, having reached the supreme court.

that project comes next on bloomberg west. ♪

welcome back. ariel, taking on its top broadcasters over the rights to stream television. making its way all the way to his -- to the supreme court, arielle is expected to submit a ero isomorrow -- a expected to submit a brief tomorrow. they have always been pretty unapologetic. >> they do not believe that this is a sneaky workaround. they believe that what they have is a legitimate offering.

it is interesting to put it in context, going back to the reason he started it in context. >> my last company had technology over viewership. we used to collect data. data, it isk at the shocking, but the majority of the people have seven or eight channels. people are consuming more content online. they are expressing their interests. >> how close is the company today to the one that you posted individually? >> startups are strange behaviors. it is a pretty common story.

this is the first time i have followed clockwork execution in this way. we wanted to do so well. we moved extremely fast. on the legal side? you must have anticipated some legal hurdles. did you anticipate this kind of legal fight? >> the things that i did not anticipate would happen were the and future of these models. had taken a moment i would have stepped back. a lot of those things, controversy was anticipated. >> outside of court rooms, broadcasters continue to speak on their options and what they are as opposed to where they can take their channels. >> we can move the broadcast

network to cable. to the internet. what do you say to that? >> cable has had an agenda for long time. has nothing to do with it. are they capable of disenfranchising that large number of people? i don't think so. i think it is a difficult position. >> to be clear, if you were not successful at the supreme court b?el, is there a plan >> no, there is no plan b. we work on merit. we do not just believe in the merit. company wasof this to try to create a platform. wedge the door open. for those who believe in that despite our best efforts, if it

failed it would be a tragedy, but it is what it is. >> have you ever thought about selling the company and saying -- hey, we started growing quickly, let someone else worry about these legal headaches? >> i am an open-minded businessman at the end of the day. >> what is the best way to get your idea in front of as many people as possible? i always look at those things through that lens. us drivingave seen the bus and pushing the boundaries. that context, if it changes in the future? we will deal with it then. but this is the best experience and the best way possible. >> tomorrow we will go inside that manufacturing facility in new hampshire to show you how they make the tiny antenna.

>> looking forward to that coverage throughout this week. time now for the big number that tells it all. >> the number is 361 million $466,000. the accumulated put the business has lost since 2005. this is a massive money-losing business. an interesting one. >> they do have one hundred $9 million in cash on hand. >> because they keep raising money from investors. it is reasonable to look at this business and wonder how they can truly differentiate themselves and ever make a profit. >> john, you just spoke to aaron leavy and los angeles. your take? like little-known fact about aaron leavy, he worked as an intern at paramount and that miramax. >> really? >> maybe that is the differentiator. inhe could have a future hollywood if he was not a

technology ceo. >> a very interesting guy. thank you all for watching. we will see you next time. ♪ . .

>> from bloomberg world headquarters in new york, i am mark crumpton. this is "bottom line," the intersection of business and economics with a main street perspective. president obama and nations leaders meet in the hague. russia excluded from the g-8. and looking at the religious rights of corporations. >> to our viewers in the united states and those of us -- those of you joining us around the world, welcome