TIME Turnarounds

How Sony Got Up and Out of Its Death Bed

President and CEO of Sony Corporation Hirai speaks at a Sony news conference during the 2015 International Consumer Electronics Show in Las Vegas
Steve Marcus—Reuters President and CEO of Sony Corporation Kazuo Hirai speaks at a Sony news conference during the 2015 International Consumer Electronics Show (CES) in Las Vegas, Jan. 5, 2015.

For the first time in a decade, the electronics company has a shot

In the annals of consumer electronics companies that have slipped from great heights, none has taken a bigger fall far from its glory days than Sony. But after years of struggling to right itself, the company is finally making real progress on a turnaround.

Just as Apple helped revive itself in the early 2000s with the iPod, Sony built much of its success on the idea of helping people carry music around in their pocket–first with the transistor radio in the 50s and 60s and later with the Walkman portable cassette player. Those products, coupled with smart engineering, made the Sony brand synonymous with peerless quality.

In the early 2000s, Sony began to lose its competitive edge. Rivals like Samsung had emerged to undercut its higher-priced TVs and stereos. Sony couldn’t get a foothold in new markets like mp3 players. Its earlier expansion into new areas like insurance and its overspending on film and music studios left it with a structure that was at once bloated and siloed.

Sony named Howard Stringer as CEO in 2005 to turn things around. Stringer cut a charismatic figure, but couldn’t speak Japanese and, as a lifelong media executive, lacked an engineering background. Stringer tried to conjure a convergence of electronics and media properties that never quite gelled. (Stringer is on the board of Time Inc.) Meanwhile, further setbacks struck: the global recession in 2009, the Fukushima earthquake in 2011 and a stronger yen that hurt Japanese exports.

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Sony has posted net losses for six of the past seven years. As a result, the price of its ADRs traded on the NYSE fell from $55 in early 2008 to below $10 in late 2012. (An ADR is a stock that trades in the U.S. but represents a specific number of shares in a foreign corporation.) Its credit ratings eventually fell to near junk levels. But then things began to look up: After bottoming out below $10 in 2012, its ADRs have risen back near $33 this month, a rally of 238% in the last two and a half years.

The change came after Sony replaced Stringer with Kazuo Hirai in early 2012. Hirai was a Sony veteran known for wringing profits from troubled businesses like the PlayStation gaming division. And like Stringer, Hirai didn’t fit the mold of the Japanese salaryman. Hirai grew up in Japan and North America, giving him a fluency in English and also a gift for being plainspoken, like when he told the Wall Street Journal on taking the job, “It’s one issue after another. I feel like, “Holy shit, now what?”

Hirai began an ambitious restructuring of Sony over the three years that followed. He quickly announced a “One Sony” structure that built on Stringer’s convergence with an emphasis on communication and joint decisions among siloed divisions. He focused the electronics business on mobile, gaming and imaging products. Over time, he cut thousands of jobs, sold off the Vaio PC unit, separated the ailing TV business into its own company and overhauled the smartphone lineup.

All of this added to financial losses with restructuring charges and made for a tumultuous 2014. But the low point came last November, with the infamous hack that left sensitive documents from Sony Pictures Entertainment in public view. But it was just around this time when some analysts began voicing their conviction in a Sony turnaround. The turnaround painstakingly plotted by Stringer and Hirai was finally bearing fruit.

That became more evident when Sony reported its most recent earnings. There were encouraging signs in the past year’s finances, like revenue rising 6% and the TV business posting its first profit in 11 years. But the better news was in the cautious forecast for the coming year.

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The bulk of the restructuring was behind Sony, CFO Kenichiro Yoshida said, and while revenue may decline 4% this fiscal year, operating profit would rise fourfold to $2.6 billion, its highest profit since 2008. Hirai had earlier projected net income to rise above $4 billion by 2018, which would be its biggest profit since 1998, before the great fall began.

There’s still some restructuring to do. The revenue decrease this year will come largely from Sony’s move away from mid-range mobile phones to focus on the high end of the market. While camera sales continue to decline, Sony is seeing strong growth in imaging sensors used in smartphones. Overall, Sony will be a smaller company in terms of revenue but with bigger sales and slow, steady move from aging markets into growing ones.

A turnaround needs more than cost cutting and restructuring. Sony has a long road ahead to go from playing catch-up in technology markets to playing a leading role in new ones. That step requires a lot more work, but Sony’s return to profitability makes a major turnaround as feasible as it’s been in more than a decade.

TIME Microsoft

Here’s Why Microsoft Is Suddenly Killing It Now

Key Speakers At The Microsoft Build Developer 2015 Conference
Bloomberg—Bloomberg via Getty Images

CEO Satya Nadella has changed the software giant's modus operandi. And investors are loving what they see

Remember Borg Microsoft, the bullying juggernaut that ruled the software industry with an iron fist? The Microsoft of 2015 has strayed so far from that original incarnation it might as well be called bizarro Microsoft.

Gone are the days when Bill Gates and Steve Ballmer mocked Linux or called it a cancer. Or when Ballmer laughed at the iPhone. Or when Ballmer dismissed Android was too hard to use. (A billion Android phones shipped last year.) The new Microsoft has shed its arrogance. These days, it works hard to play well with others.

And the new, more open approach is working. Microsoft’s stock is up 53% in the past two years after a very long season of stagnation. While the stock stumbled earlier this year, it’s up 14% since the company reported earnings on April 23, largely because of growth in its cloud business, such as its Azure computing platform.

Investors, flush from a strong year in tech stocks in 2014, are looking ahead to the end of 2015 and 2016. In some cases, they’re not liking what they see, but Microsoft is persuading more and more shareholders it’s ready to deliver on the cloud-first, mobile-first world that its CEO Satya Nadella has been touting. Unlike Netflix, Spotify or other companies that are thriving on cloud-based services for consumers, Microsoft has focused its cloud efforts in the enterprise market. Nadella said last week Microsoft’s enterprise cloud revenue, including hardware and software, would reach $20 billion a year within three years from about $6 billion now, an audacious goal but one that brought few snickers of disbelief.

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Of course, much of this will come as its clients migrate from legacy products (like Microsoft Office) to cloud-based offerings (like Office 365), so there’s some cannibalization involved. And the shift is a project that Microsoft has been working on for years, thanks to moves made by Ballmer. Ballmer, it seems, was better at building an enterprise business than effectively bashing rivals in consumer tech.

Under Nadella, Microsoft is emerging as one of a handful of big names poised to thrive in the cloud economy alongside Amazon, IBM, and Google. But last week, as the company held its Build developer conference to announce details of Windows 10, Nadella made a pitch for Windows to become a platform where developers from other platforms–iOs, Android, Linux–would not only be welcome, but actively courted.

Windows 10 is designed to build “universal apps,” meaning a single app working on phones, tablets, PCs, consoles like Xbox and even one day a augmented-reality platform like HoloLens. App purchases can easily be billed directly through carriers, simplifying payments to developers. Microsoft also introduced Visual Studio, a free, cross-platform code editor that can write apps for Windows, OS X and Linux.

But the bigger surprise–and, depending on how developers respond, the potential game changer for Windows–is that Microsoft announced Islandwood and Astoria, two middleware projects that allow developers to easily port their existing apps into the Windows platform. Islandwood will let iOS apps work on Windows with a minimum of changes, while Astoria will do the same for Android apps.

In recent years, Microsoft has talked more and more about opening up its software ecosystem to developers working in other platforms, but much of the rhetoric has sounded like lip service. Visual Studio, Islandwood and Astoria moves show that Microsoft is dead serious about doing just that, retooling its offerings to actively reach out to the iOS and Android communities.

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The idea is to make it simple for iOS and Android developers to port their existing apps into Windows. In the mobile world, more apps can mean more users, which in turn gives developers more incentive to work with a particular platform. But the plan comes with risks, such as the possibility that some iOS/Android apps translate into inferior or buggy versions on Windows Mobile. Or that developers may be too busy or indifferent to try.

Microsoft is also doing what it can to upgrade users of Windows 8. Windows 10 will be free for the first year, which could interrupt the way Windows sales are recorded as revenue but has a much bigger draw: consumers and businesses will be more likely to upgrade quickly, giving Windows 10 developers a larger audience early on.

All of this is aimed at making Microsoft a single, unifying platform for developers. In that way, it’s not unlike the original goal Microsoft set out for itself. What’s fundamentally different is how Microsoft aims to reach that goal: not through brute-force coercion, but through creating an open and inviting platform that plays well with others.

In some ways, the open, cross-platform world of software today evolved in direct opposition to Microsoft’s arrogant dominance in the 80s and 90s. Now it must adapt. Nadella’s plan isn’t likely to make Windows dominant in the mobile world right away, but in time it could give it a more equal footing in mobile OS alongside iOS and Android. And that could keep Microsoft’s revenue growing for years.

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TIME Cloud Computing

IBM Is Stumbling Its Way Into the Future

A general view of IBM's 'Watson' computing system at a press conference at the IBM T.J. Watson Research Center on January 13, 2011 in Yorktown Heights, New York.
Ben Hider—Getty Images A general view of IBM's 'Watson' computing system at a press conference at the IBM T.J. Watson Research Center on January 13, 2011 in Yorktown Heights, New York.

Despite ambitious plans for its future, the technology giant faces serious hurdles

The problem with being a tech giant is that, no matter how hard you try to charge into the future, you’re always weighted down by the past. And lately, no company has exemplified this conundrum better than IBM.

In the past few months, IBM has rolled out innovation after promising innovation. The company launched an analytics tool for the healthcare industry based on its Watson artificial-intelligence platform. Watson tools for other industries are on tap, and meanwhile Watson has written a cookbook.

IBM is also building a cloud platform for the Internet of things that companies can use to make sense of data collected from far-flung sensors embedded in a wide variety of devise. The company not only announced its Hybrid Cloud–meshing IBM’s own cloud with a client’s on-premise machines–it signed the US Army up as a key customer. Oh, and it’s building new computers that mimic the human brain.

The company is serious about investing in these new ideas. CEO Ginny Rometty told investors in February IBM would spend $4 billion this year in growth areas like analytics, cloud computing, mobility and security software. These areas accounted for only 27% of IBM’s total revenue in 2014, but Rometty sees revenue growing to $40 billion from $25 billion in four years.

This all sounds encouraging, but now look at the first-quarter earnings report IBM delivered on Monday. Revenue fell 12% year-over-year to $19.6 billion and came in $100 million shy of analysts’ consensus forecast. That marked the 12th straight quarter of falling revenue and the eighth time in the last nine quarters that IBM missed its revenue estimate. In fact, it was IBM’s lowest quarterly revenue since the first quarter of 2002.

Explaining the weak revenue, IBM pointed out that the decline reflected the sale of certain assets like its low-end server unit and the effect of a strong US dollar. (IBM warned that if the dollar stays at current levels it could slice 80 cents a share off full-year EPS.) Excluding those factors, IBM’s revenue was still flat with the year-ago quarter. Net income fell 2.4% to $2.3 billion.

How can IBM have so many promising technologies and such a weak financial performance? The answer is a classic innovator’s dilemma, in which successful companies struggle to stay atop their industries as they face newer, more efficient technologies and business models that slowly drain life from their cash cows.

Enterprise IT giants like IBM, SAP and Oracle face one such threat from cloud computing. The choice they face is an ugly one: Dig in and maintain a profitable but slowly dying business; or invest in those same innovations, thereby cannibalizing their core business. IBM has made the bold choice to invest in the future, even if it’s eating into its present success.

This isn’t new. Throughout its history, IBM has backed out of aging businesses to focus on new areas of growth. In the past four decades, it’s sold off its Selectric typewriters to Lexmark, its copier business to Eastman Kodak, its hard-disk drive unit to Hitachi, and its PC and low-end server divisions to Lenovo. In the late 90s, the company broke from its roots to push into IT services. Under Rometty, IBM is again making a transition into areas it sees as growing for years.

The catch is that areas like cloud-based services are growing because they’re cheaper, lither versions of the legacy services IBM and others have depended on for profits. In a conference call discussing earnings Monday, CFO Martin Schroeter talked about “a pretty dramatic shift of spending within IBM… Some of what you’re seeing in that core business decline is that engineered shift toward the strategic imperatives.”

“Strategic imperatives” is IBM-speak for the growth markets it’s pushing into: data analytics, cloud, mobile and security. Behind the bigger headlines of falling revenue, IBM is actually seeing some success here. Analytics revenue rose more than 20% last quarter. Cloud revenue—including the hardware that lets clients build their own “private cloud”—jumped 75%. This business has brought in $7.7 billion in revenue during the past 12 months.

Looking at cloud as a service alone, revenue totaled less than $1 billion. Again, this represents a tiny portion of IBM’s total revenue. But consider that at an annual rate it’s bringing in $3.8 billion. By way of comparison, Amazon’s Web Services, which focuses on cloud hosting, brought in $4.6 billion in revenue in 2014 with razor-thin margins. From that perspective, it’s not hard to imagine IBM as a rising leader in the emerging cloud economy.

As promising as this future growth sounds, it doesn’t change the fact that slowing revenue has pulled IBM’s stock down 22% in the past two years, a stretch when the S&P 500 has risen 32%. Investors remain patient, however, partly because IBM has doled out $26 billion in stock buybacks over that period, in addition to $8 billion in dividends.

Investors may grumble, but few are rebelling. Earlier this month, Reuters said top shareholders were seeking out activist investors to shake up IBM. But at least two such activist firms balked, in part because they felt Rometty was doing as good a job as could be expected with a tough transition. Another deterrent was Warren Buffett, who seems to support Rometty’s work. Berkshire-Hathaway has been adding to its position in IBM, which now stands at a 7.8% stake.

So go ahead and shake your head at IBM’s earnings. Yes, the company set clear goals for 2015 profits and has fallen short. Yes, revenue is shrinking and may do so in future quarters. But the company deserves credit for the painful work of building a foothold in the future of tech, even at the cost of easy profits today. IBM has chosen to address the investor’s dilemma head on, knowing no giant can endure over time without some pain along the way.

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TIME Telecom

Why Nokia’s Blockbuster Merger Turned Into Such a Mess

Nokia's chairman Risto Siilasmaa, Nokia's Chief Executive Rajeev Suri, telecommunications company Alcatel-Lucent's Chief Executive Officer Michel Combes and Alcatel-Lucent's chairman of the supervisory board Philippe Camus shake hands prior a press conference on April 15, 2015 in Paris.
Chesnot—Getty Images Nokia's chairman Risto Siilasmaa, Nokia's Chief Executive Rajeev Suri, telecommunications company Alcatel-Lucent's Chief Executive Officer Michel Combes and Alcatel-Lucent's chairman of the supervisory board Philippe Camus shake hands prior a press conference on April 15, 2015 in Paris.

Nokia marrying Alcatel-Lucent will have a huge impact

The big headlines in tech M&A come when they involve growth – Facebook buying Instagram or WhatsApp, for example – but more often they tie together two aging companies in established but still important industries. Ideally, in those cases, the merging partners will complement each other’s weaknesses, making for a stronger corporate marriage.

Take the mature but competitive telecom-equipment industry. If selling and maintaining the arcane gear that quietly keeps the Internet humming is hardly a sexy industry, it’s crucial if you want to watch a video of a dog trying to catch a taco in its mouth. Last week, when one industry giant (Nokia) offered to merge with another (Alcatel-Lucent) in a $16.6 billion deal, it seemed like a textbook tech M&A deal, one that analysts have been expecting for years.

Instead, the announcement of the deal seems to have left everyone unhappy. Analysts lined up to argue why the tie-up would be troubled, while investors wasted little time in selling off shares of both companies. Since the deal was announced Wednesday, Nokia’s shares have lost 4% of their value and Alacatel-Lucent’s have lost 21%.

This is the rare M&A deal that everyone has long-expected to happen and yet seems to please almost nobody. The telecom-equipment sector has been rife with consolidation and restructuring for years, as companies scramble to grab control of technologies that power broadband, wireless networks, networking software and cloud infrastructure.

Both Nokia and Alcatel-Lucent have been undergoing wrenching restructuring to compete with Sweden’s Ericsson, the market leader, and China’s up-and-comers Huawei and ZTE. Nokia sold its handset business to Microsoft for $7.2 billion in 2013, which helped return the company to profitability last year. Now that Nokia is alsoshopping around its mapping software, a merger seems like an important step toward strengthening its remaining operations in the telecom-equipment business.

Alcatel-Lucent has been having a harder time in the past decade. In 2006, the stock of France’s Alcatel was trading near $16 a share when it paid $13 billion for US-based Lucent. But clashing cultures, rigid bureaucracies and a failure to innovate led to years of losses at the combined firm, pulling Alacatel-Lucent’s stock down as low as $1 a share. Years of restructuring brought tens of thousands of job cuts but also, in recent quarters, signs the company may be making a fragile comeback.

So why did everyone expect a Nokia-Alcatel merger to work when the Alcatel-Lucent one failed? For one, there was a complementary fit in terms of the product and geographical markets both companies served. Also, both companies had just emerged from painful restructurings holding smaller shares of a competitive market. By combining, they could command a market share rivaling Ericsson’s and also marshall resources needed for the high R&D costs of next-generation gear.

That was the theory on paper, and for years reports surfaced periodically that the two were talking about joining forces. Talks of Nokia buying Alcatel’s wireless business fell through in 2013, and another report of a merger last December went nowhere. Now that it’s happening, the conversation has shifted from speculation about the deal to the details of how it would work. And some of the details aren’t pretty.

Any large-scale tech merger requires years of integration of sales, engineering and managerial ranks. In the best case, it takes years to complete. In the worst, it leads to entrenched fiefdoms and a bureaucratic hall of mirrors. And in areas where there is overlap, job losses will follow. But Alcatel-Lucent is partly owned by the government of France, which sees the company as a strategic national asset. It will fight massive post-merger layoffs in France, and the Finnish government is likely to do the same.

Analysts expect the trouble that all this work involves will hamper Nokia for some time. Some argued Nokia should have bought only Alcatel’s wireless assets, but since that didn’t didn’t work Nokia offered a discount for the whole company. And what a discount: Nokia’s bid is worth only 0.9 times Alcatel-Lucent’s revenue last year, well below the average figure of 2.5 times revenue for recent telecom deals. Alcatel-Lucent’s shareholders feel the discount is too much, leading to last week’s selloff.

So as inevitable as a combination of Nokia and Alcatel-Lucent seems, there are regulatory, integration and cultural issues that will complicate things for years. In the meantime, few investors are pleased about the deal. Throwing these companies together may be like, well, that taco heading toward the dog’s mouth: the appetite is there, but in the end all you have is a mess.

TIME Media

Why Investors Are So in Love With Netflix Right Now

The Netflix company logo is seen at Netf
Ryan Anson—AFP/Getty Images The Netflix company logo is seen at Netflix headquarters in Los Gatos, CA on April 13, 2011.

Nothing is ever straightforward about Netflix earnings–and last quarter was no exception: Netflix shares surged 12% in after-hours trading Tuesday after it reported earnings per share of 38 cents, a long way from the 63 cents a share that analysts had been expecting.

To explain that disconnect, you either have to conclude that Netflix investors have lost their minds or that there’s something else they saw and liked in the numbers. With Netflix, it can be both at once.

Because it’s as if there are multiple companies being analyzed here: the one poised to take over the world, or the one that is breaking the bank to get there. The stock that’s risen 4,000% over the past decade, or the speculative stock with the PE ratio above 160. In the case of Netflix, there’s plenty of room for both arguments.

One reason investors were willing to overlook the big earnings miss is that much of it was caused by the strong US dollar, which lowered international revenue 48%. Without the foreign-exchange losses, Netflix would have reported a 77-cents-a-share profit, above the Street’s expectations. As it was, Netflix reported a $14.7 million net profit, less than half the $35.8 million profit a year ago.

Investors, it seems, are willing to overlook that because of another metric, one that’s particularly scrutinized at Netflix these days: new subscribers. In the US, Netflix added 2.3 million new subscribers net of cancellations, which was well above the 1.8 million adds it had expected. Internationally, Netflix added 2.6 million net subscribers, also above the 2.25 million it forecast.

That was largely because of new original programming the company has creating, like the third season of House of Cards and the debut of new Netflix creations like Tina Fey’s Unbreakable Kimmy Schmidt and the star-studded drama Bloodline. Netflix has been cultivating series that can appeal in the US as well as abroad, and the new subscriptions suggest it’s working for now.

This quarter, the company is rolling out even more original content, such as the Marvel series Daredevil, released last Friday; a documentary series, Chef’s TableGrace and Frankie, a comedy starring four Emmy award winners; Sens8,a scifi series created by the Wachowskis; and the return of Orange Is the New Black. Those should keep new subscribers signing up, but they’re also adding to spending.

It’s the mounting spending that the Netflix bears often point to. Streaming content obligations (basically, licensing fees for titles coming in the future) rose to $9.8 billion in the last quarter from $7.1 billion a year ago. These figures don’t necessarily affect the current income statement as much as give an indication of how spending will happen in the future, but they are daunting numbers nonetheless.

For the last quarter’s spending, Netflix offers another home-brewed metric, contribution profit. It’s revenue minus content spending and marketing expenses, so it excludes tech infrastructure or administrative costs. It’s an unorthodox metric, but it at least shows how, as Netflix pushes into new markets, content and marketing are performing against revenue.

In the last quarter, the contribution profit from US streaming operations rose 55% year over year to $312 million, or 32% of revenue. International streaming, however, incurred a contribution loss of $65 million, up from a loss of $35 million a year ago. In the current quarter, the contribution loss will swell to $101 million.

On a video call discussing earnings (like its home-brewed metrics, Netflix has its own style of conference call, where a pair of rotating analysts ask questions on a Google hangout), CFO David Wells was asked about how long the spending would keep growing. He reiterated a warning Netflix has made before, that the losses could grow throughout 2015, thanks in good part to marketing in newer markets in Europe and Asia.

“We’ve said we are committed to running the business at global breakeven and we have ambitious plans for international growth,” Wells said. “We’ll have some bigger launches, and we’ve described them as meaningful and significant investments in back half of this year. So you should expect those losses to trend upward and into ’16, and then improve from there.”

The case Netflix has been making has been that it’s spending aggressively to take advantage of a global, long-term trend away from traditional broadcast and cable TV and toward TV streamed over the Internet. Others, like HBO, Hulu and possibly Apple are approaching the same market, but Netflix is racing less to compete with them today than to be ready as the audience and demand for Internet TV emerges.

To get there, Netflix has made it clear it will spend what it needs to, even at the risk of losses or shrinking profits this year. Future content obligations are growing, Wells said, but not faster than current revenue. The company’s big bet is the spending today will translate into faster growth and more profit starting in 2016.

This explains why subscription growth is so closely watched. It’s the clearest measure of whether the spending on new programs and new markets is actually delivering. The bulls believe this long-term growth will come as Netflix has promised.

What it doesn’t explain is why the stock sees such volatile swings whenever Netflix reports its quarterly earnings. For that, you need to look to the stock speculators, who have for years driven Netflix shares to euphoric heights that make its executives uncomfortable, if not themselves.

Netflix’s business may be as bullish as ever, but that doesn’t mean the stock price is fairly valued. It rose $56 to $531.50 on Tuesday’s earnings, making it worth 162 times the profit Netflix is expecting this year. Netflix is making some risky but realistic investments in its future growth. But that risk is nothing compared to what investors are taking on by buying at such a crazy valuation.

TIME Startups

Here’s the Major Downside of So Many $1-Billion ‘Unicorn’ Startups

Uber
Getty Images

Billion-dollar startups aren't rare. They're practically a dime a dozen these day—and that's not an entirely good thing

We live in a magical age of unicorns, those pre-IPO tech startups valued at $1 billion or more. And unlike the dot-com bubble, most of these startups are for real. They are companies whose services–like Uber, Spotify or Pinterest–we use every day. You could even say we consumers are the ones that are helping these unicorns to fly.

There is only one problem: Most of us consumers, as individual investors, are being shut out of the party.

These days, you hear a lot of people in the tech-investing world talk about how this is not 1999. The red ink has been washed away by the black at the strongest startups. A confluence of new technologies–the cloud, social networks, smartphones–are creating the mega-brands of the future. As one CEO memorably put it, “It’s the biggest wave of innovation in the history of the world.”

This is more or less true, but another big difference between today’s tech market and the tech market of 1999 is often overlooked: During the dot-com bubble–when most of the IPOs were pipe dreams waiting to crash–individual investors were able to buy their shares freely. Today, by contrast, most of the investments in the hottest tech startups are happening behind the velvet ropes of private financing.

US securities laws set up last century ensured that only accredited investors—currently, people earning at least $200,000 a year or with a net worth of more than $1 million—could buy stocks in private offerings. Those laws were intended to protect smaller investments from the risks of traditional private investments, and they worked for a long time. But recent changes, such as the JOBS Act, allowed private companies to more easily avoid IPOs if they so desired. And most of them have so desired.

The result is that tech companies that would have been open to ownership by everyday people in earlier decades are now open only to the elite. Hedge funds and other institutional investors jockey for access to occasional venture rounds rather than the daily battle of public markets. Corporate insiders have greater control in setting valuations, while executives escape the scrutiny of quarterly disclosures.

And so, unsurprisingly, the tech IPO has become as rare as, well, a unicorn. According to Renaissance Capital, 35% of the companies that went public in 2011 were technology startups. By last year, only 20% of the 273 IPOs were in the tech industry, and most were in the enterprise space rather than the brand names consumers knew. In the first quarter of 2015, only four tech companies went public. And none of them were exactly unicorns.

Three of those four tech IPOs have a history of losses–cloud-storage company Box, online-ad platform MaxPoint Interactive, and domain registrar GoDaddy. Only Inovalon, which runs cloud services for health-care companies, went public with a profit. In the wake of the recession, it was all but impossible for companies to go public with a history of losses but that changed starting last year, when according to Renaissance, 64% of large tech IPOs debuted with net losses, the highest ratio since 2000.

The companies that are choosing to go public aren’t the cream of the crop. Box may have a bright future, but like GoDaddy it went public at the behest of its investors and did so only after months of delays. Box also priced its IPO below its last private round, following late 2014 IPOs like New Relic and Hortonworks that took so-called “haircuts.”

Which brings up another reason for other companies to avoid IPOs–why do it when you can get better valuations in illiquid private markets? True, liquidation preferences and other private perks justify some of that premium, but private valuations are often more art than science.

The pace of tech IPOs are likely to pick up, but few of the candidates in the current pipeline are the highly coveted unicorns. Next week, Chinese e-commerce platform Wowo is expected to raise $45 million. Craft marketplace Etsy is also hoping to raise $250 million in the coming weeks. And mobile software Good Technology aims to list soon as well. All three have steady histories of net losses.

When it comes to the companies with the brightest futures, they are conspicuously absent from the pipeline. Long before the term “unicorn” became popular, CB Insights compiled a list of hot startups expected to go public in 2014. A year later, their list of hot startups expected to go public in 2015 looked suspiciously similar. And now that we’re into the second quarter, there’s little sign that many of them are planning to go public.

Ride-sharing giant Uber, lodging disruptor Airbnb, online-storage pioneer Dropbox, social-ephemeralist Snapchat, social-pin star Pinterest, music-streaming king Spotify, mobile-payments upstart Square–all have been sought after and well funded in private rounds. All have intimate connections to consumers, and would be broke without them. All couldn’t care less, it seems, when it comes to sharing their success with those consumers.

Maybe that’s why they’re called unicorns. Not because billion-dollar startups are rare–they’re practically a dime a dozen these days–but because, for most investors, they might as well be myths frolicking on the far end some of some rainbow.

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TIME Semiconductors

This Is the Biggest Question Facing Tech Right Now

TIME.com stock photos Computer RAM Memory Microchip
Elizabeth Renstrom for TIME

What happens to a key technology almost everybody depends on?

After two years of a glorious rally, investors in chip stocks are beginning to worry that the party is over.

The Philadelphia Semiconductor Index – or SOX, which includes 30 chipmakers like Intel, Qualcomm, and TSMC – has outperformed the Nasdaq Composite since March 2013, rising 63% during that period to the Nasdaq’s 51%. But this past month, the SOX has dropped 6.1%, while the Nasdaq is down 2.9%.

And that’s after a slight recovery in prices of chip shares this week. There were a few days last week when the SOX dropped 8%, amid concern that semiconductor makers don’t just have to grapple with a strong US dollar but weakening demand among the tech companies that are the chipmakers’ biggest customers.

In that sense, the fate of chip stocks is a big question for all of tech. Semiconductor orders are seen as a bellwether the tech industry because they signal optimism or pessimism among the manufacturers of smartphones, tablets and other gadgets. When those companies are cautious, chip orders decline. When they expect growth, orders increase.

Many chips are sold in US dollars, so investors have been bracing for the impact of the strong dollar pushing up manufacturing costs or weakening demand. But last month, concerns mounted that other factors may be weakening demand as well. PCs, for example, had been seeing shipments stabilize last year but now may be declining again. And smartphones in emerging markets could be seeing slower growth as countries like China see their economies slow down.

Chip sales rose 6.4% in 2013 and another 9.4% in 2014, according to research firm IHS. More clarity on 2015 sales will come once semiconductor companies report first-quarter earnings this month, but early signs of a slowdown may be already emerging.

One source of worry was Taiwan Semiconductor Manufacturing Company, which is coming off a record quarter of revenue rising 53% and net income rising 79%. The company’s CFO recently said at an investment conference in Hong Kong that it’s seen a slowdown in recent weeks. That followed a report by Intel on March 12 that its sales may be more than $1 billion below its previous forecast because of weak PC sales.

Chip bulls argued that TSMC’s weakness could also be tied to reports that Apple was switching its supplier of iPhone CPUs from TSMC to Samsung. But on Thursday, flash chip maker SanDisk issued a warning to investors about its first-quarter earnings and withdrew its guidance for the full year, citing pressure on prices and soft enterprise sales. On top of that, the durable goods report showed demand for computing equipment slack in February.

Another factor driving up chip share prices over the past couple of years has been the wave of consolidation sweeping the industry, a trend that has lifted the stocks ofacquirers and potential targets alike. Big chipmakers are flush with cash and are seeking to expand their share of existing markets or to expand into growing areas like the Internet of things.

And indeed, semiconductor stocks had a reprieve on Friday as news that Intel was in talks to buy Altera stoked speculation that the M&A wave would continue into this year. The news pushed up other chipmakers like Fairchild, Lattice and Xilinx.

While this may be welcome news for some chip investors, it’s possible that the best hope for the two-year chip rally now depends more on speculation of future deals than sound estimates for fundamental growth. Mergers often require several years of integration and cost cutting before they add materially to profit margins, especially when they coincide with a cycle of declining demand. The risk in the near term is that valuations could decouple from profit growth.

sox vs booktobill

Something like that might be already happening. The graph above measures the SOX Index’s performance against the semiconductor book-to-bill ratio, which measures the demand for new chip orders received against those being shipped. For much of the past few years, while chip stocks rallied steadily, the book-to-bill ratio remained over 1 – that is, new orders outpaced shipments. But in recent months it’s come closer to parity while the rally continued. And if chipmakers like TSMC and SanDisk are right, the ratio could fall further.

The long-term outlook for chip shares still looks bright. PC’s may be in decline but mobile devices are still in demand globally and emerging technologies like the Internet of things are encouraging. But the Goldilocks environment that the chip industry has enjoyed may be interrupted this year. And if so, it could signal a bigger slowdown inside the broader tech industry.

TIME Social Media

Facebook Is Playing a Brilliant Long Game for Your Attention

Facebook Messenger Platform F8
Bloomberg via Getty Images Mark Zuckerberg, CEO of Facebook Inc., speaks during the Facebook F8 Developers Conference in San Francisco, Calif., on March 25, 2015.

Remember Facebook Deals? How about Beacon, the ad-sharing feature that collapsed in a privacy scandal? Did you ever use Facebook Gifts while it was around? And when was the last time you fired up the Flipboard-like Paper app, if you ever downloaded it at all?

Facebook’s track record in releasing new apps or features is spotty at best, with a trail of outright failures running through the company’s history. This week, as the company announces new initiatives at its F8 developers conference, you have to wonder which ones will end up falling by the wayside.

And yet, taking the long view, you also have to wonder whether any new crop of failures will matter at all. Because when Facebook conceives new ideas and turns them into apps or platforms, the company is taking the long view. Facebook isn’t trying to bat 1.000, or even have a .407 season. Even with its collective failures, Facebook remains beloved by investors, who have pushed its stock up 232% over the past two years.

From that perspective, it’s more important to see what Facebook is trying to accomplish with its newly announced offerings, rather than looking too closely at the announcements themselves. With that in mind, here’s a quick summary of what Facebook has announced so far at F8:

Messenger Platform, which features a compose window loaded with third-party apps (40 for now), and a new customer-support communication with businesses.

Parse. The mobile platform Facebook bought a couple of years ago will let developers build apps for the Internet of things, including wearable devices and smart appliances.

Embedded videos. In a clear threat to Google, videos uploaded to Facebook’s site can be embedded YouTube-like, on other sites.

LiveRail. Facebook is launching a mobile ad exchange that lets publishers sell display and video ads using Facebook data alongside cookies.

Spherical videos. Shot with 24 coordinated cameras, the immersive, 360-degree videos bring an element of virtual reality to the news feed.

These are only the latest announcements. On Tuesday, Facebook unveiled On This Day, a feature showing users archived posts as their anniversaries roll by. On Monday, Instagram announced Layout, a new app that combines multiple photos into a single image. Over the weekend, word leaked out that Facebook was talking with media companies about hosting content inside its platform. And last week, Messenger added the ability for friends to send payments to each other.

Tech keynotes have become like Christmas stockings, a grab bag of new goodies that, handled right, fill gadget lovers and developers with either glee or disappointment. Facebook’s stocking this week wasn’t as squeal-inducing as some of Apple’s have been. But again, that’s not the goal. The goal is to keep innovating, to keep iterating, until something gels with user behavior, gaining enough traction to become a part of their daily lives.

In fact, many of Facebook’s newer initiatives are largely do-overs of its past misfires. Beacon was re-engineered in Facebook Connect, which also shared user information on third-party sites–and AppLinks, a feature mentioned in the F8 Keynote, takes that integration a step further with deep linking. Facebook Places, launched in 2011 to kill off Foursquare and shuttered a year later, was reborn this year as Place Tips, aiming once again squarely at Foursquare.

In the weekly tech news cycle, these little revelations seem ephemeral, even trivial. Take a few steps back and look at the longer-term perspective and something more significant emerges: Facebook is mutating, virus-like, to adapt to how we interact with each other online. In conference calls with investors, Mark Zuckerberg and Sheryl Sandberg repeatedly warn they won’t monetize products until they resonate with a large base of users. That was the case with Facebook’s original Web site, and it’s still the case with Instagram and WhatsApp.

Facebook’s own Messenger app is a clear example. After launching as a “Gmail killer” in 2010, the original Messages feature became a staple of the site and, eventually, a distinct app. When the company later bought WhatsApp, some worried Facebook would spoil it by turning it into an all-in-one messaging platform like WeChat or Line. Instead, WhatsApp remains largely unchanged, while Facebook is amping up Messenger from app to platform, with an ecosystem of third-party apps on top.

Of all the F8 announcements, Messenger is the most interesting. By letting users download apps directly inside conversations, Facebook is making it easy to distribute apps virally–a huge draw for developers considering Facebook’s platform. If this plan succeeds, Facebook would be hard to rival in the messaging space.

But Facebook didn’t stop there. Messenger is also becoming a line of communications with companies. Deals and Gifts were attempts to anchor ecommerce inside Facebook that largely fell short of Facebook dream of getting consumers to interact as closely with brands as they do their friends. If Messaging–which chronicles transactions from purchase to delivery inside a single thread, aiming to make ecommerce as personal as in-store buying–doesn’t achieve that original goal, it’s a big step toward it.

Not all of Facebook’s new efforts are very far along. In opening Parse up to the Internet of things, Facebook cited examples like push notifications when garage doors open or close, or reminders that a plant needs to be watered. These feel like applications that make people dread push notifications or wired homes in general. But Facebook is working with chipmakers to build Parse support inside processors, so there’s clearly a long-term game being played here as well.

Some of these new features may fall by the wayside, prompting snickers by observers. But the real question–as is usually the case in Silicon Valley–is how will Facebook respond? If you don’t love the new Messenger or embedded videos, Facebook is all right with that. It doesn’t need you to love them. It just needs them to be just useful enough among your friends that you start using it yourself.

And when it does, Facebook will have wormed its way that much more tightly into your daily life. Because at Facebook, it’s never been about being loved. It’s aways been about being used.

TIME Autos

How Silicon Valley Suddenly Fell in Love With Cars

Tesla Model S.
Tesla Tesla's battery makes it cleaner than gas-guzzling alternatives—but think about what else it's made of.

The last great remaining American preoccupation tech hasn't yet tackled is the automobile. That's about to change

“The American really loves nothing but his automobile,” Gavin Stevens says in Faulkner’s Intruder in the Dust. “Because the automobile has become our national sex symbol.” Given that longtime infatuation, you’d think Silicon Valley’s tech companies would have been eager to get into the auto industry before now. Instead, many are surprised that it’s happening at all.

Ever since the personal computer became mainstream, Silicon Valley has been inventing or reinventing new gadgets: the music player, the phone, the computer itself, first as a portable, now as a tablet. Amazon remade the shopping mall and put it on a screen. Netflix and YouTube subverted the TV set, and now Google’s Nest is going after other household appliances. This year, Apple is reworking the wristwatch, casting tech as jewelry.

The last great remaining American preoccupation that tech hasn’t yet tackled is the automobile. Much of this has to do with logistics–selling phones or music players is child’s play next to the expensive, highly regulated business of manufacturing cars–but there’s also a historical mindset at work. Detroit, with its combustion engines and metallic gears, was the epitome of an analog era that Silicon Valley displaced. The car was an anachronism, however beloved.

No longer. Google has been working on self-driving cars for a number of years. Uber has started looking into them as well. Now, according to the ever-churning Apple rumor mill, the Cupertino giant is working on a stealth car project. For tech companies, the automobile has gone from a super-sized docket to park a smartphone while you drive to a gadget that can be reimagined from the ground up with digital technology.

The sudden shift is happening for a few reasons. First, with PCs, tablets and smartphone markets close to saturation, tech giants are looking for new markets to invade with their innovations. Second, the car market seems ripe for a makeover. American automakers like GM may be reviving post-financial crisis, but the U.S. looks to have reached “peak driving:” Annual miles driven per person is down 9% from 1995, and even more among young drivers.

But the biggest single reason tech suddenly loves the car is Tesla. The company founded by Elon Musk in 2003 to make electric cars has become much more: It has fused the automaker with the tech company, and not only built a cultural bridge between Detroit and Silicon Valley but showed that both were converging toward each other.

Tesla was a wake-up call to automakers that had grown complacent about innovation. It showed that technology was a powerful way to differentiate a particular model from the herd, and that if automakers wanted to reach out to younger consumers, they should embrace the kinds of technology they enjoy. Soon, you began to hear auto executives talk about “smarter cars” and roadways as “connected networks” structured like the Internet (15 years ago, that simile ran mostly in the opposite direction).

Read more: How Apple Is Invading Our Bodies

Google CEO Larry Page has said his interest in driverless cars stems from the inefficiency of roadways, which not only cost lives but waste worker time in traffic jams. (It doesn’t hurt, either, that driverless cars could offer commuters more opportunity to look at Google ads.) Uber is also researching self-driving cars to lower costs for its passenger service as well as a planned delivery service.

The loudest buzz surrounds Project Titan, a rumored Apple car that in reality could be pretty much anything: an electric vehicle, a leased minivan, a driverless car, a ploy to acquire Tesla, a bluff to pressure automakers into putting its CarPlay software in their vehicles, or a clever Apple hoax trolling Apple rumor-mongers. Wall Street analysts, though, think an Apple car is the likely bet, and if so the marriage of Detroit and Silicon Valley is a matter of time.

If nothing else, Apple’s rumored entry into automobiles seems to have turned up the heat. Last week, Musk said Tesla would start offering “autopilot” technology in its cars this summer. Google said its more ambitious driverless-car system would be ready for broad consumption in five years.

But the dark-horse in this new race may be Samsung, which according to Thomson Reuters has “has the largest and broadest collection of patents in the automotive field including a very large interest in batteries and fuel cells for next generation vehicles.” If automobile technology boils down to a patent race, Samsung may end up having an edge. Samsung even has some history in car manufacturing.

The end goal of these tech aspirations in the automotive industry may well be partnerships with established manufacturers. After all, what company is dying to break into a low-margin heavy industry? Many auto executives scoff at the idea that jumping from smartphones to cars is good idea. They may be surprised. Cars are just another form of technology, albeit one in need of an upgrade. And who is better positioned to upgrade them Apple or Google?

TIME Apple

Apple Is Turning Itself into a Fashion Company

New Product Announcements At The Apple Inc. Spring Forward Event
David Paul Morris—Bloomberg/Getty Images Tim Cook, CEO of Apple, speaks during the Apple Inc. Spring Forward event in San Francisco, Calif. on March 9, 2015.

That's the real meaning of "more personal" technology

So much of Apple’s “Spring Forward” event last week has been analyzed to death, but I’d like to focus for a moment on the outfit that CEO Tim Cook wore. Yes, I know, such trivial considerations like executive fashion are inane when discussing a company like Apple–or at least they used to be–but bear with me.

The costumes CEOs wear during keynote events have become a part of the marketing message, especially when they involve multibillionaires slumming in something you could buy for $100 at Ross. For years, Steve Jobs wore rumpled, fading 501s, New Balance sneakers and the now-iconic black mock turtleneck. Early on in his keynotes, Tim Cook wore an untucked button-down shirt over nondescript jeans. (Fashion writers sniped that he had “no fashion.”)

That changed this week. Cook announced the sale of the Apple Watch not only with his shirt tucked in, but enveloped by a dark zip cardigan. The jeans looked to be upgraded to selvage denim. The message–coming during a week when Apple’s stock entered the blue-chip Dow Industrials and the company itself started pushing $17,000 gold watches–was clear, if fitting: Fashion now matters at Apple. I’m talking about, of course, much more than Tim Cook’s jeans.

None of this is much of a surprise. In fact, it’s been a long time coming. After Steve Jobs died, Cook’s Apple began caving to shareholder demands to offer dividends and split its stock–moves that Jobs vocally opposed during his tenure. And under Jobs, Apple products were high-end devices to give consumers the highest-quality personal computers available, not to become luxury fashions.

But if the change has been gradual and low key, Apple under Tim Cook is beginning to make some radical breaks with the Apple according to Jobs. For decades, Apple fanboys fought against the Microsoft hegemony of the PC industry and for the purity of Apple’s vision for personal computing. To be an Apple fanboy in 2015, however, is to be a fan of The Man. The ultimate corporate outsider is, under Cook, becoming the consummate insider.

There is of course much that remains unchanged under Cook. The corporate culture is largely intact despite a sixfold increase in headcount. Design is as paramount a factor as ever in both hardware and software. (Perhaps even more so than before as some of Jobs’ whimsy has been thankfully abandoned.) Above all, the user remains the focus of all products, which are never released until fully baked. Cook called the Watch “the most personal device we’ve ever created”—and that’s all Apple has really done: make personal computing as personal as possible.

And yet it’s hard to ignore the subtle but significant ways Apple is changing. The old Apple disdained the idea of giving billions of dollars to investors when it could be stockpiled for innovation. The Dow was closer to a cabal of incumbents to be disrupted and not a place for rebel companies. And the idea of splitting Apple’s shares to fit into an anachronistic, price-weighted stock index conceived in the 19th Century would have seemed silly.

These changes at Apple are understandable. With $178 billion in cash (mostly overseas), Apple would be facing intense shareholder pressure not to distribute some of that largesse. But the old Apple took a cavalier attitude about investors. They weren’t just sitting in the back seat, they were put in the back-back seat of a station wagon, and should consider themselves lucky to be along for the ride. Growth was the goal Apple strove for. Dividends were paid by sissies.

The sale of expensive gold Apple Watches is also logical. There is no killer app, or even a killer function, for the smartwatch yet. But there won’t be until a lot of people start using them regularly. But they won’t wear one until there’s a killer app, and so on. To break this catch-22, Apple is pitching the watch as a luxury fashion item. Wear it because it makes you look good–because it’s fashion–and then Apple can tweak the technology inside once it figures out what features are most popular.

So the fashion factor of the Watch is enmeshed with the same goal Apple has for every product: a more personal technology. But even the idea that fashion is a goal that Apple should be pursuing at all marks a departure. iPods were once a cool, coveted gadget, and that image was played up in memorable TV ads. But in the end fashion was simply a byproduct of the design Apple used to make the iPod more personal.

Later, when Jobs unveiled the iPhone in 2007, he would have laughed at the idea it was a fashion accessory. Its purpose was to let you carry the Web itself around in your pocket. The sleek design on the outside told you about all the smart design inside.

With the smartwatch, Apple–along with everyone else – is still working on how to make what’s inside as compelling and intuitive as the iPhone. And so to many, its primary allure is as a status symbol. That notion strikes a lot of longtime Apple users as kind of odd, with many people joking that the $17,000 gold Watch has displaced Google Glass as the new gold standard for douchebags.

Cook and Apple will be able to brush off such jokes. The more expensive watches are not immediately visible on Apple’s site, and retail shoppers need to seek them out. It’s the same with the other changes Cook is making. They aren’t immediately visible, but they add up to a new Apple that’s very different from the company that Steve Jobs built.

Apple still thinks like a startup but, in many ways, it’s acting more and more like a blue-chip giant. It still clings to counterculture ideals and yet it’s become the company that, more than any other, defines cultural norms. A big, interesting question facing Tim Cook’s Apple is, how long can it continue to straddle such contradictions?

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