♪ >> live from pier 3 in san francisco, welcome to "bloomberg west," where we cover innovation, technology, and the future of business. i'm emily chang. the obama administration has just launched new rules to reduce corporate conversions and reduce tax benefits. we will look into how the new rules impact potential acquisitions. iphones are off to a record-breaking start. they sold more than 10 million six and six pluses over the weekend. we look into what customers are buying them and when it will be available in china. taking the human resources department online. helping employees and health care coverage.

managing payroll and benefits. we speak with the ceo of zenefits. to the lead. we have breaking news, the obama administration is taking aim at corporate tax and version. -- inversion. a wave of companies are seeking foreign mergers for taxation purposes. we are joined by cory johnson and peter cook in washington. what steps are the government taking -- is the government taking? >> it only involves deals closing today and forward. it is not retroactive. that was a big question. how far back would they try to reach, if at all?

we know it is not retroactive. what they are doing with the rules, it is safe to say that they have chosen to do things that tax professionals and tax attorneys i have been talking with over the last couple of weeks thought this is where treasury was heading. jack lew said that he did not think treasury had any tools in the toolbox to deal with these issues. what they are doing is hopscotching. it limits firms. it makes it less economically attractive going forward. they are tightening the rules on what constitutes ownership stake and equity ownership stake in the company. it makes it more difficult for foreign companies to meet ownership thresholds required by the u.s. government for tax purposes. they are tightening the tax rules for subsidiaries for taxation purposes. they are tightening up these rules to make it less attractive. what is important to note is

that, in his comments associated with this, jack lew said that these first targeted steps make constraining this and meaningfully reduce the economic benefits of inversions. when possible, stopping them altogether. he goes on to say that this is a first step and the treasury department is prepared to go further, if necessary, to deal with the wave of inversions. short of congress acting on its own, which is what the administration would have preferred, that did not happen. there are a lot of members in the corporate community having to assess what these deals -- what this means for deals pending. >> burger king, medtronic, a deal with google's health startup, what companies and our world will be affected? -- in our world will be affected? >> they will argue that this is fundamentally based overseas and we have not seen a lot of tech companies do this because the basic rules require that most of your business operations are in foreign countries. there is not a lot they could do. from your perspective, is that the worry? could this spread from biotech to burger king, which was a wake-up call. could this spread to lots of other industries? >> absolutely. this would have a chilling affect on all of the activity out there. the treasury response is that this is targeting companies that do this for tax purposes and not real business purposes. they are making the case that cross-border mergers are good and they will continue to support those.

they think the rules are tight enough that they can effectively block the transactions going forward that they did not think met the test. >> some companies, like google and yahoo!, having criticized for years for keeping money overseas. this is different, right?

>> this is about doing an acquisition to change your head structure. it looks like you are in a lower-taxed region. one of the things that is interesting about the deal is that some corporate mergers make sense because of that tax change, as opposed to hopscotching.

a third-party created this to reduce the deals and repatriate money. we have not seen that. there have been complicated structures. maybe now, we will not. >> cory johnson, our editor at large and peter cook, thank you. apple has a new record number of iphones without selling them in china. when will they hit china? ♪

>> you are watching "bloomberg west." i am emily chang. turning to alibaba. a 25 billion dollar ipo was the largest ever in the world. shares surged 38%. today, the stock closed down slightly. so, what are the risks associated with alibaba's ipo? joining me now is cory johnson. >> it was pretty flat.

they do not want this to collapse on the second day. they were active. we know that it is easier for them to do that. it is interesting. there is a price that makes things different for alibaba. it places a different emphasis. $89 is a different matter. it means that alibaba is an expensive stock now. just my opinion. >> at $68 a share, it was below its peers. >> exactly. it is a question of how fast it is growing. right now, it is valued at 55 times the operating profit and the operating profit is growing 52 times. the price to earnings growth is equal. the problem is, the growth rate, while it was 62 times in the last year, it has been coming down and the growth has slowed dramatically. that is a problem for the company. i am not saying the people who bought the stock are morons. the thinking people are thinking something different. >> what are the challenges question mark >> the comparisons out there are amazon and principal businesses in the u.s.

that is not how chinese spent. -- spend. >> we have home equity loans to buy new cars. americans spend a percentage of gdp. in china, that number is only 36%. one of the things alibaba tried to convince investors is that they are spending money in ways they never have. if that happens, alibaba would be a beneficiary. >> there is a rising consumer class and they will spend more money. >> here is an interesting thing, customers are buying from alibaba more often.

the average customer used it 35 times a year. the average user uses it 52 times and every week, they buy something on it. you might expect the chinese revenue to start to grow faster. that is the kind of fun a mental change a -- fundamental change alibaba needs. >> jack ma and his son called it a jumping off point. >> just by having shares in pocket, they borrow more in other places. just because it is not selling does not mean he is not taking profiteer. we look at the international revenue and what we see is the numbers are growing. there has been a lot of talk of the u.s. as a future market. that market is growing. as a percentage of revenue, it is not as important. it is less important than it ever has been. >> that does not mean that it could not be.

>> anything is possible. look at the last six quarters. the percentage of revenues have gone from 12% to 9%. a year ago, it was as high as 26%. it is coming down and it is a function of chinese growth. international is not as important. >> they have to focus on small businesses and making investments in small businesses that have to grow. what does that mean? >> it is enabling buyers and sellers to come together and benefiting from that. alibaba benefits. they are the opposite of walmart and amazon. a bull investor would have to believe that there is a growing mobile phone usage in the middle class and they are going to use alibaba. they have seen a tremendous growth. you have seen the number grow from 11%, 18 months ago, to 33%.

the business was happening on mobile devices. the problem is there are fewer conversions. a lot of people who go to alibaba on the phone do not buy. >> they window shop.

>> that is a problem they have to fix. while you like that 33% of users are on mobile, there is not conversion. >> a competitor is more mobile-first. >> right. they have to be successful in mobile. >> cory johnson, our editor at large, thank you. sony is set to release -- next month. what does it mean? ♪

>> i am emily chang. this is "bloomberg west." a feature that iphone owners will find next month is apple pay. mastercard and visa are official partners. it has chip and pin technology. how does the technology work together?

i am joined by cory johnson and ellen ritchie. how does apple pay work? >> the way it works is, you provision your card by taking a photo, in the background, visa, working with your bank, verifies it is you. when you have done that step, it all happens in the background. you can simply wave a phone after pressing your fingerprint reader and it will make the payment. >> there is risk perspective. we have seen credit card breaches at target and home depot. had they been more mainstream, would that have happened? >> no one thing can solve the problem. we have very enterprising criminals attacking the financial system every day. apple pay and similar technologies that you can get soon will be a big part of the solution, along with the new cards that you mentioned. specifically about these

technologies, does visa have more cards using the chip technology than using different wallet formats? apple pay or whatever. >> most of our payments in the u.s. take place on plastic cards. the mobile technologies are relatively new. we think they will be taking off. right now, the overwhelming majority is on your plastic cards. they will be swapped out for those new chip cards over the next two or three years. >> how fast will you guys actually be swapping them out at visa? >> a great question. that was what i was about to tell you. visa itself doesn't put the cards out. it is our issuing bank partners. so, whatever bank issues our card, they have told us that by

the end of 2015, we should have 575 million chip cards in the u.s. market. huge numbers. >> specifically, do you think that the value proposition for apple is different because they have biometric id on the device? therefore, they will have a lot less risk. >> i think the apple proposition is a strong one, from a security point of view. it isn't really about the fingerprints as much as the technology that operates in the background. that includes chip technology, which generates a one-time code, which can't be replicated by criminals. it really makes the data useless to criminals and will be a big part of devaluing the data and making the system a lot safer in the future. exactly the same thing the chip cards do. >> i don't understand the

difference. >> right now, the store reader reads the card and it has a series of numbers that can be used to make a fake card. once you have a one-time code, it does not matter whether the data is stolen. you cannot use it without a new one-time code. it is generated by a chip in the card or on the phone. >> in other words, you are saying that the retailer never has the actual number and hackers can break into target and home depot a lay want. there is nothing -- all they want. there is nothing in there. >> we can take it out of harms way and out of the line of sight of criminals that are trying to steal data. >> the technology that is integrated in apple pay is different from chip and pin technology. is this just adding layers of security to the actual transaction? >> yes. it is adding to all of the transactions.

it is important to know that the criminals always go to the weakest link. you have to secure a physical point of sale where you use your card in the terminal and the digital point of sale. whether that is mobile or electronic, the technology is operating on the same principle. it is implemented differently depending on whether you are there. >> you mentioned that visa will have 575 million cards out there next year. will retailers have the cards -- the hardware? >> the retailers are coming along, perhaps a little slowly. they have to swap out the terminals. they have done the work and many of them are in the process of upgrading their system to read the information. we expect significant numbers. i do not have an exact number. some gurus are predicting 30% will be chip on chip by the end of 2015. >> that explains why credit card processing is so hot right now. if i was apple, i would say to visa, i do not care if you think the token is great, the thumbprint reduces the risk of stop explained to me why the thumbprint is not reducing risk. >> let me start with the tokenization.

it creates a single digital account number, similar to the code on the card. it reduces the risk. the thumbprint is a great thing. don't get me wrong. it is what we call static data. it doesn't change from use to use. so, in theory, our ingenious criminal minds could eventually be able to counterfeit that thumbprint data, as well. it is good. it is a combination of things that really make it work. especially the static data -- a limited in the static data through tokenization -- eliminating the static data through tokenization. >> is apple taking a part of your cut?

>> their arrangements are with financial institutions. the economics for visa does not change. >> all right. thank you so much. we will be right back with more of bloomberg west. ♪ >> time for bloomberg television on the markets. let's take a look at where the stocks traded today. we saw decline for major averages. a one-to punch here -- 1-2 punch here.

existing home sales in the u.s. fell for the first month in five. more bloomberg west is next.

>> welcome back to "bloomberg west." i am emily chang. apple's new iphones are off to a fast start setting a new record for opening weekend sales. apple sold more than 10 million iphone 6 and 6 pluses beating sales of the 5s and 5c by about one million. tim cook says while the team had manufacturing better than before, we could have sold many more iphones with greater supply and working hard to fill orders as quickly as possible. the phones went on sale in nine country and will go on sale in 20 additional countries later this week. one place that it will not be happening is china where the new phones are delayed. i sat down with cory johnson and the j&p securities managing director. i asked alex if the $10 million -- 10 million units figure is really that good of a start. >> it is up from nine million last year from the 5s and 5c. we would have liked to see a larger number.

they had some manufacturing constraints. most likely, that is on the 6 plus side where manufacturing started a bit later. a good start. we are only in nine markets, 20 more as you said and hopefully china will be among them. >> this is about manufacturing, not marketing? we have been discussing the issue -- does apple purposely hold down supply in order to increase the hype? >> i don't think apple does that. they do the best they can. it is less than two weeks from announcement to ramp. samsung couldn't do that with the note 4.

we are going to wait another month for those to come ou. it is a manufacturing marvel. some people will have to wait a bit longer, including a lot of people in north america for the larger screen iphone 6 plus. >> do you think there's a particular component that is difficult or is it that did pushed the design into the weeks before the announcement? >> the speculation is the larger screen sizes on the iphone 6 plus were problematic from a yield perspective. >> the yield of the sapphire glass -- is it sapphire or not? >> sapphire protection, yes. >> they're not able to successfully make enough of this stuff? >> potentially.. we have not been able to confirm tha,t but we believe that is the case. >> it is unclear if the 6 or 6 plus is more popular -- it seems the 6 plus is sold out in more places, but that doesn't necessarily mean people are buying it more. >> there are fewer of them to be bought. there are indications there have been outside demand for the larger screen phones. when we get to launching in china, i expect those to be extremely popular in china as well. >> about china -- there have been unconfirmed reports that the chinese government has not approved of the phone and maybe might not for a while. we know china as a government is supporting some local manufacturers -- lenovo. what do you know about what is going on in china in terms of

the regulatory approval? >> china is going to happen, in our view. it is a question of when, not if. we have already got the 5s on sale in china. china was a great geography for apple last quarter. china mobile is working hand over fist to install infrastructure. they upsided last week of their target for 4g base stations and now the intended figure is 700,000 instead of 500,000.

altara is a company that we believe should be bought on that upside announcement. the stock. apple is going to come after that. i think it is very wise for apple to wait until it has sufficient supply to go after that market. is the regulatory portion of this? probably. >> when it comes to the other countries, how do you expect the sales to play out? what kind of international rollout are you expecting? >> very strong because, as in north america, the other geographies have been starved for a larger screened iphone. people cannot afford both a phone and a tablet -- a hybrid device that can do both roles is advantageous. there is also the nations where there is a greater degree of commuting by subway, rail where the larger screens come into play. we think it will be a very strong international rollout.

>> last year after the 5s was released, we got the weekend figures and they said the quarter was better than expected. i look now and does it mean things are just as expected, worse than expected? >> what is interesting is that we have not had in previous years them talk about the pre-orders and the initial weekend sales. there is more information this year than there was last year. perhaps, they're just teasing it out. we will have to see. hey still have to roll out. >> ipad launch coming up in october, we believe. what are you expecting there? >> it is another really important aspect of the story. apple is working with ibm to increase the penetration of enterprises. we would like to see what these new ipads -- refreshes the strategy on how they will do that. they can go a long way with replacing and modernizing the way people, franchises do

business. part of the pay could also bleed into the ipad. >> i spoke to sources at ibm on the sales side. i have gotten two interesting tidbits. one was the sales force is really stoked to have the ipad to offer to customers instead of offering them subpar tablets or saying to get it your self. also, the application development within ibm will be the driver. this is coming from the bottom of the sales team, not the ceo. >> we can look at pay right now. apple pay is a wonderful marriage between hardware and an application and bringing along an eco-structure -- an ecosystem. let's add ibm to this equation and all those fortune 500 relationships. all those business need cases that they can now bring specific

technology solutions to with an elegant hardware solution behind it. >> that was alex of j&p securities. coming up, benefits can be a challenging area for companies. next, a startup that handles all of your hr paperwork backed by marc andreessen and actor jared leto. ♪

>> welcome back to "bloomberg west." i'm emily chang. emc is exploring its strategic options as it faces activist pressure and the upcoming retirement of the ceo. the data storage provider has contacted oracle, cisco, hp, dell and others about a possible sale. they say a deal may not happen. e

after much anticipation, the open enrollment period for healthcare.gov starts next month. one startup, zenefits, is looking to help simplify the sign-up process. zenefits sells the software to help small businesses buy health insurance and other employee benefits. i spoke with the ceo and cofounder parker conrad and started by asking how the company works. >> we sell this problem that is common to every business in the united states with less than 1000 employees which is that businesses have these separate systems related to human resources and their employees. payroll, benefits, time and attendance systems. it creates this problem that any time you hire or terminate someone, you set them up or remove them from 15 different places and somebody has to do all this work manually, often on paper via fax machine. we take all that stuff, put it in one place.

we connect it to your existing systems. move it all online and automate a tremendous amount of the work so that you can focus on your people instead of paperwork. >> you have an interesting personal story that has helped inspire you to do this. you battled cancer yourself. >> i had cancer about 10 years ago. once you have a condition like that, you have to be very vigilant about health insurance. as a result, when i started this company, i was looking around and wanted to do something that was related to the affordable care act which was tied in with the health insurance market because i saw these broad changes coming as a result of the legislation and potentially an opportunity for new companies that can be more nimble and move more quickly than some of the incumbents to grab market share. >> how does this tie into the affordable health act? how does zenifits impact people signing up? >> we think that everyone who is focused on the employer mandate and what that is going to do to employers in 2015 is looking at the wrong thing. the employer mandate does not matter as much because most

employers are already offered health care coverage. the real issue is the mandate for employers to jump through a series of compliance hoops that the federal government imposes on them. the irs released the guidelines and the form employers have to fill out is an entirely new tax return. it is a complex thing and nobody is really focused on this. i think there is a lot of what zenefits is helping businesses jump through these compliance hoops. there are a lot more coming down the pipe. we think we can take all of that on for companies so they don't have to deal with it. we do it all for free which is the best part. >> you are backed by andreessen horowitz, valued at $100 million -- how many businesses are using zenefits right now? how many people to you touch? >> a little over 2000 companies and 50,000 employees.

>> the health insurance brokerage market is worth $18 billion. how much of a piece of that can you get? >> we want all of it. insurance brokers happens to sit in front of like 18% of u.s. gdp and take a 5% tax on it. we can provide a lot more value than the existing folks in the market. >> you are also backed by jared leto. where does he fit in? >> jared is, in addition to his many other talents, is a small-business owner and entrepreneur. he was really intelligent about a lot of this stuff so we wanted him on board. >> jared was on stage at the latest big box conference. who are your main competitors? >> we compete with a lot of companies. i think of our software as a hub and spoke model where you have a central system that these nodes connect to. what happens is we compete with a lot of guys for individual spokes. we compete with wage works versus commuter benefits,

insurance brokers on the insurer's side, different companies for time and attendance software. nobody is taking this all-in-one integrated approach that we are taking. that is why i think it is very powerful. >> do you think you can make all of these benefits cool? it really is kind of a pain to deal with a lot of the different -- >> this stuff is tremendously unsexy. i'm not sure we can fix that but it is a huge headache for a lot of people. >> you've been pretty forthright

about the fires that you're always putting out behind the scenes at a startup. i know friends that work at the hottest companies and it is always one catastrophe to the next. tell me what it is like behind the scenes. >> growing or starting a business is somewhere between a very, very hard and absolutely impossible. behind the facade of every entrepreneur who is killing it or crushing it, i think there is somebody who is worried about -- are they going to launch the product on time? are they going to be able to raise their next round? what are they going to do if this whole thing fails and goes under? this stuff is hard and i am sure everyone, including people who are doing well, has that stress. >> tell me about the times you felt you were on the brink. >> we have grown really quickly and that has created challenges for our operations. there was one point that the rate we could physically set up customers was too slow. we could set up like six customers a day and we were getting 18 new customers every single day. there was a growing backlog. it threatened to be a company-ending catastrophe. our problems are usually engineering challenges so we threw a lot of engineers on this working day and night and weekends. in seven days, we got this brand-new solution that totally cleared the backlog.

we're constantly stamping out different issues as they come up. >> parker conrad, ceo of zenefits. sony will begin selling playstation tvs in the u.s. in the next month, but what is special about the set-top box compared to others like roku? that is next on "bloomberg west." ♪

>> welcome back. i am emily chang. this is "bloomberg west." activision-blizzard has hired former new york city mayor rudy giuliani to defend the company in a lawsuit over its call of duty games. former panama dictator manuel noriega is seeking damages after his likeness was used in the game. rudy giuliani called the lawsuit absurd. while activision says its use of noriega's likeness is protected

under the first amendment. sony will release a set-top box next month in the u.s. playstation tv will cost $99.99 and let players stream over 700 games from handheld sony devices onto their television. could the box be expanded for even more entertainment options? i am joined by our bloomberg news and entertainment reporter from new york. cory johnson is still with me. could it be used to expand entertainment options or is the target audience gamers? >> it absolutely could be used for other entertainment options. it is already being used for sony's own in-house streaming service. they have not say yet what else it will be used for but it certainly has the option. sony has always been gamer first so we will see how soon it takes them to get that far. >> what kind of other companies are they targeting? are they targeting apple tv or roku? >> i asked them that just today. they said yes, it can, but because it is gamer first they think they can do more than the apple tv. they offer 700 games, that is the selling point. it works in conjunction with their playstation 4.

you can use your playstation 4 in your living room and then you can have your playstation tv in your bedroom and stream the games that you are playing on the tv in the living room. >> the tv division in sony was so important for the company for so long but it has been an anchor on their neck for years. is there a suggestion they can get out of the making of the glass and just stick with the electronics where they have better profits and maybe a better business someday? >> last week, they had a lot of bad news about their smart phone decision. they are not ready to let go of it yet.

a lot of investors do want them to let go of the business. it is something they are still working on. games are a growth area. however, games are also a smaller area for them. their playstation has been leading the xbox for eight consecutive months now. investors, from what i hear, want to hear them bring more games to more platforms. they are suggesting the playstation streaming services will be available on smart phones and tablets as well. >> it seems hard for them to break out of the idea to make everything that they invent. this device is fairly interesting if they open it up to other developers. what is the pace in which that might happen? that is so important to the success of the playstation at every release. >> it is definitely early. they are still trying to figure out how to market this device because it does so many things and the offerings are kind of confusing in terms of how it fits with the playstation and even smart phones and tablets.

it will work with the bravia tv so that is something else. we will see where they will go with other devices. >> in terms of other content that might be available, what do we think? netflix? >> they have not announced anything like that. i don't know what we will see. it is certainly possible. it is kind of difficult because they do offer their own in-house

streaming service so we will see what they decide to do. >> it seems like their in-house streaming service has always been an and one for a long time. is there a notion that a lot more content will start streaming when it has not in the past? >> we will definitely see. the gaming division is interesting because they are trying to stay gamer focused. they are making original content already. it is a comic book-type storyline that they are developing for this as well. we will see what other kinds of content that will be available for this device because for them the gamer is first and it has worked for them. there be huge audience of gamers right now and they don't want to stray too far from that, but they do want to enter these other entertainment areas as far as this device goes. >> thank you so much for joining us. it is time for the bwest byte where we focus on one number that tells a whole lot. cory, what do you got? >> it is three. three points is all the 49ers have scored in the second half of any game this year. there are three u.s. tech and media companies that have orchestrated tax inversions in the last day -- decade. those companies -- applied materials, liberty global and the 3-d printer maker stratasys which has a big operation in minnesota. compare that to 14 biotech companies.. that has been a technique of biotech companies to change their domicile. there have been a couple of oil and gas companies as well. burger king attempting to do it

with the tim horton's deal. the treasury is trying to shut that down with big changes. >> i find it interesting it has taken so long for the treasury to take these steps. most republicans and democrats agree this is not a good thing. they disagree about how to go about changing it. >> it has been brought up by the right a bit to say if the taxes weren't so high, we wouldn't have this problem. >> we should change everything. >> a lower corporate tax rate that is closer to the rest of the world. companies have been trying to find some way to get around u.s. taxes whether it is keeping profits overseas, a tax holiday someday. the inversion technique may be falling to the wayside as of just now. >> cory johnson, thank you. thank you all for watching this edition of the "bloomberg west." you get all the latest headlines at the top of the hour on bloomberg radio and all the time on bloomberg.com.

see you tomorrow. ♪

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