Wise to Stay Out

By Ian King

Carl Icahn makes a pretty compelling case for why Apple should get into the television market. The billionaire investor says people spend a quarter of their free time watching TV, and that the market, which he says is worth about $575 billion, excluding advertising, is more valuable than smartphones.

Sounds nice on paper, but the reality is that the economics of building a TV set are very different from those of mobile phones or laptops. The key difference is that the entire product essentially hinges on one component: the display. In many TVs, the screen accounts for about 80 percent of the production cost, according to data compiled by Bloomberg. In a smartphone, it’s about 20 percent, says market research firm IHS, which leaves plenty of room to differentiate with other features.

Whereas savvy smartphone shoppers look at software, memory, processing power, and other tech specs when deciding on a phone or computer, people tend to choose TVs based on picture and price. Apple doesn’t make its own displays, so both factors would rely almost entirely on whatever ones it can procure from a competitor in Asia. Perhaps that, more than the lack of exciting new features, is why Apple put an end to its efforts to develop a TV set last year, according to a report in the Wall Street Journal.

To gain a foothold in TVs, you’ll want a great screen, and only a few places sell them. Two South Korean tech giants, Samsung Electronics and LG Electronics, supply about 42 percent of the world’s liquid crystal display panels, according to market researcher IDC. To get access to those panels, Apple would have to persuade them to let it compete with their TV businesses. Samsung and LG-brand TVs together account for about 38 percent of purchases by consumers around the world, according to researcher TrendForce.

The Koreans have gained a technical edge over Taiwanese, Chinese, and Japanese panel manufacturers. Samsung and LG have been at the forefront of new TV technology, such as curved displays, OLED organic displays, and 4K ultra-high definition. There aren’t many other alternatives. China Star Optoelectronics Technology in Shenzen and other companies with similarly catchy names are rapidly climbing the ranks of suppliers by feeding a growing domestic demand for local, low-cost brands. While Sony still sells a lot of TVs, its market share has been declining for years. Sony placed its TV manufacturing business into a separate structure to boost performance after years of losses. Apple buys screens for some products from Sharp, another Japanese consumer electronics company that’s not exactly in ascendance. On May 11, Sharp said it was considering reducing capital and issuing preferred shares to shore up its balance sheet.

There’s probably never been the kind of opportunity in TVs that Apple exploited in other areas of consumer electronics. When it entered the phone market in 2007, Apple used a game plan that had already borne fruit in music players with the iPod. It wrapped industry-standard components in an attractive package and married it with easy-to-use software. It also helped that Nokia, Motorola, and BlackBerry were painfully slow to respond.

The TV business is already fiercely competitive, and profit margins are slim. The latest sets on the shelves at Best Buy can be easily hung like picture frames and have bezels measuring a fraction of an inch. Smart TVs, set-top boxes, and game consoles offer all kinds of innovations in voice search, motion control, and content. You can already get Netflix or Hulu on many of those—including the Apple TV box or similar devices from Google, Roku, and Amazon.com, each available for less than $100.

Despite all the odds stacked against this project, more than a few Apple watchers were surprised by the prospect of the company not making a TV set. Icahn told CNBC he was confused by the Wall Street Journal article. Besides that apparent miscalculation, we’d like to check Icahn’s work on the value of the TV industry. IDC says the TV industry generated $149.5 billion in revenue last year. While still a hefty sum, that’s about a quarter the size of Icahn’s estimate and less than half of the smartphone market, according to IDC data.

Gene Munster, an analyst at Piper Jaffray who’s been among the loudest beating the drum for Apple’s TV project, is trying to come to terms with the loss. “Given how adamant we have been about the reality of an Apple television, it’s hard to accept the reality of no Apple television,” wrote Munster in a note on Tuesday. Don’t worry, Gene. There’s a lot of other good TVs you can buy.

Fake Facebook Shares

By Anthony Effinger and Katherine Burton

The pitch seemed irresistible: Here was a chance to connect with a money man for billionaire Carlos Slim.

But the supposed financial whiz, who called himself Ken Dennis, wasn’t who he said he was, authorities now claim. In truth, he’s Troy Stratos — and is now standing trial in a bizarre fraud case that provides a glimpse into how money and influence flow through Silicon Valley.

A powerful investment consigliere; a Facebook Inc. insider; the ex-wife of comedian Eddie Murphy: this story has all that, and more.

It begins one evening in December 2010. Divesh Makan, who today manages the fortunes of Silicon Valley billionaires, was working at Morgan Stanley advising well-heeled clients. He shot an e-mail to David Ebersman, then the chief financial officer of Facebook:

“I wanted to introduce you to Ken, who runs the funds for the Slim family and related parties,” wrote Makan. “I will leave it to you to connect. Best, Divesh.”

With that introduction, a methodical charmer got one step closer to stealing $11.25 million from a group of East Coast millionaires looking to buy scarce Facebook shares before the company went public, prosecutors say.

Stratos, a self-described movie producer and music impresario, was about to be indicted by the U.S. Department of Justice for allegedly stealing $7 million from Nicole Murphy, ex-wife of comedian Eddie Murphy. His trial on the Facebook charges started Monday in Sacramento, California. Another, on the Murphy charges, is set for October. The DOJ expects to take eight days to present its case.

In Jail

The 49-year-old, who’s pleaded not guilty to both crimes, has been in jail in Sacramento County since his arrest in late 2011, when the Federal Bureau of Investigation found him hiding in a closet in a rented luxury apartment in Los Angeles. The government added the Facebook-related charges to the original indictment in May 2013.

Stratos never delivered the Facebook shares, according to his testimony in a bail hearing in January 2012. He said he connected the investors’ money manager, Tim Burns, with a Facebook executive and others who said that they had stock for sale. He said he spent the money — which he called a fee — paying old debts, trying to develop a restaurant in Las Vegas, and buying a Range Rover, a Chevrolet Camaro and a $200,000 Audi convertible.

Philadelphia Families

Burns, like Makan, is a Morgan Stanley alumnus. He left there in 2005 to start ESG Family Office to manage the fortunes of wealthy denizens of Philadelphia and the surrounding suburbs. He raised a $13 million fund from them, specifically to invest in Facebook shares.

Burns declined to comment. Makan’s spokesman, Paul Kranhold at Sard Verbinnen & Co., said Makan had no comment. Facebook spokeswoman Vanessa Chan declined to comment. Jack Siegal, a lawyer for ESG, didn’t return calls.

Before Facebook, Stratos spent decades traveling the world signing up investors for films that never got made and real estate projects that weren’t built, according to a story by Bloomberg Markets in 2011.

Nicole Murphy says she heard from Stratos in 2006, shortly after she and Eddie Murphy divorced. She and Stratos had been close friends in high school in Sacramento, and now Stratos offered to help manage the millions she’d gotten from Eddie in the split.

One move Stratos recommended: Move the money to Dubai, where she could get higher interest rates. She agreed, but instead of stashing the money safely overseas, Stratos spent it, the government alleges.

‘Smoothest Guy’

“He’s the smoothest guy you’ve ever met in your life,” Dennis Rush, a real estate agent in Hawaii, said in an interview in 2011. “He’s a con man’s con man.” Rush won a $2.1 million judgment against Stratos in 2001 for money he put up for a music project.

Facebook promised an even bigger bounty for Stratos. Wealthy investors were prowling for employee-held shares of the private company after a plan to distribute millions of them fell apart in January 2011. That’s when Goldman Sachs Group Inc. excluded U.S. clients from a roughly $1.5 billion investment in the social media company, saying “intense media attention” on the deal may have violated rules for marketing private securities. Investors, including the group represented by Burns, started looking elsewhere.

Detailed Look

Court documents in the criminal case and a civil suit that ESG filed against Stratos provide a detailed look into how Stratos constructed the alleged scam that cost Burns’s clients millions.

Burns and “Ken Dennis” first spoke in March 2011, introduced by a broker who knew Burns was on the hunt. Dennis told Burns he ran a company called Soumaya Securities, named after Slim’s late wife. Slim has never had any contact with Stratos or a man called Ken Dennis, Arturo Elias Ayub, a spokesman for Slim, said in an e-mailed statement.

Dennis said he knew Facebook executives who were ready to sell shares for $27 apiece. When Burns asked for references, Stratos sent him to his lawyer, David Meyer, in the Los Angeles office of Venable LLP, a national firm with 600 attorneys. Meyer told Burns that Dennis was indeed affiliated with Slim, ESG said in its complaint.

Meyer, now at Los Angeles law firm Arent Fox LLP, didn’t return calls or e-mails. Nor did his lawyer, David Willingham. Venable partner G. Stewart Webb didn’t respond to calls or e-mails. In 2013, a federal judge dismissed ESG’s claims against Meyer and Venable after both denied any wrongdoing. ESG has appealed the decision.

Makan’s Introduction

Around the time he met Burns, Stratos used Makan’s introduction to reach out to Ebersman, the Facebook CFO, telling him he had office space in Los Angeles that Facebook might want to rent. The connection was key because Stratos then wooed Burns in part by arranging a telephone call with him and Ebersman, according to court documents.

On April 19, 2011, Burns committed to the deal and wired $2.8 million to a trust account at Venable to be ready for the purchase. Stratos withdrew some of the money to buy the $92,000 Land Rover, make a $50,000 deposit on a Las Vegas condominium and pay $333,000 to a professional gambler, ESG’s complaint said.

Stratos, still operating as Dennis, strung Burns along. That July, he said a deal was imminent, according to the government’s indictment, convincing Burns to send $7.2 million. The following month he asked for another $1.25 million to get it done. Meanwhile Stratos was withdrawing cash at the rate of $40,000 a day, ESG alleged.

Fateful Error

Shortly after, Burns made a fateful error.

When it appeared that the Facebook deal would earn him millions in commissions, Burns used cash from investors’ accounts to buy a beach house in Avalon, New Jersey, for $4.6 million, said ESG investors, who filed their own suit against Burns in Montgomery County, Pennsylvania, in 2013. He also put a $1.13 million deposit on an office building in Conshohocken.

The Facebook deal collapsed in December 2011, when Stratos was arrested and charged with defrauding Nicole Murphy. Still acting as Ken Dennis, Stratos tried to keep the deal alive from jail by having associates text Burns to say that Dennis was unavailable, the government said.

Burns finally e-mailed Venable. Webb, the partner there, responded, saying that the contact information Burns provided for Ken Dennis was in Meyer’s files under the name of Troy Stratos. “Mr. Stratos was, we understand, arrested early last week by federal authorities,” Webb wrote in the e-mail.

The government charged Burns in May 2013. He pleaded guilty to fraud on June 25, 2013, and awaits sentencing.

What ESG’s clients didn’t lose to Stratos, they lost to Burns. Facebook shares, meantime, have more than doubled since the company went public in May 2012.

Strategy Talks

By Aaron Riccadela and Jack Clark

The chief executive officers of SAP SE and Salesforce.com Inc. held discussions last year about possible strategic alliances between the two companies, people with knowledge of the matter said.

The talks also included a potential acquisition of Salesforce by SAP, said one of the people, who asked not to be identified because the negotiations were private. The discussions between Salesforce Chairman and CEO Marc Benioff and SAP CEO Bill McDermott began after Benioff contacted McDermott via telephone before SAP reported quarterly earnings on April 17, 2014, said the person.

“There is no truth whatsoever to the suggestion SAP is considering or ever did consider acquiring Salesforce,” said Nicola Leske, a spokeswoman for SAP. “Any such suggestion misses the point that salesforce automation is a 20th century solution to 21st century business opportunities.”

Salesforce, which has a market capitalization of $48.1 billion, is working with financial advisers to help it field takeover offers after being approached by a potential acquirer, Bloomberg reported Wednesday. Salesforce was prompted to work with the financial advisers by a more recent overture from a company other than SAP, another person said.

It couldn’t be determined whether there are currently any takeover discussions between Salesforce and Walldorf, Germany-based SAP. A takeover of Salesforce would be the largest ever for a software company. Acquiring the company would give any buyer a lead in the market for customer relationship management software, and credibility in cloud computing.

Industry Disruption

Safra Catz, co-CEO of Salesforce rival Oracle Corp., said this week that an acquisition of Salesforce by a competitor would be good for Oracle. “It’ll cause a lot of disruption in that market,” she said and declined to comment on whether Oracle was interested in the company.

Growth has been slowing in Salesforce’s main customer relationship management business, forcing the company to expand into other verticals such as marketing and analytics via a combination of acquisitions and new products. Oracle, Microsoft Corp. and other rivals have done the same.

Salesforce’s revenue rose 32 percent in the fiscal year through January, compared with 33 percent in the prior year, and 35 percent the year before that.

Competition Should Be Terrified

By Ian King

The technology industry’s greatest rivalry may be turning into an unstoppable collaboration. Relations between Apple and Samsung Electronics appear to be thawing since the war waged by Steve Jobs forced these onetime corporate comrades to end lucrative supply contracts and engage in costly legal battles. In August 2014, Apple Chief Executive Officer Tim Cook agreed to begin winding down the patent suits with Samsung, and the two companies are teaming up again on new products.

Samsung will manufacture the main chip for the next iPhone, as well as displays for other Apple products, and it is budgeting $14 billion for new plants and equipment that are expected to accommodate, among other things, its big new client. From this alliance, Apple gets access to one of the biggest, most sophisticated chip manufacturing operations in the world to help it continue outselling the competition. Samsung gets crucial new orders for its core chipmaking group to make up for stagnating profit in mobile phones. Just about all other companies in the industry will suffer, starting with Taiwan Semiconductor Manufacturing and SanDisk.

On April 29, Samsung reported first-quarter earnings showing growth in every one of its component businesses. Meanwhile, TSMC, which made the main chip for previous versions of the iPhone, cut its spending plans. “Samsung has come back with a vengeance into the chip market,” says Betsy Van Hees, an analyst at Wedbush Securities. “When you look at all the capacity they’re going to put online, it’s an amazing amount of money that they’re investing.”

Another likely loser from an Apple-Samsung love affair is SanDisk. The company, which makes memory chips for the iPhone, iPad, and Mac, released a forecast on April 15 that fell short of analyst estimates. SanDisk cited lower prices, product delays, and the loss of customers. Apple is believed to be one of those customers, having turned to Samsung for the flash drives used in many newer Mac models, according to analysts. “Playing against Samsung is never easy,” says Daniel Amir, an analyst at Ladenburg Thalmann. “They took away SanDisk’s business at Apple.”

Apple was SanDisk’s biggest customer by far, contributing 19 percent of the chipmaker’s revenue, according to data compiled by Bloomberg. SanDisk’s dependence on Apple and the ensuing fallout could make it a canary in the manufacturing plant for companies in the industry that have similar relationships with the tech giant from Cupertino, Calif. Micron Technology, SK Hynix, AU Optronics, and TSMC all count Apple among their top three clients, and each competes directly with Samsung in their respective markets.

Even as it’s expected to manufacture chips for Apple, Samsung continues to make smartphones of its own. The Galaxy S6 and S6 Edge, released on April 10, are receiving favorable reviews. But the company has every reason to refocus on its roots as a chipmaker. As recently as June 2014, Samsung’s mobile phone division was providing more than 60 percent of the company’s operating profit. That slipped to 37 percent by the end of last year, with the semiconductor division picking up the slack to account for more than half.

While Samsung has been losing market share to Apple in high-end smartphones, the South Korean company remained the world’s largest consumer of electronic components at the end of 2014. Apple was second. The two account for 17 percent of worldwide chip purchases, according to research firm Gartner. And they make up 40 percent of the smartphone market by units, according to researcher IDC. In other words, you can’t avoid them.

As if the prospect of losing Apple’s business weren’t enough, chipmakers have to worry about Samsung building more of the components for its own devices in-house. The latest Galaxy phones use Samsung-made processors, storage chips, modems, and image processors, whereas previous models farmed out some of the work to other companies. Samsung had long promised not to favor its own components if it could get a better deal elsewhere. That no longer seems to be the case.

After Apple, SanDisk’s biggest customer is Samsung, according to data compiled by Bloomberg. Qualcomm, the world’s largest designer of phone chips and maker of the iPhone’s cellular modem, counts Samsung and Apple among its biggest customers. Samsung ditched Qualcomm components for its Galaxy S6 and S6 Edge, and the chipmaker says Samsung will also forgo its processors in the next Galaxy Note phones.

Qualcomm Chairman Paul Jacobs may have a strategy to reclaim lost business. The company failed to win the Galaxy orders partly because its chips were made using a slightly older manufacturing process at TSMC factories, which limited improvements to performance and battery life. When asked on April 28 what it could do to lure Samsung back, Jacobs suggested Qualcomm might be moving its production to the Korean company’s superior factories.

Although Samsung’s newest phones don’t use Qualcomm chips, perhaps Jacobs and his colleagues should root for the products to succeed. If Samsung again proves a threat to Apple in smartphones, Cook may be less keen to look past the rivalry.