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Bloomberg Audio Studios.
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Podcasts Radio News.
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Bloomberg Tech is live from coast to coast with Caroline Hyde in New York and Ed Ludlow in San Francisco. This is Bloomberg Tech. Coming up, Electronic Arts agrees to sell to a group of private investors in a deal that values the company at about $55 billion in the largest leveraged buyout in history.
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Plus, Huawei plans to ramp up production of its most advanced AI chips in a bid to market share from Nvidia.
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And Big Tech pushes higher as investors look at and beyond the Magnificent Seven in a key week for economic data.
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And talking of key week for economic data, let's check out these markets ahead of nonfarm payrolls on Friday, we are really seeing actually market sentiment trade higher on the NASDAQ 100 up 8. 10 of a percent. After a little bit of digestion last week, we're back on top for Big Tech, but I'm looking at crypto also getting a bit of buying. We're up almost 3% on Bitcoin. We're still off our record highs, Ed, but it's notable after some of those leveraged bets came out of the market last week, there's some tentiment buying as we see gold OG gold at a record high, we see digital gold pushing higher to what have you got?
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Let's get to our top story and that is Electronic Arts, the biggest leveraged buyout in history. It equates to an offer of $210 per share. As the chart behind me illustrates, that is a significant premium over where the stock was trading when the rumors started coming out. We now have confirmation and we're not that far off. $210 a share. The structure really important, Silver Lake, Saudi Public Investment Fund and a group of other investors. And there' debt portion here as well. JP Morgan's involved. And I remind everyone, look at the historic relationship between Saudi's PIF and Electronic Arts. We need more details.
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We do. And we can do that exact thing with someone who'll break the news. Diana Baker's with us, of course. Bloomberg US DEALS Managing Editor the deal is an interesting one just from the sheer scale of it, Diana, but also the players involved. And why are this group of investors interesting considering what they already own? So Ed mentioned a bunch of investors, but he didn't mention Jared Kushner's Affinity Partners. It's a firm that he founded during Trump's first administration. And as you know, the son in law of the president. There's a view that maybe his involvement could help ease the approval of the deal. Any foreign takeover does need CFIUS approval.
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This is really interesting, but it's in line with what Saudi Arabia has been doing in video games. Like three years ago. Billions and billions of dollars pledged to this and they already held 10% of electronic arts. Anyway, could you just explain a little bit the structure of the leveraged buyout and how we think it's going to work?
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So you mentioned JP Morgan. So they're providing about $20 billion of financing. So that's just, you know, bank debt. Goldman Sachs advised Electronic Arts, but in terms of the structure, it's just a leverage buyout. These investors are putting debt on the company. They're valuing, valuing it at over 50 billion. We're still trying to report out, you know, how much money specifically are these equity checks that Silver Lake PIF and Affinity are putting in. But we're hearing, you know, as you mentioned, PIF already is a big shareholder with about 10% of EA. They're certainly going to be involved. They have a huge portfolio of video games right now. We've got plenty more to discuss. We're going to get a little bit more detail, of course, from our gaming report as well.
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Yeah. And I just point out one thing real quick. This is a company that's free cash flow positive, just doesn't have a massive growth story. Bloomberg's the honor Bake who leads the deals team. Thank you very much. What does this mean for gaming? In fact, the question is why is Electronic Arts going private? Let's get out to Bloomberg's Jason Schreier who leads our video games coverage industry. When I was a kid, you know this story, I would save up for weeks and I would spend my allowance at a store to buy a disc for my PlayStation or my PC. The video games industry does not work like that anymore. And I think it speaks to the core of how EA is running right now. Explain it and I think nowadays you would be saving up to buy a new costume for your character and EA's Apex Legends. Yeah, the. The big number that I would look at that I think helps illustrate why this happened is EA's revenue split between what they call live services and products. Live services meaning in game transactions where people spend with inside their games rather than buying new ones. And that's what is 75, 25, 75% of EA's revenue in the last fiscal year came from live service microtransactions. People buying costumes, people buying FIFA players, ultimate team players. And that to me is a shocking number in many ways. But I think largely what it says is that gaming has started to become, if it's not already a mature market where it is not seeing a ton of growth, it is certainly not seeing double digit growth anymore. It is seeing maturity and predictability among its games and EA's yearly sports franchises which is kind of generating predictable revenue. Ease free to play titles like Apex Legends that tells that story.
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Just to go in on why private equity therefore thinks this is the moment to take this out of the public markets. You're not having to report on a quarterly basis, Jason, but it's also interesting timing because they've got a juggernaut about to come out in October, Battlefield 6. Could this change the dynamics of what this is priced out, whether other people come into the field and try and scoop it up?
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Yeah, it's a little baffling to me. I was actually pretty surprised at the time because I would think that ye would want to hold off for a better price given the Battlefield is expected to be a pretty big hit. That said, from what we've heard, from what other people have reported, this deal has been in the works for months now. EA has actually been looking to sell themselves or to participate in an M and A of some sort for years now. Andrew Wilson has been, if not quite public, at least semi public about that fact, about wanting to become a bigger BD Company, whether through a merger or an acquisition. And it could be just that the timing worked out kind of independently of their release schedule and they were looking to do this regardless. But yes, I would think they would be able to get a better premium if Battlefield 6 comes out and does Gangbusters or even beats Call of Duty.
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Their biggest rival, Andrew Wilson, did put out a statement to his own employees saying they're entering a new era of opportunity. We'll dig into what that looks like a little bit later in the show as well. Jason Schreier, it's great to have you. Meanwhile, broader market outlook for you right now with Michael Green Simplify Asset Management, Chief Investment strategist and portfolio joining us now. Michael, just the scale of desire to hold and buy into debt. We think of Oracle Sale and bonds. We've got leveraged buyout now being clearly taken down by banks because they think they can syndicate this, this. What does it signal about the wash of cash that we have in the market and the valuations we're getting on companies?
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Well, there's two separate components that are coming through. First, we're seeing more and more evidence that the cash flow that is the prodigious cash flow that's come through many of the technology companies now has claims against it and taking on debt is simply a way of pulling that forward. You effectively said the $2 billion of free cash flow that Electronic Arts currently has is going to go to servicing debt as compared to significant investment. And this is, I'll be honest with you, this is part of a signal that we are very, very interested in actually buying debt. We have incredible tightness in both the high yield market and in the investment grade market. The demand for debt is very, very high given the retirement needs of the baby boomers. And interestingly enough, people are trying to deliver into that. This is very, very similar in a lot of ways to what we would have done in historical time periods of manufacturing IPOs, if that's what' we're seeing that on the platforms like Robinhood and Coinbase where there's a ton of demand for new IPOs. The older generation really wants to own investment grade debt and high yield debt. Michael I just, I scrambled a bit, if I'm being honest, but I think you guys do have like less than a thousand shares. I don't know why, whether that's sort of a historical or tangential fact, but just talk a little bit more about that. You know, biggest leverage buyout in history has a big shiny headline. We've reported that JP Morgan is going to do like 20 billion of the debt. You sort of interested in a mechanism like that? Well, if we have exposure to to Electronic Arts it's going to be through one of our index oriented products. We are not going to select shares in Electronic Arts. So I would be misspeaking if I spoke about a particular inserted desire that drove that. I would just highlight that ultimately when we think about the quantity of debt that is is being offered, there is tremendous demand for debt both in actual form as we're discussing and then also in synthetic form. You know Eric Balconis of Bloomberg speaks often of Boomer Candy. The idea of products that offer extremely high yields. That the type of call overriding is just a way of creating synthetic debt exposure. So that you is demographic demand is driving through on all of this stuff. And I think this is just telling you there is more of that out there. There is an alternative to market based debt. And that's a mechanism that we're seeing from Nvidia. It's called circular financing. To some, you give an equity investment or capital to a company and they use some of that to then buy the product that you are known for. Can you talk a little bit about that, Michael? Yeah. A lot of people are starting to become increasingly aware of this component of vendor financing. And it's not just vendor financing. We see it not with just within video with their deals with core weave that are circular and an equity investment is made into core weave that then flows back into repurchases of Nvidia products. One that reduces the price competition associated with it. If Nvidia is giving me the equity investment or lending me the money to make purchasing going to be less willing to negotiate speaks to Nvidia's extraordinarily high margins and the protection of those. The more transactions that are going through in that form, the more I would argue we have to be thinking perhaps the margin is not as sustainable as it actually appears. The second thing that I would emphasize is if we look at other types of debt that are being taken on, they're being taken on. Metta in particular has taken on an extraordinary amount of debt where they are simultaneously financing or underwriting the debt for the financing of building of data centers and they are also entering into operating lease agreements where they are effectively committing on both sides of the equation. We're seeing more and more evidence of this. And one of the great ironies I would would highlight is is that all of this is equity finance at its core. It's really not subject to the whims of Federal Reserve rate policy. It tells us us nothing about whether policy is restrictive or not.
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Michael it's interesting that below the surface, when you think about the check, the money that's being promised to OpenAI from Nvidia, many had said, actually it then helps OpenAI itself go out and take on debt because they've got this backing from Nvidia. More broadly, is this an asset class you want to be piling into at this moment? What are the risks clear for everyone to see and what are some of the hidden risks when you're piling into a very few names, companies who are going all in on each other, and indeed Datacenter more broadly?
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Well, I think that there are two really, really interesting components to it, right? One is, remember that the vast majority of people are piling in here without any explicit thought behind it. You guys obviously know the work that I spend talking about the impact of passive investing. The average American investing into their 401k putting money into a Target date fund has no interest in Nvidia or Microsoft or has any critical evaluation of it. It's simply the way we plan our retirement today. And so a huge chunk of the money that is flowing in is not being sent through thoughtfully, it's being sent through mechanically. So people are very allocated to this regardless of whether it's discretionary or not. The second component that I would emphasize is that this type of circularity is again, a byproduct where in many situations you would look at this and you would say, wait a second, this really seems like antitrust activity. Google just lost a verdict in terms of antitrust. The judge failed to force remedies, and immediately they turn around and engage in the activity that they were actually dinged for working with Apple to basically lock in a monopoly position in Apple's user interface. So we're seeing this circularity across multiple components of it. Whether it stops, whether it continues to be enabled by the way that we invest, we simply can't know yet. Michael Green of Simplify Asset Management Across Asset News of the day. Really appreciate it. Coming up, Israeli Prime Minister Benjamin Netanyahu discusses AI with investors and tech leaders last night here in New York ahead of his visit with President Trump. He's due to arrive at the White House any moment. We'll have the details. This is Bloomberg Tech.
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Israeli Prime Minister Benjamin Netanyahu met with tech executives and investors in New York during his United Nations General assembly visit. Now, according to sources, Netanyahu discussed using AI to boost his country's economy and its military capabilities. For more Bloomberg Surveillance, co host Annmarie Horden joins us now from the White House where President Trump now is set to meet with Prime Minister Netanyahu. And that's much more about military, much more about geopolitics right now.
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Yeah, absolutely.
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We're just moments away though for Prime Minister Benjamin Netanyahu from arriving at the White House to have this really crucial meeting with President Donald Trump. After the president last week at the UN General assembly met on the sidelines with a number of Arab leaders and discussed this 21 point plan alongside the UN General Assembly, Benjamin Netanyahu also had a little bit more of an informal conversation with these tech executives. According to reporting from my sources as well as Ed sources, individuals like Eric Kleiman, venture capitalists like Josh Wolf, a part of this meeting and most notably Jacob Helberg was also there. This was an individual that was an adviser to Palantir that he was tapped to join the Trump administration. He had his hearing. He'll be an undersecretary of the State Department just waiting for final Senate confirmation. And the discussions really involved around how to use artificial intelligence to not just boost the Israeli military, but also so Israel's economy as we see an absolute arms race when it comes to AI infrastructure and development. It's also on the keels of almost two years ago, Palantir deciding to have this strategic relationship with the Israeli military. So Ben Yahoo is sitting down with some of these tech leaders on how exactly Israel is going to advance some of this capability in the military format as well as an economic one before he sets sets foot inside the Oval Office with President Trump.
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B
Exactly. So I think the point that sources made to you and I is that this was a group of tech industry people that had existing relationships with with Prime Minister Netanyahu. What do we need to know about this upcoming meeting with the president? What's on the agenda?
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Well, this one is going to be incredibly important for both President Trump and Prime Minister Netanyahu. As I mentioned, it comes on the heels of President Trump outlining how he could can see an end of the war in Gaza, which he's feeling very optimistic about with this 21 point plan he discussed with Arab leaders. And I sat down with the Egyptian foreign minister on Friday who was optimistic after being in that meeting with President Trump that they do have a path forward on ending the war and reconstruction. Of course, the devil and all this is going to come in the details when it comes to the Israeli red lines as well as Arab leaders.
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Red lines as well. Bloomberg's Anne Marie Horden. Thank you very much and be sure to stay with Bloomberg for complete coverage of that meeting between President Trump and Prime Minister Netanyahu. That's coming up at 1:15pm New York time. Coming up on Bloomberg Tech, While we plans to ramp up production of its most advanced AI chips in a bid to take market share from Nvidia, we have the details next. This is Bloomberg Tech.
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How can you go from daydreamer to industry leader? Amazon Business accelerates your journey with smart business buying. Get everything you need to grow in one familiar place. From office supplies to IT essentials and maintenance tools. Amazon Business takes the buying experience you know and love from Amazon plus tools that help you save costs and make insights based decisions ready to bring your visions to life. Learn how@amazonbusiness.com so have you heard the story about the prescription plan? With savings automatically built in, it's where a family of any size can feel confident the cost of their medication won't hold them back. Go to CMK Co stories to learn how CBS Caremark helps members save just by being members. That's CMK Co Stories. We're seeing live pictures of President Trump walking in with Israel Prime Minister Benjamin Netanyahu, who's just arrived at the White House. The two sets of to participate in a bilateral meeting in just a few moments time. Back to our other top story. Huawei is preparing to sharply ramp up production of its most advanced AI chips over the next year, aiming to win customers in the world's biggest chip market. Is in video struggles with geopolitical headwinds. Bloomberg's global technology Executive editor Peter Elstrom joins us. We're talking about the 910C Ascend chip, right? This is kind of the marquee for Huawei. Talk us through the numbers that we learned in the course of reporting about the next two years. Right away Course is probably best known for its communications equipment. Had smartphones for a long time too. But it is also really the leading developer of semiconductors within China. It's put a ton of research and development into this process and it's made quite a bit of progress. So what sources are telling us is that the company is preparing to ramp up production of some of these high end chips that would be used to run AI models within the country and also train some models in the country. As you mentioned, the 910C is the most advanced chip that they have on the market right now. We understand from sources they'll produce about 300,000 this year and they're planning on ramping that up to about 600,000 next year. That's not enough to meet all of the domestic supply, but they're hitting the market at a very vulnerable, memorable moment for Nvidia. Nvidia had hoped to be able to sell a bunch of chips into China. There's a very vibrant AI scene there. Companies want to buy their chips. But there have been these geopolitical tensions where the H20 chip was banned for a while, then Washington allowed it to be sold, but then Beijing pushed back and said they don't want their companies to buy that chip right now. So as Nvidia stalls, Huawei is racing ahead and trying to fill that market need.
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Cameracon Technologies also trying to race ahead. This is a moment for domestic chip making talent. But ultimately we're still worried about how SMIC can actually produce or manufacture and how powerful any of these next iterations that Eric Shu, the rotating leader of the business, can actually be compared to Nvidia. It seems as though analysts think they're not going to nearly rival the GPUs in the next iteration from Nvidia.
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Right. They're still very far behind Nvidia. I mean, Nvidia is the most valuable company in the world. They have tons of resources to be able to throw at this. And obviously they've helped companies in the US like OpenAI and Microsoft a ton on this front. Now Beijing is very concerned about that reliance on American technology at this critical juncture. So as Xi Jinping and President Donald Trump enter into these trade negotiations, they have many issues on their plate, including tick tock. The Communist Party wants to do whatever they can to be able to wean themselves off of that American technology. So they poured a ton of resources into building these domestic capabilities. As you mentioned, Capricorn is coming on one of the upstarts that's probably most promising in the market. And then Huawei is also spending a lot of money on this front. Alibaba, the E Commerce company, is investing in semiconductors too. So you're seeing really this nationwide effort to try to make some progress in chip production. Again, they're very far behind what the Americans can do. And the Taiwanese can do right now, but they are making progress. And I think what sources are telling us now is they're making progress over the next year to an extent that we had not anticipated.
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Peter Elstrom always breaking it down. We so appreciate that. Meanwhile, fitness company Peloton is set to unveil new products this week, refreshing its exercise equipment, hardware and its software lineup. Of course it's including AI. Let's get more from Bloomberg Consumer Tech Managing editor Mark Gurman. And how wholesale is the change going to be for Peloton this week?
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This is going to be their biggest hardware revamp in at least half a decade. This is under new CEO Peter Stern. I know a lot of us love and use Peloton, but they've been struggling lately from a revenue perspective, from a sales perspective, from a profit perspective, management perspective, but also from a product perspective. And it's time for them to step it up under new leadership and that's what they aim to do this week. Peter Stern will be holding a keynote address in the middle of the week and introducing an end to end hardware refresh that includes new bikes, new treadmills, new rows, a fully upgraded operating system across all Peloton hardware that deeply integrates what they call internally Peloton intelligence. This is AI for personalized coaching and creating plans for users. So this is a big refresh. This is Peter Stern's moment to put his stamp on the company. The last CEO, Barry McCarthy basically ran the company into the ground, something that they said was necessary after the CEO before him, co founder John Foley, pulled some levers that put the company in a very bad financial position. So we'll see if Stern is the one to be able to turn things in the correct direction. Mark, Carol and I are both users of the hardware and subscribers to the platform. There'll be an audience watching the show that have like deja vu and say, well hold on. Isn't this the latest of several turnarounds that have happened in the last many years? The last turnaround was mostly focused on re architecting the fundamentals of the company. They moved production to third party manufacturers, they shut down facilities, they tried to right size the company. They did I think four or five different rounds of layoffs. What Peter Stern is doing after that was done by the last CEO is actually trying to go into to growth mode here, which means rolling out new products and new initiatives. No new products or major initiatives are rolled out under the prior regime. So this is about bringing new hardware into the market and we'll see if that's successful for them. You know so far they're up quite a bit on an on an annual basis. Let's see if investors like the hardware. At the end of 2020, the pandemic year, this was a stock that was at $162. It's now just above 8. Bloomberg's Mark Gurman, a big week. Thank you very much. Now coming up is he goes private in a $55 billion deal. We're going to speak with Jason Chapman of investment firm Convoy on the impact to the gaming industry. This is a firm that only looks at the gaming industry and we've gone over the details of this deal carry we've looked at how historic it is from a financial perspective. There will be gamers out there going look I love some of these games.
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Yeah.
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Why are you doing this?
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My son recently new to the whole, whole EA experience but I'm looking though at the market effect. We're up 4% but remember the market moved on Friday. That was the initial reporting came out. It's a nice tasty premium. We'll see what private equity could do for the business. This is Bloomberg Tech.
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B
Welcome back to Bloomberg Tech. Electronic Arts or ea, the video game company company is going private in the largest leverage buyout in history. We talked about the structure of the deal throughout the program. But like we start the question why this is a five year chart the stock and apart from that spike on the far right hand side which was the trading, remember $210 per shares, the offer we're at like 203 right now. So stock this traded sideways five years and there are a lot of questions about whether executives of EA saw the writing on the wall or on their console screen or whatever that there's some uncertainty for the future. Carrie and I'm still trying to understand it.
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Well, we've got a good voice to dig into it for more on the EA deal. Jason Chapman, Convoy managing partner joins us. Convoy is an investment firm is dedicated to video game and interactive entertainment industry. You understand better than anyone the disruption that's happened within this industry Is going private the right tactic for ea.
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B
Thank you for having me on again, Caroline and Ed and I absolutely do think it is the right thing for you to go private and here's here's why. Today EA has represented kind of the digital home for many core tenant properties and games. Think of the sports division which compose about 60% of revenue. You've got the sins. You've also got Battlefield which is about to launch and a lot of speculation for EA has been that they continuously go back to the well of producing the same types of IPs and they haven't come up with anything quote unquote new in a while. Going private will allow them to take a risk to develop some new IP and also be a powerhouse once again for generating new experiences for gamers. And so for therefore, as a gamer myself, I like the transaction you're investing.
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At the frontier of gaming and the next experiment. So what is it that they can innovate on at the moment? What are the trends that you're seeing in your portfolio? Companies that could be adopted by the biggest studios?
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Yeah, so one of the challenges for large studio driven public entities is that the public market cycle is difficult for developing new ip. And so, you know, you saw the Activision Blizzard acquisition by Microsoft, you're seeing this again finding homes where these companies can actually innovate in private. Think of like what Rockstar is doing with Grand Theft Auto. That is difficult to do as a public entity. It just is unless you have a multitude of properties that can kind of play defense for you in the short term. And so what am I excited about? I'm excited to see what that infrastructure optimized. Let's, let's call it further refined, which I have full confidence the PIF and there are other partners will do here in this transaction to see what they can produce on the other end. And they produce Battlefield. I don't know if you all saw that test, but it was the 19th most successful CCU event on Steam. And Ed, I've seen the test and like all over Instagram reels and Tik Tok is, is, is the early access experience. What you just said about PIF though, this is the letter that Andrew Wilson sent employees. Right. And in the limited amount of, of time I've spent with EA's leadership this year, they've talked about IP in the context of going outside of games. And this letter, he talks about sports and he talks about gaming and he talks about entertainment broadly. This is something that Saudi Arabia has been working on for a number of years. Do they just give EA a new domain to move into? Absolutely. So you know, roughly right now about 2% of the PIFF's assets are in entertainment and sports supports. That's going to move to about three and a half percent at the conclusion of this transaction. They have seen massive success with scopely. They acquired that for just under 5 billion. They've rapidly expanded and acquired Niantic for an additional three and a half billion. They are now looking at EA as the mothership of their gaming strategy outside of mobile, I believe that you'll continue to see scopely dominate their mobile strategy and EA will now probably dominate their, their console and PC and alternative strategies outside of mobile. And so this is, this is forming a formative move by the pif and I'm excited to see what they do with it. I'm keeping a team in New York on their toes, but like Battlefield 6, we're showing on the screen right now, Sims, Madden, EAFC, formerly known as FIFA. What are the future of those properties? Do they change somehow? People are spending less time on new titles and more time in existing titles. That's going to continue to propagate here. And that's why I look at this transaction by the PIF as, as a very intelligent move. EA has dominated the digital homes that we're familiar with for years and that's what people want. They want innovation on things they're slightly familiar with. Also, they will have the ability when going private to risk it and go for some new properties that will come to love, like a new Battlefield World. I'm excited to see them challenge Call of Duty with their Battle Royale. And so for all these reasons, I like the transaction.
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A
What about consolidation? Do they start picking away at companies that you invest in?
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B
I, I think when you have a new buyer in the market, which the sovereign wealth funds appear to be, you know, one. We're seeing this with PIF mainly, but secondarily we're seeing this with Tomask with their move into Keyword Studios. So absolutely. Having a new buyer on, on the scene is a good thing for the industry. It is not a bad thing, and especially one that's willing to pay a premium. You know, typically when you look at private equity, you're not that excited given that the, the multiples you may receive are not quite what you would hope for if you're going to go public. But sovereign wealth funds are here to play. They're here to play well. And I think having another place of capital liquidity is only a good thing for startups and for those who are motivated. I saw a twitch your eyebrow there, very quick. I think Carrie's question is it's a good opportunity for your portfolio companies to get acquired by a bigger beast because like, EA goes for very technical acquisitions. Yes, yes, absolutely. And I'm very excited about this. I think it's a good sign for what is to come. And there's many good companies in our portfolio that I think would love to work with ea and many of the parties involved in this transaction. Jason Chapman of Convoy really appreciate you coming on Bloomberg Tech Tech thank you very much Caroline. We're looking at shares of Comcast. So much news coming out today. Basically it's a very simple story. They're down 310 of a percent basically flat the story. Michael Kavanaugh has been promoted to co CEO joining Brian Roberts. I don't know much more to say beyond that. The landscape's interesting.
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It's interesting because he used to be heading up M and A and another big bank and institution before he came on board to Comcast. So clearly Wheeler dealing there as they particularly sell off some of their assets. But coming up we're getting the world of crypto and some amassing. A CEO of Blockchain association going to be joining us discuss the group's new campaign to defend the stablecoin legislation. It was only passed in July. More on that. This is Bloomberg Tech.
- [32:25]
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- [34:04]
A
SoftBank and Ark Investment are among potential investors in a major funding round for Tether Holdings. According to sources, the funding could give the company behind the world's largest stablecoin a value as high as $500 billion. Let's get the details of Bloomberg Finance reporter Catherine Doherty and why are we seeing such a gargantuan overall valuation for this company. What are they thinking? What is Arkansas bank backing here? So there's a few against the backdrop of a changing regulatory environment, I would say that is probably the number one force behind the decision that firms like SoftBank and Ark Investment are looking into. When you have a firm like Tether that has been at the forefront of stablecoin and emerging technology in the cross crypto space, these firms in putting their money behind a private firm and the development that Tether is working on behind the scenes is really a signal to the rest of the industry of where things are potentially headed. It also sets up the stage for a really increasing environment of setting up major firms in what they're trying to do in expanding into other forms, forms of payment and lending. So it's really all eyes on how big the valuation really does become. The numbers that we're reporting out at Bloomberg are on the higher end. So it really remains to be seen whether or not they come in or are lower than expectations.
- [35:32]
B
You know, there's this moment in time about whether this round is sort of unique to Tether and what it tells us about valuation. A moment more broadly. Then there's the strategy. How does this backing help Tether grow as an issuer of stablecoins? Give us the one to answer those, Catherine.
- [35:48]
A
Yes. Well, on the second point that you're making, it really is about where they're going to put their money, where they go next. I mentioned lending, payments. These are all emerging technologies and Tether has always been a firm that is at the forefront and now that the regulatory environment is changing, where there is is engagement with the industry and regulators, that is really where the industry is going to look to see what happens next. And in terms of the actual size, that is really the big question here on if they do get the higher end of the range, how will they put that money to work and what does that mean for the rest of the sector? Will there be other firms that are looking to raise money either privately or going out? And potentially we've been seeing some big IPOs and that really sets the scene. When you have a firm like Circle that is out there publicly having to report to their investors and disclose what kind of money and the investments that they're making, that really sets up a stage between Circle and Tether. You have a public company and a private company both working in the same industry and looking to compete in the stablecoin issuance space.
- [37:00]
B
Catherine Dockers, great to have you back on Bloomberg Tech. Appreciate it. Elsewhere in the world of stablecoins a battle spring between crypto supporters and traditional finance over the Genius Act. Let's get the perspective of some immersing a CEO of the block chain association context. The Genius act creates a regulatory structure for the issuance of stablecoins, a form of crypto pegged to the dollar. And it was just signed into law in July. And I think you and I talked about it. Yes, surely there are absolutely, you know, like we've discussed the idea that David Sachs is out there, like talking. This is dollarization. This is fantastic. But we're talking about now tension between a more modern industry and traditional finance. How for your association is that tension being debated? Well, we're coming out pretty strongly against some of the proposals that the traditional banks have in front of Congress now. They'd like to roll back a lot of what the Genius act does. They have claimed that they want to close some loopholes that truly are not loopholes. They were at the table when we negotiated this bill. So any concerns that they have now are kind of, you know, late, late to the game concern. At the end of the day, stablecoins have the opportunity to change how we move money in this work in this globe, in the globe. And we want to make sure that the regulations are such that we can can continue to see that innovation thrive and grow.
- [38:20]
A
If you can't beat them, join them is the saying. So is the idea that I've heard of just bank of the bank considering launching their own stablecoins. Why then fight the Genius act, which would allow them to do that?
- [38:31]
B
Yeah, I mean, I believe they will start to issue their own stablecoins. This is a competition question. Right now a lot of the exchanges are off, are able to offer a reward around 4% for stablecoins. Your traditional savings account is offering less than 1% and they don't want to compete. So the idea is let's try to stop the competition and really kind of create a regulatory moat around traditional finance and let them get out ahead where the stablecoin issuers are already ahead of the banks. And I think that's probably the biggest concern they have right now.
- [39:09]
A
You're sending a letter to Congress. You're, you're arguing against some of these actions taken by the big banks. Ultimately, when you're looking at the broader context of tether out there raising funds 15 to 20 billion dollars, maybe giving it a valuation of 500 billion, do you think those sorts of numbers are reasonable as to the market opportunity right now?
- [39:25]
B
Yeah, absolutely. When you think about how money moves in the, in the world, it's traditional, it's slow, it's inefficient, there's a lot of friction. Stablecoins take that out of the system. It's an opportunity to again move money quickly and efficiently and it's something that I think the financial services sector has been waiting for. So I'm not surprised by the valuations we're seeing for these companies. I think there's just a lot of opportunity in the stablecoin sector going forward. Real quick, as a point of clarification, Tether holdings things is a member of your association, somebody that you are supporting Tether? No, they're not a member. They just, you know, we were just at their launch for Tether us certainly somebody that we would love to see in our membership circles. Our membership. So we do have stablecoin issuers in our membership. The reason I ask, I want to go back to the genius act point which is that the banks want one thing and you or association as members want something different. You basically don't own agree. That being said, what is it that the banks are wrong about? Just distill that please. Yeah, so they're calling this loophole where the exchanges are able to offer a reward for stable people putting money in stablecoins. This is no different than a reward you would get if you're using a bank credit card. Right. They are claiming that that is a loophole around the yield prohibition in the bill. This is not a yield offer. This is is a separate reward offered by the exchanges. This is not the stablecoin issuers offering yield again, it's the exchanges offering a reward. It's very different. It is not a loophole. And again if the banks want to compete, they're welcome to do so by offering similar rewards or similar interest rates on savings accounts.
- [41:11]
A
What's interesting is Tether of course makes its money by allocating the money it holds and the US treasury it holds and farming yield from those. All of this is about regulation.
- [41:23]
B
Yes.
- [41:24]
A
You come from the CFTC at the moment. The CFTC has one person in it. We've yet to see a new leader installed. Is there an anxiety, is the anxiety that some have about a void of regulatory oversee seeing of this very nascent industry group. Is that right or wrong in your perspective right now?
- [41:43]
B
I think there are is some concern that there's not permanent leadership at the CFTC that probably you see that play out more with potential market structure legislation that the Capitol Hill is working on. But at the end of the day you see very strong leadership coming out of both the FCC and the cftc. They're holding a roundtable together today. So it's certainly, you know, even though there's only one person at the CFTC, that's not stopping the agency from moving ahead, doing what is necessary to ensure that they are allowing innovation to thrive. So I think the concern, while it, you know, probably is something to think about with market structure because they do need long term leadership at the cftc. Right now the CFTC and the SEC is doing everything they, they need to be doing to make sure that innovation is going to thrive in the U.S.
- [42:32]
A
Caroline Flam, Republican Acting Chair, the sole member at the moment at the cftc. It is great to have you here though of course we really appreciate Sumner there. Coming up, Modal Lab CEO Eric Burton Howard, Ben Hudson is joining us to talk about the infrastructure company Series B funding round and $1.1 billion post money valuation. This is Bloomberg Tech.
- [43:05]
B
Startup Modal Lab says it provides AI infrastructure for AI native startups enabling the building and testing of AI applications. It's just closed a new $80 million Series B funding round led by Lux Capital. Model Labs CEO Eric Bernhardson joins us now. Caroline and I have been discussing all morning kind of a bit like the Salesforce question what does Modal do? But I think like the understanding is it's more analogous to like a together AI and maybe nearer to a NEO cloud. But just, just explain that basic question to us to start. Yeah, totally. And it's great to be here, by the way. So we build the infrastructure layer of a lot of AI applications. If you think about a lot of all these applications, you know, people building things like generative media or large language models or things like by coding platforms, they all need a software layer to run that. And so we basically provide that software layer by aggregating a lot of underlying physical infrastructure, a lot of GPUs all over the world and then make it easy for engineers to build things on top of that. Build things whether that's related to training or inference or batch processing or code execution or many other things. We have a lot of customers like meta Lovable suno ramp scale, very a lot of happy developers who basically build things using our SDK on top of this infrastructure platform. So that sounds very much like aws. AWS and US Lambda. Is that fair? Like, like what's the landscape here? There are some similarities. Like AWS Lambda is built for more of a traditional infrastructure. And I think what we realized when we started this company was basically A lot of traditional infrastructure, you know, things like, you know, AWS Lambda or Kubernetes or Docker just isn't built for AI. So we realized in order to, to build this new layer of infrastructures to support all these applications, basically to throw out a lot of the existing infrastructure and build a whole new stack. But we were very happy customers of aws. We run on aws, we run on many other hyperscalers. We have great partnerships with them. I think what they're good at is running all the physical infrastructure, all the data centers. And then what we're very good at is innovating in the layer above with the developer experience and building this platform that enables engineers to build all these applications on top of it.
- [45:15]
A
So you've got $80 million more in funding. We've raised more than 80 million and now that takes you to 111. What do you need all the money for? What are your absolute costs? Eric, what's keeping you up?
- [45:27]
B
Yeah, for sure. So so far we've actually been pretty capital efficient, but we see a lot of demand out there. There's so many customers building these applications, you know, starting to see a lot of adoption. Also later stage company, a lot of enterprise companies are now taking what's maybe previously research prototypes and putting it into production and they need, you know, a platform to run these applications and that's when they come to you. We think there's just a massive opportunity that the market is exploding. So much demand out there. Since we're going to take this money and you know, first, first and foremost, hire a lot of engineers to build, you know, because we need to invest in this platform. We're building a very deep platform. But also invest, of course, in sales and marketing.
- [46:03]
A
How hard is it to find the right talent? How expensive is it?
- [46:07]
B
It's hard. Hard. It's hard. I mean, we're in New York so I think we're actually a little bit sheltered from the very worst part of it. But yeah, it's very hard to find all these, you know, hard, you know, these people solving these hard infrastructure problems. Eric, we're going to bring back some video. We're just showing the platform. It still comes back to access to infrastructure. The GPUs, the underlying technology. Right. Are you taking on the capital burden of that? Like, like who's actually paying for access? Access to lease or buy out the capacity? No, we're trying to be very capital efficient in the sense that we don't actually own any underlying physical infrastructure. Like I mentioned, we run on top of a lot of different clouds we run on all the major hyperscalers, we're adding a bunch of new clouds. And so our view is that, you know, in order to move fast, in order to expand very quickly, it's much better to build an existing physical infrastructure and we focus more on the layer above the software layer. And that enables us to move very quickly and expand very quickly in a more capital efficient way.
- [47:04]
A
Eric, you're going global. You've got a lot of love from the likes of Scale AI but Lovable as well. That's more an overseas play. How much are you able to broaden this?
- [47:14]
B
A lot more. And it's great to see customers like Lovable. I actually grew up in Sweden and so, you know, lovable is Swedish. But yeah, most of the customers are in the US but we're seeing a lot of very wide different types of use cases. Right. Like I mentioned, you know, things like generative media or, or large language model applications. But, but some of the stuff we've also seen more recently is, you know, a lot of computational biotech. Literally I talked to a customer the other day who is literally using Moodle to cure cancer. And then, you know, weather forecasting, there's many other applications. It's super exciting.
- [47:46]
A
All right, Ben Hudson, it's great to have you on the show. Thank you. CEO of Model Labs on the latest funding round. Meanwhile, that does it for this edition of Bloomberg Tech right here in New York.
- [47:53]
B
Yeah, it's taking us 56 minutes, but I am here in New York this week. I'm really happy to be here. Incredible amount of news recap this show EA that's a big moment podcast. You know where to find it online on the Bloomberg platforms. Let's do it. From New York today, this is Bloomberg Tech. How can you free your team from time consuming office tasks? Amazon Business empowers leaders to not only streamline purchasing, but better support their teams. Smart business buying tools enable buyers to find and purchase items fast so they can focus on strategy and growth. It's time to free up your teams and focus on your future. Learn more about the technology insights and Support available at amazonbusiness.com Hiscock Small Business Insurance knows there is no business like your business. Across America, over 600,000 small businesses, from accountants and architects to photographers and yoga instructors, look to Hiscox Insurance for protection. Find flexible coverage that adapts to the needs of your small business with a fast, easy online'@hiscox.com that's his c o x.com there's no business like small business Hiscox Small Business Insurance Promotional products aren't.
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