>> live from pier three in san francisco, welcome to "bloomberg west," where we cover the future of business. i am emily chang. big stories we're following right now. facebook making another multi-billion-dollar acquisition. it is buying virtual reality company oculus for $2 billion. we will look at what it means for the social network. candy crush maker king sets its ipo price at $22.50 a share.

it gives it a valuation of $7.1 billion. we will have complete coverage. but first, top headlines. htc has released a new version of its flagship smartphone called the htc one m8. it features a dual camera design. it is counting on the phone to reverse nine straight quarters of decline. the irs that bitcoin should be property, not currency. that means that bitcoin income will be subject to normal federal taxes. investors will also have to pay capital gains on any bitcoin money that they have made. google wants to become a bigger player in cloud computing. they just cut the price of some cloud services by as much as 85%. they're trying to win over customers were storing data as amazon web services, microsoft, and other companies.

first, to the top story. cory johnson is with me here. we're talking about facebook announcing a major acquisition, buying oculus for $2 billion. this is a market that does not exist yet. this is not even available to consumers. >> a company that does not make a product. >> they have given it to developers but we cannot buy it. >> this has been acquired by a publicly traded company for $2 billion, including $400 million in cash. >> mobile is a huge platform today. they're looking at the platforms of tomorrow. facebook really missed the early days of mobile. it was not really that good. we just had the former cto of facebook on the show and he said that was a really tough time for them. >> you can see -- if you want to think that that was a

life-changing experience for facebook, missing mobile, recovering is amazing. i don't think they get enough i don't think they get enough credit for that. looking at instagram and saying, it cannot grow and take away our users someday. we are going to buy it. looking at whatsapp and sang, it cannot grow and take all the text messages in the world. we will buy it. now say, what else can be out there? virtual reality. it is not out there in any way right now so it is an aggressive mood. they will explain more in a conference call with investors. >> that starts in a few minutes. someone pointed out the

zuckerberg is two months away from turning 30. that is ancient in the tech universe. is he having a midlife crisis? >> i would not say that 30 is ancient. trust me, kid. this is an aggressive use of cash. we know, some of us that saw 30 in the rearview mirror, that that does not last forever. this company is making some really big bets here. the board of directors has to be involved in some way in counseling the company. sheryl sandberg is involved as well. it is a big deal. >> let's take a look at oculus in action. it is a cool idea at the very least. brad stone tested it out. >> right now, i am wearing an oculus rift headset. i'm flying into space. i now see my enemies. i'm firing my machine gun. this is crazy. the maker of the oculus rift headset is promising that virtual reality will finally feel real. what if virtual reality were perfect and we could have an experience of fidelity with full

body line which, full presence, feeling like we are in the same space. it is like the matrix, except everyone realizes they are in it. >> palmer lucky created the rift headset in his parents' garage. >> this was your hobby and personal passion. now you're the cofounder of the company that just turned $75 million, moving towards a commercial product and you get to live your passion. >> it is pretty great. a lot of people are smart at what they do, not just me. >> one of the people he is networking with is brandon. >> i am skeptical about virtual reality because i grew up in the 1980's and 90's but it didn't work. now the technology is there. it finally works. >> that is because oculus has a new technology called positional tracking.

when a player leaves ford, the character leaves for his as well and sees the world with a new perspective. >> technology has advanced. we are able to deliver on synthetic 3-d environments. we could not do that before. we have accomplished a lot with this version. unlike previous vr systems, i am not feeling nausea. it is almost like i am there. >> sony just announced product morpheus, it's vr product for the playstation 4. >> i hope they take it seriously and deliver something great. i hope it makes the vr a bigger industry. >> they have a lot of hurdles ahead of them. there is no release date. when can consumers buy an oculus rift? >> when it is ready and not a second before. >> is that in 2014? >> we will see.

>> he literally just did that interview. that guy must have known. he must have known that he was about to sell to facebook. let's dive into this a little more. paul kedrosky is with us from san diego. paul, the visual of the oculus on your face is so powerful, but it does not exactly look like a social product. what is your take on this? >> i think a bunch of things are going on. it is the emergence of a virtual world as a new environment for interacting with social. the other is i have to imagine this was hotly competitive. when facebook spends what seems like an eye-bleed amount of money, it is probably because a lot of people were bidding eye-bleed minus a little bit. oculus is getting a huge amount

of attention because of the demos and the impression that someone cracked the knot and did it in a way that it is not a novelty. the idea of vr has been around for 25 years. >> is this different from other game makers over the years who have tried things like this? >> yes. what you're seeing is the technology is there right now. the machines are powerful enough. the equipment -- you can do positional tracking. it is much more in the picture. it is smoother, more reactive. you feel part of the scene that they put you in. it is really interesting that way, they are really trying to make sure that you feel part of the system. >> do you feel that virtual reality could be the next big

platform like mobile is today, or is that way far out? >> it is interesting. if you look at what mark mentioned in buying this in his blog, he is saying that, look, we are recognizing that mobile is there. they're climbing into the share of gaming. the oculus will be a big gaming platform. once sony jumped in, there will be wait i did. sony will put effort behind it and he realized that this is a market that this will go somewhere. sony is doing well the playstation 4. they said the game developer's conference last week that this is where they're putting their way. >> zynga was a big growth platform. do you think when they see oculus, they are seeing google glass? >> yes. i don't see them spending $2

billion straight up for a gaming platform. i think this is one-upsmanship. >> you think it is defensive? >> i do. i think it is a great win. it is a fantastic venture deal for the early stage investors. >> we are going to be talking more about gaming coming up. also, peter fenton of benchmark will be joining us next. ♪

>> startup megadeals are happening. other startups are raising mega-rounds of funding. private hedge funds and mutual funds are pouring money into silicon valley at an unprecedented late. the latest example is blackrock, giving a $100 million investment in hortonworks.

peter fenton joins us in the studio. jon erlichman is with us from l.a. the mega-rounds of funding, there have been 11 nine-figure rounds this year. when it comes to hortonworks, how did you come to the decision to raise more money as opposed to going public? >> we have a response ability on the board to make sure the company is ready to go public. we're finding that there is such pressure from the public investors to participate early, they are fighting for ipo allocations when they don't realize they can go to the company prior to that. it allows us to build a company that has the foundation to be,

not a groupon or a zynga in the book market, where we have predictability in the performance of six plus quarters. we know what the future looks like. we have also started a relationship with their long-term capital base. blackrock and passport are fantastic holders in the public market. the company gets to know them and it puts pressure on the traditional late-stage venture market because there is a new after. >> your partner was on a couple of weeks ago, saying that there are ridiculous amounts of capital-chasing deals right now. you think it is ridiculous and you think it is at all bubbly? >> i think, without question, being a child of the last bubble, i started in the venture business in 1999 and i saw what happens to companies when capital was free. you start to take routes to acquire customers that in many cases are non-durable. the challenge we have as directors we have this flow of

capital is to try and maintain the discipline and responsibility to have a financial model that works when capital is not free. it is less capital availability. competitively, you can get access to it. what you do with that and how does it affect how you build for the long term? that becomes a big problem when you have companies whose underlying free model without capital will not work. you have a structural problem of not being able to generate long-term returns for your investors. despite that, there are extraordinary companies that deserve these evaluations. there are some that don't. as the market gets more frothy on late-stage, we're going to push the boundaries and have companies in the don't then we in the duke category. >> which ones don't? >> is a matter of competitive advantage. something we assess on his leverage in the marketing model.

if you spend more per quarter to acquire customers and sell to them successively, that is a massive red flag. those to me stand out in the don't category for they show less efficiency and capital versus more. at the moment, everyone is thinking that growth equals valuation. some games that should not be played is played because the models do not supported. >> you have snap chat in los angeles, which is a company that edge mark has invested in. it got a lot of headlines when it said things, but no thanks to facebook. i spoke to osborne was around the time that said they would have liked to have seen a sale of that business almost as a validation of the l.a. market. what you think the public down the road and how that helps to validate a market? >> i would actually have the

opposite perspective if i was an l.a. -- i think the single most important thing to validate a market is building an iconic company. every great company, google, twitter, goes back to facebook, face an opportunity to sell early, where they were given a multi-billion-dollar offer that they rejected because they have their gaze on the horizon. it is the biggest problem i see in new york. there is a more short-term mindset around monetization. the valley has this belief, its purpose, to build the next google. you cannot build the next google if you sell before you reach your potential. i think that snap chat -- as investors, that is the game we play. we worked shoulder-to-shoulder with these teams so that they can realize their full potential. along that road, your conviction gets challenged because there is a number that is put in front of you that is so irrationally large, you have to be a rational to stay independent. the best thing for los angeles

and new york is that they will get their google or facebook. you cannot do that if you sell early. >> we will continue this conversation. we will have a quick break. we're going to talk more about the landscape and social. ♪

>> welcome back. i am emily chang. we are back with peter fenton, an early investor in facebook and snapchat. jon erlichman is with us from l.a. >> whether it is l.a. or new york or silicon valley, you obviously made this decision to relocate to san francisco from silicon valley, mid-market, not too far from twitter. now that you have done that, how are you measuring for success? what has it done for your brand?

>> san franciso became an epicenter post-salesfore's success. it is a place to build tech companies. the reasons for that are fascinating to us because it is a somewhat unintended consequence of the google bus. they give them an opportunity to

live in san francisco and bust down. if you are living in suburbia or a city as a young engineer, you pick the city. that started the process. the benchmark's standpoint, we work with entrepreneurs and have a field-based business and we measure success by the time of companies. it has got a meaningfully by being in san francisco. 2/3 of our investments have been in san francisco in the last five years. there was something going on which is not resolved between the technology industry integrating more deeply into the san francisco historic, and it is something we are interested in because it is created tension. one community has been hyper-successful and the rest of san francisco needs to be brought into that. >> what's that about one company that is thereby that is mentioned in terms of your success and that is twitter. we talked about it in l.a. as well because of ties to television. you talked about the ties between twitter and television for a long-term. in terms of twitter versus

facebook, if you had to pick one as they both try to be the second screen, which one ultimately wins? >> i don't think it is an either/or in that sense. twitter has always been compared to facebook in a way that i think misses the uniqueness of what twitter has built. their model is very much a human-powered network, much like a telephone network or other networks that we now use in our daily life. twitter has established itself as a parallel channel ro television, a non-substantive. we're not taking hours away or measuring time on site. we are trying to be a parallel, consummate three channel to television. facebook has a different agenda or model. both have a role to play. twitter has been symbiotic to the content industry and has try to stay engaged with the online experience and not steal it away but amplified the success.

>> facebook bot whatsapp, instagram. there is twitter. how does this evolve? what is the dominant social network years from now? >> the question we ask is the chewing gum question. if you lose your flavor after six months or pick your timeframe, it is a question of durability. snap chat is an example. we didn't know if it was a fad. there are fads in our industry. we took a chance. the medium is the message and the tools that we create as much create us as we create them. snap chat has created a flourishing set of human behavior that did not exist before. the selfie, the carefree, you are in control of your emotions in reflecting to your friends in a private way. that is a different experience than existed before. benchmark is a believer and a plurality of the networks. if you look at your phone, there is not one app that does everything.

there are purpose-built apps for things you are trying to accomplish. that allows for an ecosystem of multiple success stories. >> thank you, peter fenton of benchmark. it is great to see. jon erlichman as well. we're going to talk about president obama's lan with the nsa and changes that are coming. ♪

>> you are watching "bloomberg west," where we focus on innovation and the future of business. i am emily chang with our editor, cory johnson. king digital priced their ipo at $22.50 setting their valuation of more than $7 billion. >> $7.1 billion according to the great leslie picker. >> also with us is paul kedrosky from san diego. leslie, this price is in the middle of the range we had expected. >> is all about psychology.

the high end of the range was already a discount to its peers. the number sounded high, $7.6 billion is what it had been valued at the higher end, but it is all psychology. the middle of the range helps investors feel like they got a decent deal on this if they decide to buy shares. >> when you look at this deal, i see a deal that prices the sales ratio cheaper than any of the other game companies other than electronic arts. what do you make of this? >> i am torn. >> you sound sad. >> i am not sad at all.

i am torn because i feel on one level that the growth is flat line. we're going to make this thing shine because we are a one-trick pony. they're not preying on investors, but it is a one-trick pony. we have been down this path many times. there is nothing different here. is it cheap enough to discount? we know the likely trajectory of the company and that is a hard problem. it is not that cheap only know the history of companies like this. it is difficult. to credibly build a pipeline of mobile games or games on any platform. it is a very hard thing to do, among the hardest thing to do in technology. i think it is highly unlikely that they have cracked that particular nut of building a process to do that. i think it is expensive. >> let's talk about the one trick. they make this game, candy crush saga. it is 78% of the revenue. leslie, what are investors and analyst telling you about how

interested they are to getting into king? >> do they see long-term potential? >> i have had countless reader e-mails from retail investors on how they can buy shares of king. that is interesting me for me to receive those e-mails. it is from a fundamental point of view, they have been cashflow positive for nine years. they're profitable, which is different from many of their other social media peers. there is a bullish case to be made from the fundamental side. >> that just terrifies the living daylights out of me. that is exactly the problem. it is a classic retail-centric deal. the only reason they would get involved now is because they think they could flip it to a bunch of wahoo retail investors. that is the danger here and that is a dangerous sign, that most of the interest, anecdotally,

has been in retail. >> you said they were not trying to say that they have other games in the pipeline. i would argue that that is exactly what they are saying. there is a weird statistic that they came up with at the ipo filing. 180 ip's, intellectual properties. not 180 games they developed, intellectual properties. not patents, products. >> back in the day, electronic arts used things like that. they called it on the inside a, "dude, i've got one." >> are we seeing, with box revealing their ipo filings, the numbers do not look great. it was called a house of horrors. are we seeing the beginning of tech companies taking advantage of the window, taking too much advantage of the window that is open right now?

>> i was speaking with a banker today and asked him that question. he works at a company that is a health care i.t. company that had $13 million in revenue last year. more than doubled on their first day. what are investors looking for? he said growth over yield. they want growth, no matter what it costs. i think it is interesting companies liking to get out in this environment. it is an interesting environment for these growth tech companies. >> do you see the similarities? >> huge. what you're seeing is massive amounts of investor push from inventory, meaning companies on their respective funds statements and they want to push them out and get them out as quickly as possible. in doing that, they do whatever they can to get them out. you look at the acceleration and

box is an example. you have a picture of a top line that looks impressive and that is great, but it comes with consequences. a huge split to sales try to put these numbers, a giant burn on the sales and marketing line. these are not long-term credible companies. these are events to go public. this is not a company going public. >> here is a non-worthless metric. there are 174 ipos pending in the u.s. right now and that is up 255% from last year. >> the events in russia, a stock market correction. people, if they have companies where they want to go public in the future, they are going to push them out now.

it has been closed of the past couple of years and there have already been a decent-sized backlog. the window is open and companies are ready to take advantage. >> how do you see this playing out over the course of the year? >> we are already -- the first-quarter of numbers is the best quarter of 2004. every ipo that price in the quarter priced in the top and are outside. that is stunning. the only metric that we are missing is a significant fraction, more than half of the companies, is doubled on first-day issuance which would take us back to the bad old days. >> we are headed for the bad old days? >> it yanks out junk. >> i want to look for the ways right now that this bubble is so different from 1999. the ipo thing right now is so similar. leslie, in your coverage of

this, surely people are making comparisons of this. >> i see this bifurcation of bubble theory. on the east coast, you hear bankers talking. it is all sectors, they are saying that things look fine. they are mature companies with long business models. everything is fine. they have sector diversification. on the west coast, totally different story. people are saying, we are in a bubble. we are not sure if we're in 1996, 1997 and 1999. it is interesting. >> what year are we in, paul? >> 1998. that is my bet. >> my favorite fact of last week was when we were told that irrational exuberance was a phrase coined by al greenspan. it was coined in 1996.

>> bubbles tend to build up very slowly and when they pop, and happens really fast. we will be watching for that. paul kedrosky and leslie picker, thank you. ♪

>> welcome back. i am emily chang. google is hoping to make google glass more stylish. they have announced a partnership with a company that owns the ray-ban and oakley sunglasses brands. they're going to design and distribute new versions of google glass. the high-tech glasses are expected to be available to mainstream consumers later this year.

we're focused on architectural design today as we sit in front of the new bay bridge which you cross every day. >> once in a while. >> what you think of it? >> it's all right. it is growing on me. i have watched it go up. >> it is more open. >> some of the other designs were more interesting to me. it is interesting. jerry brown, the governor of california but then the mayor of oakland, opposed the bridge over design issues. the design was actually big in his mind. the mayor of san francisco did not oppose it. it shows this growing and interesting concern with design

these days that was not around 15 years ago. >> design is so critical to building things. you are involved in the shanghai tower. when it comes to design problems, are all of those different problems or are the principles in the approach the same? >> that is a good point. it is a process. most people think of design as the shape, the style. something that is a lickable product that you want to hold. we think of design is a process. it is a way of dealing with complex situations. an mba has financial spreadsheets and they try to resolve for one variable. the sign is a team sport. it is checking the ego at the door, doing prototypes early, making mistakes, and finding out what works. getting the input from the customer. it is a process you can apply to

anything. >> what you think of the bridge? >> i love it. >> the western -- >> the new one, of course. i think it is a fabulous bridge. it is an iconic style. everything you are saying is also functional. design is working with highly ambiguous situations. think of all the variables that come into play to make something that could survive an earthquake in the bay area. the bridge had nine inches it could move before it would fail. this could move nine feet. >> the way it uses light to illuminate itself, it is an interesting design. i feel like bridge design has generally been spectacular in this country. there are great bridges throughout the midwest. "bridges of madison county" is a terrible movie. but i am interested in the reasons, or what you think the reasons are, why great design is

creeping into everyday design into things like pcs. 20 years ago, they were horrible. what is different? >> it comes down to competition. in the world today, design is the differentiator. back in the 1980's, it was customer service. nordstrom said that pretty well. in the 1990's, you had walmart and southwest airlines. it was about cost. design is limitless. being able to innovate and differentiate in the market. if you look at the markets today, capital is nearly free. anyone can get capital to start a business. marketing is inexpensive. you can do small run

manufacturing. global competition is immense. the product has to stand up for itself. >> what tech companies out there are doing design well? >> there are many. i think the bay area is great. we have that team sport, the ability to innovate and have a lot of failures. in the valley, you have lots of failures that are finding what does not work but they're doing it cheaply. i look to the tesla's of the world, the nest is an example. amazon is a great example, how they have integrated so many different elements. >> the functionality wrapped within that, a real form and function all-in-one. >> it is really about making the product stand out to the people who want it. you cannot market your weight to a successful product in this market. there are too many competitors. >> bryan matthews, thank you so much for stopping by. what if the broadcasters win this fight? ♪

>> welcome back. it is one of the most closely followed court battles right now. startup aereo taking on top broadcasters over the rights to stream television. the case has made its way all the way to the supreme court. aereo is expected to submit a brief tomorrow. jon erlichman sat down with them in salem. they have been unapologetic. is that still the tune? >> definitely. this is someone that does not believe it is a sneaky workaround to avoid paying broadcasters. he feel strongly that what they

have is a legitimate offering. in context, when you go back to why he started the company in the first place, here's what he had to say. >> my last company was a company that created technology for measuring viewership in cable companies. it collected data from a use of homes. when you look at the data, it was shocking. the majority of people watch seven or eight channels and half of them were broadcast channels that were free to air. prices keep escalating. technology does not keep pace. people are consuming more content online. people are expressing their interest in moving away from the traditional model. >> how close is the company today to the one you envisioned?

>> startups have a strange behavior. you start something and you test and you pivot and pivot again and you have a couple of mishaps. it is a common story. this is the first time that i have observed what i would call a clockwork-like execution. it is exactly what we set out to do. we knew what we wanted to do so well that we moved extremely fast. this is to the t. >> what about the legal side. you must anticipate is a bit of legal hurdles. did you expect this kind of a fight? >> the things i did not expect where the direct impact of the computing cloud and these things. if i had taken a moment to step back, but you never do.

the controversy we had anticipated, but the scope and scale of what has transpired was a surprise. >> outside of court rooms, broadcasters continue to speak about what their options are in terms of where they can take their channels. we can move our broadcast networks to cable. we can take our broadcast network to the internet. what do you say to that? >> they have had an agenda to go to cable for a long time. aereo has nothing to do with it. are they capable of disenfranchising that large number of people? i don't think so. i think that is a very difficult issue. >> to be clear, if you are not to be successful in the supreme court, is there a plan b? >> no. there is no plan b. we believe in our merit and -- not just believe in it, we do things. it is the right thing. progress is important. the mission of the company is to try to create an open platform, try to wedge the system open. if we do not succeed in that

despite our best efforts and good law on our side, it would be a tragedy but it is what it is. >> have you ever thought about maybe selling the company? say, we started to grow pretty quickly. let someone else worry about the legal headaches. >> i am an open-minded businessman at the end of the day and then engineer. i was look at what is the best way to get your idea out in front of as many people as you can. i always look at partnerships through a particular lens. thus far, we felt that a striving the bus and innovating and pushing boundaries is the best approach. if that context changes, we will entertain things. the lens that we apply is, what is the best experience, best way possible to get in front of as many people as we can. >> that was the aereo ceo. tomorrow, we will go inside the manufacturing facility in new hampshire to show you how they make their tiny antenna. >> looking forward to that

coverage this week. it is time for the bwest byte, one number that tells a whole lot. what we have today? >> it is $361,166,00. that is how much money box has lost. >> they have money on hand. >> i think it is reasonable to look at the business and wonder how they can truly differentiate themselves and never make a profit. >> you to spoke to aaron leavy >> you to spoke to aaron leavy down in l.a. what is your take? >> they like to lose money at the studio sometimes. he worked at miramax. >> he could have a future in hollywood if he was not a tech ceo. he is very entertaining. >> he does magic for emily.

>> thank you for watching. ♪

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