Apple Is Ready to Make Long-Awaited Push Into Smart-Home Market

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1:14Bloomberg Audio Studios Podcasts, radio, news You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. A lot of tech news out there. We want to get to that. Matthew Bloxham, the senior media and tech analyst for Bloomberg Intelligence, usually in London. He flies all the way over here to New York, the world's financial capital. And where is he today? He's at the Bloomberg offices in Princeton, New Jersey, because that's where Bloomberg Intelligence Week.

1:54That's where we got our start. Boy, how many years ago? 17 years ago, we started Bloomberg Intelligence down there in Princeton. Matt, thanks so much for joining us here. I want to start with Apple. Looks like Mark Gurman was reporting here from Bloomberg News. Apple making plans to push into the smart home market with a smart home hub code named J490. That just rolls off the tongue. Tell us about what Apple's doing here in the home market. Yes, I mean, obviously they've been kind of pushing gradually into the home market for quite some time, but mainly through the kind of home speaker market with the kind of HomePod and the HomePod Mini, which I think, you know, hasn't been a runaway success the way you'd expect an Apple product to be.

2:36And, you know, some of that, I think, is the cost of the device. Some of it, you know, it kind of is playing to the Apple ecosystem. some of it's about the fact that Siri hasn't been actually that great as an AI assistant and it's been up against some pretty strong rivals in the likes of Amazon and Google. So I think this is a kind of revamp of that strategy and the addition of this kind of Home Hub device is kind of a concerted effort to kind of really push forward and make a bigger splash in that market and create these smart homes where you can control your heating and a whole bunch of other things through this kind of centralized hub.

3:16So let's see. So far, it's not been a great hunting ground for Apple, but maybe with this kind of revamp, and in particular with Siri AI, they can have a better performing product and gain some more momentum. Turning our attention a little bit more toward AI, the news that the Federal Trade Commission is really looking at OpenAI, Anthropic, and other AI companies around the safety of their products amid recent cybersecurity incidents. What are your thoughts with respect to how this may change those companies or what changes may be on the horizon for them as a result of this probe? Yeah, I mean, what I have to say is there's just like so much going on across the industry when it comes to safety, collaboration, cooperation, agreement between companies and the extent to which some of this is anti-competitive or not and whether it's really necessary.

4:12So I think there's so many different things going on. Obviously, we had the agreement signed by close to two dozen execs with Donald Trump and President Trump yesterday. So I think it's an evolving space. I think the fact that we saw that this agreement signed by so many executives does point to the fact there are real concerns out there that need to be addressed. Agreement within the industry is definitely the quickest way to kind of make progress on this. Possibly some kind of legislation is going to come at some point in the future. But as we all know, legislation takes time. There's a lot of differing views amongst politicians about what legislations would look like.

4:56So I wouldn't see anything coming any time seen on that front. Matthew, I guess we're also waiting on IPOs for some of these big AI names, Anthropic, OpenAI. It seems like maybe they're kind of pushing these things back a little bit for a variety of reasons. Where do you think the market reception would be for some of these big IPOs? Because the numbers they're talking about are pretty darn huge. Yeah, they are. And, you know, I think that the first number that people are looking to, particularly when you look at Anthropic and OpenAI is their annualised recurring revenue, run rate revenue. Obviously that's been kind of growing materially over the last 12 months, so as their businesses scale, but that's kind of really the number that these IPOs are going to be anchored on and the revenue multiple you can get against that.

5:46So I think ultimately that's kind of still the most important thing and if perhaps they're delaying it, Maybe it's a sign that the momentum in their revenue isn't coming through as quickly as they hoped. And playing into that when investors look to the longer term, they're trying to assess what is the addressable market for these companies. And that's, I think, where these kind of AI safety concerns come in, is that if there are going to be more guardrails about the pace at which they develop their frontier models, to what extent does that slow the pace of adoption and the revenue opportunity on a three to five year view?

6:21Stay with us. More from Bloomberg Intelligence coming up after this.

7:08This is Robert Smith from Business History. If you're listening to this, there's a good chance you're a small business owner. And like every small business owner, you started with a dream to do what you love and watch it grow. What you probably didn't dream about? Keeping up with cyber threats. That's where MasterCard can help, with access to tools that help identify cyber threats to better protect your business. Building your dream business? Priceless. For cybersecurity in a changing world, there's MasterCard. Learn more at MasterCard.com slash small business. us. You're listening to the Bloomberg Intelligence Podcast.

7:43Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. OpenAI CEO Sam Altman, he spoke with Bloomberg's Ed Ludlow from OpenAI's Dev Day in San Francisco. He spoke on concerns over AI safety, saying they will happily slow down releases when needed. When we need to make a decision about slowing down our training or our model release so that we can make more progress and put more of our attention into safety, alignment, monitoring, security, we will happily do that. Now, of course, we're going to continue to make progress, but the world should always have confidence in our safety cases, in our safety claims and that we are going to be responsible with this technology.

8:38All right, that was OpenAI CEO Sam Altman speaking with Bloomberg's Ed Ludlow from OpenAI's Dev Day in San Francisco. We're now joined by Ed Ludlow, Bloomberg tech host. I believe he's down there in LA somewhere. You never know where this guy is. Ed, thanks so much for joining us here. I guess this whole safety guardrail thing, that narrative is just not going away, is it? How do you think this plays out? What does Mr. Altman think? Yeah, I think, you know, what has been interesting in the last 24 hours is there is a combination now between the action that OpenAI will or won't take on either delaying the release of a model or pausing the training of a generation of model and whether or not and when it goes public.

9:21And so, you know, the way that Sam, he actually pushed back on me pretty hard because I asked him, is it that going public is incompatible with the idea that you need to slow down the cadence of release and pacing at the frontier? And he said, not quite. The whole point is that when you are a newly public company, that's when it's most difficult. You know this, Paul, right? You know what it takes to go public, all the internal audit, the requirements of you within 12 months of going public. I think his point is like, it's not just that you have your duties to shareholders. They want to see growth, profit, etc.

9:58And that that's incompatible with delaying or slowing down. It's that it's a body of work, two bodies of work that require a lot of the company. And so that was a fascinating discussion. And in the news as well with respect to their IPO, what could OpenAI lose by waiting? Yeah, so what was interesting, we broke this story yesterday with some curious timing, I have to admit, because it happened during the keynote at their Dev Day. But sources are telling us that they are in talks with their existing investors to do a private market round, which you can kind of see as a bridge to an IPO happening, whether it's next year or even 2028.

10:41What I hear a lot from sources is people are pretty supportive with OpenAI taking its time anyway. And to be fair, We talked to Sam Altman and OpenAI's CFO about this idea. And the way that the CFO, Sarah Fryer, put it is, you know, there is market demand for them to do a private market round. But they will go public eventually. They will go public when the timing is just better. The environment right now is not the right environment for them to do it. But I think answering your question, you know, my understanding is that everyone's pretty calm about it, actually. You know, the acceptance that Anthropic will likely go public first.

11:19So to the extent that there is another private round, I'm assuming it's going to be at some higher valuation, suggesting that at least the private market is still bullish on this AI story. Yes. So the valuation that we reported is about$1.4 trillion, which would be up from, you know,$900 billion-ish,$850 billion to$900 billion in its last private market round. you know again what Sarah Fryer said on the record because I said here's what we reported what can you say was that there is market demand for them to do this you get the sense this is the investors pushing them to do it rather than them needing money because don't forget when they raised 122 billion dollars earlier this year in a single round that was a record and all that money sitting on their balance sheet so right now there's like all this this debate about how much cash they burn through for the compute, but they do have a lot of cash, right?

12:15You know, sitting there ready to use. Stay with us. More from Bloomberg Intelligence coming up after this. Some people treat ChatGPT like some kind of smart search engine, and some use it to get work done. ChatGPT work is a new way of working in ChatGPT that can take action across your apps and files, stay with a project for hours if needed, and turn a goal into finished work. It's designed to help you move from a chaotic starting point to a reviewable first version. So all the source materials, briefs, and scattered information that you have to grind through to turn into something useful can just become something useful.

12:55Put ChatGPT to work on your most ambitious ideas and projects. Get started at chatgpt.com by selecting work mode, available on plus and pro plans. This is Robert Smith from Business History. If you're listening to this, there's a good chance you're a small business owner. And like every small business owner, you started with a dream to do what you love and watch it grow. What you probably didn't dream about? Keeping up with cyber threats. That's where MasterCard can help with access to tools that help identify cyber threats to better protect your business. Building your dream business? Priceless.

13:26For cybersecurity in a changing world, there's MasterCard. Learn more at MasterCard.com slash small business. us. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. There's some bond deals out there in the marketplace right here. I'm talking size. Paramount Skydance out with something like 51 or$52 billion. I don't know what's going on up there. That's a lot of debt for a media company. Stephen Flynn, it's his job to figure it all out.

14:08Stephen Flynn, he's a credit analyst for Bloomberg Intelligence, covers all the tech, media, telecom space here. Talk to us just about the structure of this deal. What's the company doing now in the marketplace? Sure, Paul. They're raising a lot of debt. They're bringing a lot of money. They're hitting various markets. They have two components to the debt. There's the first lien debt. That's investment grade rating. They're doing loans, and they're doing U.S. dollar denominated corporate bonds. On the high-yield side, they have second lien bonds that are high-yield rated, and they're hitting both the dollar market and the euro market in high yield.

14:41So there's multiple parts. They're hitting multiple markets. In your opinion, what would be sort of the first sign that that debt reduction plan is not working? Well, let's hope it does work because they are voting on a lot of debt. They're going to have a lot of leverage. you know what's expected is the company is going to be implementing a ton of cost synergies right so they're starting out with high leverage but the goal is to de-lever right and there's two components there right you could increase your EBITDA to lower leverage or you could reduce your your debt or net debt balance so they're going to do two things number one they hope to grow the EBITDA but a big part of that is the cost synergy so if you look at the two companies combine them you're talking about 12 billion dollars of EBITDA they're looking for six billion dollars of annual cost savings within three years.

15:24That is a huge number. So that growing EBITDA will lower your leverage ratio. Also, once you get past a year or two, they should start to generate a significant amount of free cash flow. And that free cash flow will be used to reduce the debt. And that will get you to delever over the next three years. Bloomberg News is out with a great story on this deal today, just saying, hey, they wanted to get this deal done like six months ago, or if not more. But they had some delays, state's attorney generals kind of holding up the deal. So that delay, what's happened in those six months is interest rates have gone up dramatically.

15:57So now this is going to cost them a lot more. How much of a problem is after them? Yeah, it is going to cost them a lot more, right? So if we think about it, they first announced plans to, I think they offered$30 a share back in December of 25. They agreed to$31 a share in late February of this year. And you think about where the credit markets have gone over that time, it's gone higher, So if we look at the generic U.S. 10-year Treasury bond, it's up about 100 basis points from about 4.2 % to 5.2%. The IG market is up about 110 basis points, up to about 6 % in total. High-yield markets up about 160 basis points.

16:35It's now on average 8.3%. So if you think about that significant rise in the underlying markets, obviously, and Paramount's going to be, you know, Paramount, they're issuing a lot of debt. It's going to come wide, right? It's going to cost them a lot of money. But if you think about that change, in total, they're raising about$57 billion of debt with all the different markets that we talked about. An extra 100 to 150 basis points, that's an extra$570 million to$850 million a year in interest expense. Oh, my goodness. Now, the company is expected to generate significant free cash flow. This will clearly put somewhat of a dent in that free cash flow.

17:11But hopefully, the company will have the capacity to deal with it or it should. You're a credit analyst, so you don't rely on hopefully. you guys like i'm an equity guy so i say ah it's all gonna work out then we're gonna buy the stock you guys really look at the numbers and can they actually do it yeah well like i said we hope they can but no the bonds are coming wide right like so right if you're a bond investor you're saying hey i have significant concerns right media mergers don't have a great track record there's a lot of synergies that they have to cut right there's some uncertainties there but it's going to be a big name in the market and it's coming really wide right so if i don't own it and it performs or if it tightens, I'm going to underperform.

17:49So that's going to force people to be involved. The new secured debt will basically place them above unsecured debt holders currently for Paramount. How much of a problem is that? And what does that mean for those investors who are already investing in Paramount debt? Sure. So it's going to be a complicated capital structure with many layers. So like you said, the first lien is the first priority. That's investment grade rated. The new bonds they're offering are second lien, which are high yield rated. Now, there's some legacy debt on the Warner Brothers side that's exchanging at the second liens, and then there'll be some stub pieces.

18:20You referenced the legacy Paramount unsecured debt. So that will be behind a few layers of debt. Now, those bonds are yielding much more. They're trading at large discounts to par. So a lot of those risk factors are already in where the Paramount bonds are trading. So it's interesting. Paramount bonds were a part of the investment grade index until I think it was March this year when they got their last downgrade to junk. They fell out of the index and into high yield. Stay with us. More from Bloomberg Intelligence coming up after this.

19:13and scattered information that you have to grind through to turn into something useful can just become something useful. Put ChatGPT to work on your most ambitious ideas and projects. Get started at ChatGPT.com by selecting Work Mode, available on Plus and Pro Plans. This is Robert Smith from Business History. If you're listening to this, there's a good chance you're a small business owner. And like every small business owner, you started with a dream to do what you love and watch it grow. What you probably didn't dream about? Keeping up with cyber threats. That's where MasterCard can help with access to tools that help identify cyber threats to better protect your business.

19:51Building your dream business? Priceless. For cybersecurity in a changing world, there's MasterCard. Learn more at mastercard.com slash small business. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. Well, the New York Times investigation found that DraftKings built a machine learning model that scored customers by how much they would lose for each free bet or bonus they received. That's raised some concerns here on this subject in part of our next guest's opinion column.

20:35That's called him, Makonda. He's a lecturer at the Yale School of Management, and he is a Bloomberg opinion contributor. We are in the era of warped entrepreneurship. What do you mean by that, Gotham? So this is a DraftKings story, but it's not just a DraftKings story. And for DraftKings, I'd almost just want to ask the people who are doing this, if you told your mother that what you did was using the data science skills that you acquired over years of painstaking work to find people who are problem gamblers and extract the last bits of money from them and make it harder for them to sort of separate themselves from their gambling habit.

21:11Would you feel proud of yourself? Like, is that something that your mom would say, gee, I'm really glad you did that, son? I sort of hope not. But I don't think it's not just a DraftKings story, although the issues of gambling, you know, sort of online sports gambling, what it's done or something we really should address. It's that we have created a version of too much of American capitalism that's sort of oriented around predation, around making life worse for your customers and your counterparties, gathering money for your sort of returns for yourself instead of creating wealth, which is what capitalism is supposed to be about.

21:45In my opinion, what the most striking part of your piece was is basically the dichotomy between this aspirational capitalism and this predatory capitalism. And you had mentioned in centuries past we really were better at reining that in. What are ways in which you see that possibly happening again in this age of globalization, in this age of having so much information about others at your disposal very quickly? Yeah, I think there are two thrusts that we could take. One is sort of issue by issue, area by area, right? We just say that, look, it's not, you know, I would just say broadly, allowing online sports gambling nationwide, that was a Supreme Court decision.

22:27It was a catastrophically bad one. It should be reversed. But there are other like, you know, you see private equity companies that are monopolized in construction of fire trucks and then jacking up the prices. There's just no excuse for that kind of thing. Antitrust was designed for that. We need to do that much more aggressively. But the broader one is the idea that we need to reorient the American economy around people who make things instead of sort of people whose idea of running a company is how do you squeeze it for numbers? That the classic problem here is Boeing. We all watched what happened to Boeing and it's slow recovery now.

22:56But like if you if you are running an airplane company, you should think that your product is airplanes and not a stock price. And that involves sort of a pervasive attempt to de-financialize the economy and make it sort of really put it in charge of people who are people who like to make things as opposed to just people who are playing games with it. But we've trained generations. And one could argue the backbone of American capitalism is to maximize profitability for shareholders. Full stop. Are you suggesting something different? So I am because it's sort of very important to say this. I do this to my students every year.

23:32I'll ask them, do you as a CEO in the United States have a fiduciary responsibility to maximize shareholder returns? And most of them will say yes. And they are wrong. That is a matter of black letter law. It is not something that is hotly debated in the law. You as a CEO have a responsibility to exercise your best business judgment in the interest of shareholders. That's not the same thing. And so, yeah, Paul, I would say very simply, the model we have created that does this, it's not just bad for workers and the environment and stakeholders in society. It's bad for shareholders. Before we had this model of short-term shareholder primacy, shareholder returns were better than they are now.

24:14I'm going to ask a deeply philosophical question right now. So how do you untangle the idea of American individual achievement that is obtained through that particular sort of edge that somebody might have? So you had noted that that kind of edge to take advantage of others is what really is launching a lot of this really predatory capitalism. what needs to happen to be American identity, especially as it pertains to business, to not say, I'm going to get my economic advantage at all costs, even if that means harming another person. Yeah. And I think that is an ideological shift and it goes everywhere from schools.

24:55But the most important thing is incentives, right? That we need to shift. If you change incentives in such a way that this sort of behavior is not rewarded, the norms will start to shift with it, too. And it's not just about incentives, but sort of saying like, you know, if we find out that you as a company are treating gambling the way the opioid, you know, making gambling into the next version of the opioids epidemic in the United States, we should probably intervene before it gets that bad. And if we go after the people who do it strongly enough, that will change incentives. But the broader question, and I think it's a it's like a really powerful one, right, is in the 1950s, Peter Drucker wrote about the fact, he said that if you were a top graduate of a business school, he said, you wanted to go to, you know, General Motors or, you know, or Ford, you wanted to go to a place that made things.

25:43He said, you would be ashamed, ashamed of yourself if you went to a place where you were just allocating capital. And that's a very different model of the world. And it's one that's that historically the United States has had that you can sort of see ways in which go back where this idea that we really care about making great things, not just short-term returns. This is the Bloomberg Intelligence Podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday, 10 a.m. to noon Eastern on Bloomberg.com, the iHeartRadio app, TuneIn, and the Bloomberg Business app.

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