cory: this is the "best of bloomberg west." we will bring you the top interviews and news stories. tesla is showing ankle this week. giving buyers their first peek at the model three. we'll bring you the highlights. microsoft on artificial intelligence after an meltdown.ng ai the next game changer. it is getting crowded in the market for music streaming.

we will check with two rising players as they get ready to go head-to-head with apple music and spotify. with aaking reservations mass-market vehicle on the third $35,000 model three. people put down a $1000 reservation on the car. it will not be available until 2018. his master plan to enter the high-end of the market and then drive down the market as fast as possible to higher volume and lower prices with each successive model. william explains why tesla needs the model three to sell like hotcakes. >> the model three is arguably the company's most important vehicle yet. the new car will not launch fully until next year at the earliest will be priced more for the mass-market. with mass-market comes competition. their success today mean

s competitors like gm and bmw are working hard to catch up. just five years ago, there were only four electric models in the u.s. by the end of next year, there are expected to be almost 60. as any car dealer knows, the more people you are up against, the harder to make a sale. the more you have to spend to promote and market the product. this uses up a lot of cash. tesla already burns a lot of cash. worse, both competitors have a big edge. they sell millions of regular cars and trucks to observe the -- absorb the losses on their electric product. all of which is a problem for investors paying top dollar for tesla shares. tesla is valued at $30 billion, putting it in the top 10 carmakers of the world. s sales do not come

close to matching other companies. you cannot even see them in this graph. to buy this stock at this price, you have to believe they can change the global car market and beat everyone else what they do so. the model three will have to move fast to catch up. >> i spoke in portland, oregon with more on tesla's plans. >> the most important issues here, tesla has a huge number of challenges going for. they have said all along, even as a luxury company, their brand is underpinned by this idea that they are on a mission to make cars available everywhere. this is the first vehicle that will take a step in that direction meeting fully. -- meaningfully. execution is everything. >> tesla is fueled by big subsidies for the car. some states have added to that. we've seen those subsidies have

going away in europe, norway in particular. the suggestion is that by the time this gets out, they say they're going to ship in the last quarter of 2017. only made six cars the last time . look at all of the competition out there. mercedes, bmw, we have a lot of cars that will be there to compete with them in the all -electric space even before this thing is in production. >> i think that is why tesla is taking this step of going ahead and collecting deposits before they even show the car. they want perception that they will be the first to market with the affordable car. the reality is there will be a lot of competition when they get to market, assuming they do not delay the actual launch of the car.

which they have for all their other vehicles. huge challenges there. >> back to that pricing, is that $35,000, does that not include a lot of the extras people will want with the car? we have seen that where the average price is a lot higher than the base model. >> they have a choice, they can either have an affordable car that beats all the competitors by every metric, or they can have a car that beats profit -- delivers solid profit over the competition. they cannot have both of those things. the real question here with this launch, what we will look at, is which side of that equation are is on. are they going to continue to be the competition and build their brand by offering more for less or are they going to start generating profits at some point to support their ridiculously high valuation? i think they have to do the latter.

but that threatens to disappoint consumers. prestigious to this come high level of execution on the product. cory: the model s is so cool. even at $100,000, they lose money on every sale. what are they not going to put in this car? if you lose money on every sale, you cannot make it up in volume. >> as great a product as the model s is, its reliability and quality has been quite bad. if you do the research on this vehicle, something like 80% have had the driving unit replaced once. >> that is a big deal. >> edmonds is a car in tumor consumer advice company, their test model s had the drive unit

replaced twice. they are on their third drive unit. as you get into this mass-market, people become more demanding. it is an interesting dynamic. mass consumers rely on their car more than luxury consumers. they will be a lot less forgiving if these problems persist. as they ramp up production, without a great track record of manufacturing quality, those defects are likely to go up. all this together spells a tough challenge for tesla and elon musk. cory: microsoft makes a big bet on artificial intelligence after bet led to a sexist, racist tweets. we'll show you their take on ai. spotify and pandora singing a different tune.

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cory: this week, microsoft is hosting their annual developers conference in san francisco. their ceo announcing their intention to be a leader in artificial intelligence. their latest attempt was kind of hilarious. ai tweetingd an

program. it ended up tweeting racist and sexist things. >> we want to take that power of human language and apply it to all of the computing interface. to do that you have to infuse ,nto computing all around us intelligence. that means you have to bring forth these technologies of artificial intelligence and machine learning so that we can teach computers to learn human language, have conversational understanding, teach them about the broad context, people places -- people, places, things. context about your preferences, your personal knowledge. so they can really help you with your everyday tasks and everyday life, both at work and elsewhere. does microsoft have a

future in ai? programsots are ai that do things in a human fashion. microsoft wants them in commercial areas, but also to sell you things and provide customer service. they're going to make them themselves and ask people to write them. they put out developer tools. cory: we've had people say on this program that microsoft is quietly making a big comeback. is microsoft very relevant? >> people are paying attention again. there are exciting, interesting things happening. this company is more tuned into the overall state of programmers than it used to be in the world of coding than it used to be. every now and again the old microsoft comes out and bad things happen.

cory: i think it is so interesting that microsoft as a --t's was a company microsoft was a company that dominated technology, every conversation about technology regardless of the aspect not so long ago -- 10 or 15 years ago , maybe. what matters most? >> what matters most is building a future. they missed the mobile revolution. steve ballmer, that is probably the one big hit on his agassi. it put microsoft in this position. for the future, it is carving out a new market. artificial intelligence seems to be a strong part of that. conversation as a platform is a strong part of that. i also think that the success of the platform. cory: the success of azure or

whatever -- everyone pronounces it differently. i say azure. that is a huge success for them. you see a lot of your clients talking about this. >> i think they are part of the big two. what microsoft hopes to do is infuse intelligence into that delivery of cloud-based services. >> intelligence like a bouncing paperclip. >> hopefully it will be better than our old friend, clippy. in this instance, developers can call on these different apis to create these bots. there are all these cameras today, and they could tell you your emotional state. they could tell you you're happy, sad, you are 31 years old, your 51 years old. are 51 years-- you old. they're trying to make those tools available so developers and incorporate them into their own programs. >> i think that they are killing

it in the cloud. they are number two. azure is a big deal. cory: i like this it i'm not the only one who can't pronounce this. i think we are back to clippy. it was based on the idea that conversational interface would help people deal with all the complex of the in mark software. they're trying to do it for the whole world, not just one application. >> why didn't that work? the idea was not a problem, but it had no intelligence. it did not know what you needed most of the time and it and did -- most of the time and it did

not know when to shut up. microsoft is thinking with ai and machine learning, these things will understand your context, what you need and when you need it. that is the bet for them. cory: have you used amazon echo? >> it is catching on for a reason. it seems to understand natural language. >> you can do something with it, too. siri works, but i don't use it. i think that is a common expense. >> people use it for things like they are in the middle driving, and they need to send a text. that is not super intelligent. today, they showed this idea of being in a chat about travel and there is a box that gets into the conversation that makes a recommendation. that is proactive intelligence. cory: is this anything more than the advancement of moore's law? machine learning has been talked about for 70 years or so. are we finally at a point only because of the advancement of semiconductors or something else

going on driving this? >> people in the world of ai will tell you that there has been new approaches and models for representing knowledge and doing weird things with ada. data.h a computer just beat a person at go thanks to google. things are happening. there are new approaches. a lot of excitement. the basic idea is the same. dna is nothe entirely dissimilar to what we see from clippy. we see a lot of information available on the open web and giant databases. there are billions of more users to interact with. that is our own deana

vass, jp and paul. a little-known japanese pinball maker soaring this week after reports that it might be behind the fbi hack of the san bernardino iphone. that story is next. sound cloud launches a long awaited premium service. why sound cloud will survive the streaming wars, from their ceo. ♪

cory: let's take a look at apple. the fbi said they cracked the security of the iphone used by the san bernardino gunman. a little-known company worked with the fbi to crack the phone. they saw their shares soar 40% after that report.

i sat down with alex webb. alex: suncor sounds like the company we should all know about. it is completely off the radar. it has a rudimentary website. it is like a holding company. assets, oneumber of is this israeli firm. >> a small company. this is an interesting company. we should see it more as a shuffle master, a company that makes slot machines, things like that. it is interesting they are in this business. this is not a huge secret in the intelligent community. alex: the fbi does contract with a lot of different people. when i was looking last week, people were saying there may be -- maybe a dozen companies that could do this and any number of those work with the fbi in some capacity. there could be an office in san francisco with two guys who are

experts that might help the fbi locally. people talk about this, but it is a box that you can plug into a pond. phone. plug into a it is a machine that the machine, the is a parent company is based in japan. alex: it was bought by the japanese in 1990. it remains largely independent. they have offices in the united states. their r&d is done in israel. cory: there is a lot of cyber security work that happens in israel. alex: that is one of the reasons

expanded our tech coverage there. there's a lot of innovation there. cory: here's the question. if the fbi has had a contract with them for a long time, the fbi said they needed apple to get into this phone, and they did not meet apple. one wonders why did they realize they did not meet apple and if best need -- not need apple and if the court case was an excuse to get a legal ruling to get into a lot of iphones. >> that is something experts have been talking about. it seems the fbi could have done this for a long time, that means judges will be circumspect going forward when they look at these rulings. they will have a second look and say to law enforcement agencies, are sure you cannot do this. who are you using? have another try and come back. cory: we don't know if these founders of this company -- that leads to a lot of companies doing cyber security. it suggests that israel has some of the strongest ability to hack

and get information when they want information. alex: going back six years now, if you think about the bug that infected a lot of factories around the world. people suspect that came out of a combination of israel and the united states. cory: it has been reported that it was the u.s. and israel combined. certainly a focus in defensive and offensive tools. alex: they have a huge amount of ability there. people say that the greatest concentration in this area is the nsa. if the fbi cannot do it, surely the nsa can. cory: that was our bloomberg news reporter covering apple for us. it is getting crowded in the market or music streaming. pandora and spotify have high hopes of cracking this market.

if you like bloomberg, check us out on the radio. you can check us out in the united states on sirius xm. we continue after the break. ♪

>> welcome back to the best of bloomberg west. competition heating up in the music streaming business. these are the popular music streaming services in france. those plans were scotch. down andlocke law sat asked what the current prospects for a public offering. find there were some conditions that were complicated.

we just finalized our funding privately. we will keep all the options open at this stage. >> when you talk about the options not being there, is that because it is difficult to get funding on the markets? >> i think there are two issues, the markets are very volatile. tech companies like ours. second thing, it was just a few months after the apple launch. there are concerns about groups like pandora. we did have options. >> give me a sense of the united states market. this is the toughest to crack. i know you are present in france. investors are saying you're maybe too close to orange, how do you crack the market, is it pricing? do need to get the music acts on

board? >> i think we need good partnership models. i think we need big telephone companies like orange or others. i think we are going to be one of the big three in the world. we have a successful partnership with at&t and cricket. we are observing the market. we operate in the market. we have not found the right time to go in. >> do need to spend more on marketing? >> you asked for an example. a few hundred million is not do the trick. if you are committed strongly, you have to put a lot of financial resources behind it. it is a question of options. >> how, is it social media? if you want to tap into that market share, what kind of narrative do you have to play out for consumers?

>> is a mix of social media and traditional media and pr and communication. you need to explain to people what you get that is different. the biggest issue of all is how you access the consumer. >> a lot of the music acts have wanted more of a say on what music goes into what service. some competitors have given into that. will you? >> we are in constant conversation. we have explained very good to our artists and the music industry -- the big debate is on the free side. that is fair. the only has to prescription model. we are at the beginning of a big market. more than 50% of the revenue is digital revenue. you can see the potential. >> are there any markets or countries that are willing to pay?

>> we are the leader in the emerging markets. we have some asian markets. columbia, for example, was a small market or the music industry, but now it is a double to digit million dollars market. those markets will leapfrog. people jump into streaming. >> is it infrastructure? >> it is infrastructure and mobile economy. >> is that five or 10 years away? >> it is shorter. you will see the top level of customers. in latin america it goes fast. >> that was hans holger albert. spotify is said to raise a billion dollars in debt.

that debt is a loan that converts into stock in certain scenarios that turn into class a shares. this deal has some toxic terms. >> there is a lot of ipo noise coming from the streaming industry. it seems spotify has also started the clock on their own idea by raising funds that get more costly for the business if it does not sell shares in a year. the streaming company with a presence in about 60 companies has raised $1 billion in convertible debt. perhaps using the instrument rather than using normal fundraising to ensure it does not have to lower its previous valuation, guessing it will be worth more in one years time. it is reported that spotify has signed up to give investors in

the debt higher coupon and a juicier discount on share sales if they have to wait longer than 12 months for an ipo. that is a big bet for spotify as they tackle the challenge of apple music and have to pay higher fees to music labels. they arty have 30 million paying subscribers and 100 million that pay -- listen for free. bloomberg news, london. >> sound clout is jumping on the streaming bandwagon. they will be similar to pandora and apple music. users will get 125 million songs and licensed content on demand. i spoke with the ceo to ask him how he is going to compete against bigger and better financed rivals.

>> the unique thing about sound clout is that it started from a greater community from the beginning. it has gone from directly at the source which is greatest. we pay about 12 million creators every month. that has attracted over 175 million visitors every month. we have had a much larger catalog than any other service out there. >> why use the word creator instead of musicians? >> i say creator because it is broad. it could be musicians or podcasters or comedians, teachers, any kind of creator. >> i will give you that. what makes your service very different from what we are already seeing from apple or spotify or pandora? >> sound clout go, our subscription service for $9.99

every month, you get some features at three. off-line sync is huge for our millions of users. it is our guest requested feature. we have a radically expanded content catalog. we offer over 100 million tracks. everything from the biggest hits to the deepest underground is tracks that just came out. it is the only service in the world where you get that full breadth of content. everything from giants to emerging creators. we have starts from yesterday, today, and tomorrow in one service. >> i wonder what your take is on apple music. let's not be kind. when you look at what they have succeeded at and failed that, what do you see? >> i think that they were in

some ways a little late coming into streaming. as i said, we are early in the market over all. then helping the market grow from the perspective of their service and in terms of focusing on it from a device perspective is good. choice for consumers is always good. we have always wanted to build the music service that can contain the entire world's creativity. all the different creators out there. i think that is really appealing. >> let me ask about pandora. a different kind of service. they are going through some struggles with their ceo suddenly out this week.

the founder comes back again. if you were looking at pandora, what do you think they need to do? >> i think what they have done well is capture people's intent to listen to radio on their mobile device. to listen to long and undid corrected sessions. -- long and uninterrupted sessions. people want to be able to open the app and just listen to a great stream of music. that is why we have featured track stations. you can start a station from any track and have it play for as long as you want. >> do think they are focused on a different kind of experience? is there a downside to not have individual teams -- tunes? >> i think today's music consumer wants to be able to listen in different ways.

i know that i open up the app and just want to let it play because i'm lazy. sometimes i know exactly what i want to go to. some days i want to listen to a top 40 track, and some days i want something that was just released and is not available in the system yet. that is universal for most music listeners. we are trying to cover all those different cases. depending on your mood, you can have the experience you want. >> that was the sound clout ceo alexander young joining me. fitbit outselling the apple watch. i will ask the ceo if he can keep it up. we will talk to her hot startup that has defined -- a mega-round of funding. ♪ >> the battle of the fitness

bands. fitbit remains in the league. it is still dominating this market. earlier this week, we spoke with the ceo. we asked him about the fitbit blaze watch. >> the company has grown pretty explicitly. our idea last year, but we had about 5 million in revenue in 2010. last year, we had $1.9 billion in revenue. we have been growing pretty quickly. we announced the fitbit blaze in january. it got great reception. we have 17 awards and counting.

we shipped over one million blazes within one month. a phenomenal launch. >> what is interesting about this device is it is really focused on athletes and best suited for runners even. >> that differentiates us other products on the market. it is geared towards the active consumer segment. these are people focused on fitness and interested in cardio activity. it really has that sweet spot between focus on the right features, primarily fitness, and battery life. it has five days of battery life. >> how much of a hurdle is it you to sell a device to that consumer and what is the likelihood that he will buy another device? >> we are not at saturation point yet. we're growing rapidly in north america and internationally as well.

retention of our users has been great. if you look at the devices of the past six years, 59% of our users are still active. 59% over six years are still active. that is very engaged. if you look at last year, 72% of all users that bought devices in 2015 are still active. >> i think anecdote of late, people buy these devices and put it in the washington forget it. >> that might be true for our competitors. what makes us sticky is the power of our software. we have seen that layer of social and media -- community engagement that drives long-term retention on our platform. last year, we had an increase in the average number of friends people had on the platform. that speaks to the power of friends and family driving you

to your health goals. >> i made the mistake of putting someone who gets more steps on my list. >> there are always those stealth people who have treadmill desks. >> i looked at the reviews online. i looked at how you guys were doing with your watch. it is really surprising to me how much more discussion there was of your watch than the apple watch. i can't decide if that is his device was new or you are getting more buzz than the watch. >> this has been the best launch we have had to date. if you look at amazon, 85% of the reviews are for or five

stars. >> i started to see a slew of other products that go beyond stuff you wear on your wrist is that part of your long-term plan? >> the long-term plan for fitbit is that we are not just a wearables company. we are digital health company. we want people to become more active, lose weight, feel better, manage their stress. our products are filled with devices that are wearable and nonverbal to address those goals. >> that was simulcast on bloomberg radio and tv. robo advisors in the world of finance. a mega-round of financing. ♪ betterment has raised $100

million in new capital, sending the valuation to 75 --

goldman, fidelity, vanguard are all taking notice. by asking him how disruptive he thinks the business could be for the broader financial industry. >> we have been building a crazy business in financial services that turns the traditional models on their head by providing unbiased advice. thesethreatening to companies, especially the stuff you are seeing around. this financing is a big validation for the model. and for us as leaders of this movement. >> lots of companies get lots of money. is interesting, given the size of the business. someon't you give me

indication of the size in terms of your revenues. >> we don't talk about revenues. but a year ago we had $1.1 billion in asset management. have 3.9 billion dollars under management and 150,000 customers. we have grown customers three acts -- three times. january was our fastest-growing month ever. i think that gave people confidence in the business model. we actually had a good month. >> the nasdaq down by 9%. >> we had more customers signing up. more net deposits from new customers. on every metric it was our best month ever. we keep growing faster and faster. isthese markets that

something that people and investors in particular would like to see. we are starting to build out our original village -- original vision of becoming a customer central relationship. we are is try to use our advice and vision to advise more financial services, to help people do more with their money to make it stretch further. you can see some of our recent introductions, account aggregation, where you can see a full dashboard of advice. we are also investing in betterment institution. the partners with advisors and our new 401(k) business, which is growing like crazy from our start in january. >> we often talk about the money raised or the valuation. what are the terms that you rejected and the terms you accepted?

>> we look for really clean turn .heets we took an offer from a great partner. part of the deal was it was a clean turn sheet. we value above any sort of -- no ratchets, no nothing like that? >> everyone around has had that same common friendly structure. to us we prioritized the value of our shares. all my employees are common holders. we put them first. >> we see a lot of these companies taking place with all kinds of hair on the deals. >> we saw some of that. it may seem good at the time. spotyou get into a rough and you regret having that structure. your next investors are going to

want to put it in. we have always had clean turn sheets and that gives us a strong negotiating position when we come to the table. >> that was our interview. that is it for this edition of the best of bloomberg west. see you next weekend. ♪

♪ up, the stories that shape the weekend business around the world. a legal battle comes to a sudden stop. valley,llen sparks the and there's plenty to discuss in the u.s. jobs report. omics, to brazil, to canada, we examine the abcs of a complex economy. the markets are anxious about oil and gas. >> the way to play energy is through the energy infrastructure. alix: a quick take on