Motley Fool Hidden Gems Investing - Motley Fool Money: 02.07.2014

Episode Date: February 7, 2014

CVS makes a surprising announcement.  Twitter tumbles.  And Disney hits a new high.    Plus, Guardian technology editor Charles Arthur talks about Microsoft's new CEO. Learn more about your ad choices. Visit megaphone.fm/adchoices

Chris Hill. Everybody needs money. That's why they call it money. From Fool Global Headquarters, this is Motley Fool Money. It's the Motley Fool Money radio show. Thanks for being here. I'm Chris Hill, and joining me in studio this week from Motley Fool One, Jason Moser. From Motley Fool Income investor James Early, and from Motley Fool Hidden Gems, Chief Investment Officer here at The Motley Fool, Andy Cross. Good to see you guys. Hey, hey, guys. Hi, Chris. Microsoft has a new CEO, CVS has a new policy, and Disney's got a new all-time high. We will

talk big technology with columnist Charles Arthur, and as always, we'll share a few stock ideas to put on your watch list. But guys, we begin this week with the big macro. The jobs report for January is out. 113,000 jobs were added. That was lower than expected. But Andy, the unemployment falls to 6.6%. And the U6, the broadest measure of unemployment, falls to 12.7%. And that's the lowest since November 2008. It seems, you look at the percentages, it seems like a pretty good report. But what do you think? And stocks rallied on it, which was kind of surprising given the fact that the number was much lower than what the estimate's going out there for. But there were some good signs,

like some of the manufacturing numbers were back. Construction numbers were up almost 50,000, so that was good. Some of the adjustments from December and a little bit from November kind of revised up there, which was good. But overall, it does show you that the unemployment number and the employment figures really are still not really robust. Frankly, I kind of expect that. I think we're in this new paradigm, I've been saying this before, that the employment picture is going to be a little bit less rosy because companies are so careful, including us here at The Motley Fool, on how you hire, making sure you're very careful in allocating that capital to the right people, and using technology as much as you possibly can to get out as much efficiency as you possibly can. And the idea is just, it's maybe not as good an unemployment number as we expect, but it's not bad enough to provoke the Fed into further action, right? So it's like a kid who's bad enough just to get smacked with a wooden spoon, but not the belt. The big punishment didn't come here.

Not that we advocate either. We're saying. Exactly. As an example. Circa 1950. I mean, I think a spoon might actually hurt worse than a belt. A spoon can hurt. Depends on where they hit you.

Metal hairbrush in my face. I think, I mean, we talk a lot about these numbers. Unemployment numbers. they tend to get revised upward all the time. So, I think it's probably more helpful to try to at least look past these numbers and more how they affect our economy, how they affect consumers. One thing I was looking at here earlier today, just to get a little bit of a better take on this, is the evolution of a credit-based economy. You look over the past 40 or 50 years here in the United States, and you look at this chart of the personal

savings rate, which at one time topped out over 14%, which was really nice. People were focused on saving and being prepared. But over time, particularly over the last 10 to 15 years, this number has just plummeted. And with a personal savings rate under 4% now, I mean, it just goes to show that when the hammer drops, there's a reason why so many people are feeling so much pain, because they just don't have anything to really back themselves up here. The evolution of a credit-based economy? Yeah. Your morning research, that sounds like a semester-long college...

I'm a smart guy, James. Well, and don't forget also, the government payrolls continue to shrink, and that's having a big impact on the overall numbers. So, as the government pulls back, that does have an impact on the employment figures. Alright, let's get to some of the company news this week. CVS surprising the retail world by announcing it will no longer sell cigarettes or related tobacco products. James, this starts October 1st. They're getting praise for the move, saying that selling tobacco is inconsistent with their purpose of helping people on their path to better health. But

if you're an investor and you're looking at CVS, you're asking the natural question, why are you walking away from something that has been $2 billion in revenue every year? Chris, even as an investor, and you know me, you know I hate tobacco. I mean, I felt so good about this, I almost stained my pants. I'm going to be a loyal customer from CVS all my life, all my Xanax, all my Valium, I'm going straight to them. No, yeah, it's $2 billion out of $130 billion or so in sales. So, that sounds bad. But long-term, 60% of CVS's revenue comes from the prescription benefit, pharmacy benefit stuff, corporations. So, they're more of a healthcare company than we think. So, this bodes poorly in the short-term, but bodes

much better in the long-term. Plus, you get people like us talking about it. It's great PR. I think this is one of those purpose over profits thing. I think you're right. The short-term, it doesn't look all that great, maybe because they're sacrificing this profitability, this money. But yeah, in the long term, I think there's actually something to this. I agree with the move. I like it. Are we going to see others follow? And I'm thinking primarily of Walgreens. I think so. Walgreens actually has more stores than CVS. And even Obama put out a statement commending CVS. Now, it's ironic. I guess he's going to have to send his helper somewhere else to buy his cigarettes. But I think we will see a trend here. Well, yeah. And this is actually

CVS. I mean, this has been happening already. I mean, Target made some changes. So we have been seen this already. But given the fact that CBS is trying to move into this health care area more, it's a natural fit. Disney hitting an all-time high this week after strong first quarter earnings. Jason, ad sales at ESPN up 10%, toy sales up 24%, record attendance at some of their parks. Was there any downside to this quarter? Nope. There was no downside to this quarter at all. Literally, I couldn't find any. I think most of us here, at least two of us, I know, saw the movie Frozen, and they just

have really hit it out of the park with that one. They're going to string that hit out for a long time, pluck a few characters out there, and build their own storylines and new movies from that. But, I mean, top-line growth of almost 10%, I think, just shows there is demand out there for what they're doing. And you're right, every segment saw operating income up in double digits, which I think is indicative, again, of not only demand, but the operating leverage this company has, particularly in the parks segment, where You're going to keep those things open anyway, so the more people that come and the less you have to discount them, the more money they're going to make with it.

We always talk about the movies, they get the headlines. It's not the most profitable part of the business, but they do a great job of taking what they make in those movies and spreading it out to the other divisions there. I think, really, the only things that I'm focusing on with Disney, it's two things. Leadership with Bob Iger is going to step down in June of 2016. They want to let him get this new Star Wars acquisition going, Lucasfilm acquisition. So, I mean, it'd be nice to kind of keep an eye on how they're going to fill those leadership shoes there. And then, you know, you chimed in there on ESPN, and we know that is a crucial part of this business here today. That is definitely an industry that is

ripe for disruption. I think there are a lot of people out there, a lot of folks trying to figure out how to disrupt it. Fox Sports, for example, is trying to, you know, take a little bit of that share as well. So, that'd be something to keep an eye on. There's nothing that suggests they're in any trouble. You know, I was in Tokyo. I went to Disneyland Tokyo with my son, and it was a Tuesday, like middle of December, and it was packed. It was packed with high school kids, too. Like, it's a school day. You wonder what other high school.

It was good for Disney. Good cross-family going to Orlando in May, so I'm looking for tips. May, hoo-hoo. As a shareholder, I thank both of you for that. Mac's probably got a few tips for you. Yeah, our producer, Mac Greer, he's the man to see. Sweet, I need help. The search is over, guys.

Microsoft has named Satya Nadella as the CEO to replace Steve Ballmer. He's 46 years old, a 22-year veteran of the company. Andy, right now, he's heading up the cloud computing and enterprise divisions. Good choice? Well, I mean, I actually, yes, I think it is a good choice. This has been a long search. They interviewed more than 100 candidates to kind of get the right fit for the third-ever CEO here at Microsoft, of which I own shares and we own shares here at The Motley Fool, you know, as well.

I do like this fit. He, while people have classified him kind of as a little bit of a safe bet inside player industry veteran, Microsoft veteran, he actually has a history of mixing things up at Microsoft, kind of breaking down barriers. He's very open with looking for alternative solutions. He kind of made a lot of headlines when at one of the developer conferences, he pulled out a Mac and showed how you can actually develop iPhone applications, apps tied to Microsoft's cloud services. So he is not afraid to kind of mix it up. He is very, he's much more reserved than Steve Ballmer, which I think is a great thing. He's a technologist, veteran. I think it's actually a good move.

It is a huge job. He does have Bill Gates coming back into a little bit of a role as a technologist to help out there, which I think is a good thing, too. So, overall, I'm very positive on the move. I was going to say, that was the thread of this story that surprised me, that Gates is stepping down as chairman. I knew he'd step down eventually. I was just a little surprised he's stepping down this soon. And by his own account, he says he's going to be spending about a third of his time advising Nadella on technology. Is that a plus?

I'm assuming it is. I think it is. I'm also wondering how long he's going to do it, if it's just like for the first year or so, because as he continues to sell off his shares methodically, pretty soon he's not going to have any financial interest in Microsoft. Well, that may be true. I think he still has the – what this shows is he still has the interest, which I think is very important. I mean, we saw this handover to Steve Ballmer, who was a lawyer and an operating guy, and that just was never really a good fit. So here we have a technology leader coming back in to lead the company, along with the founder kind of stepping into a role that is going to be a counselor to help him on technology. And I think overall, that partnership, I think, is going to bear fruit for shareholders.

Coming up, we'll give you an inside look at the stocks on our radar. This is Motley Fool Money. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Welcome back to Motley Fool Money. Chris Hill here in studio with Jason Moser, James Early, and Andy Cross. Shares of Green Mountain Coffee Roasters up more than 30% this week after Coca-Cola announced it will be taking a 10% stake in the company

for the princely sum of $1.25 billion. James Early, I know you're excited about the prospect of a Coca-Cola machine in everyone's home now? Coke is an income investor recommendation, Chris. But yes, you're right. I do have a significant loathing for all things soft drink. I mean, I'm of two minds here. On one hand, shipping water or derivatives thereof around has got to be one of the top 10 dumbest concepts of modern civilization, right? It's super heavy, takes a ton of fuel to ship around. We don't need to do that. So that's great. But on the other hand, soda is cheap. Soda doesn't need to be made fresh like coffee. It can stay fine in a can or a bottle. So there's not really a

financial need for this. There's not really a functional need for this. I think it's more of a novelty play. So I don't know how big of a needle mover this is going to be. You know, Jason, it's pretty interesting. Once this got announced, shares of SodaStream got whacked immediately after hours. And then you look at it, it's actually up about 10% since this news broke. Why the reversal? Well, I think it's really easy to look at this initial headline with Green Mountain Coke and say, wow, that's just an endgame kind of press release there. And the initial reaction was such. I mean, the stock was 10% down after hours. But take a second to think

about that and recognize the fact that really, Coca-Cola just basically, they just validated that market. They just said, yep, there is a market opportunity there and we want to pursue it. And so, the story with SodaStream for the longest time has been the United States market opportunity, potentially. And I mean, to James' point about soda, I think that's a very good one. And I think that one thing that makes these types of machines a bit more attractive is you can go beyond the soda and just, you know, if you like seltzer water or just flavor it with some lime or lemon, you can make healthier options, which I think is very attractive. I think the biggest drawback for me on these machines to date, at least, is the fact that

you still have to go out there and buy the CO2 refills. I can't, you know, there's an effort that has to be made there to still go out there and do that. So, you know, I think about it from like a, say, if you have a gas grill and a propane tank that goes with that grill, well, there's propane taxi that'll deliver those tanks to your house. So, I think that the company that can sort of address that last mile issue, whether it's UPS, FedEx, Amazon, Coke, whoever, if they can address that last mile issue and really make this as convenient as possible, that could be, I think, a real game changer. But there's something there. Let me, you seem familiar with this, Jason, more so than I am. So let me ask you this. With these little pods, are you just making

like latte-sized Cokes? No, it's not a single serve, no. I mean, I don't have a machine, but it's a one liter. 90 ounces is like the bare minimum these days, right? The Big Gulp is like humongous. I think it's a one liter bottle for SodaStream. But yeah, I mean, like Brian White, for example, has one, and he loves it. Jim Mueller has one, and they love it. And I think that it's because of the options that it provides you. But yeah, it's not like coffee in that it's a single serve. You make a liter bottle at a time. Jason just never wants to leave the sofa. You want to do the radio show from your sofa.

I mean, there is a lot of truth in that statement. Shares of Buffalo Wild Wings down 9% on Wednesday after fourth quarter. Revenue came in lower than expected. Andy, it didn't seem like that bad a quarter. Why the drop? It was a good quarter. And Jason talked

about this in Motley Fool 1. It was a very good quarter. Especially if you look on a 13-week comparable basis with both sales and earnings right in line. Basically, what happened is there was one or two lines talking about next year with some rising costs, about increasing employment costs with minimum wage increasing, and maybe their growth rates, their earnings growth rates may not be quite as high

as they have been historically, which they've always been typically in the 20-25% range, which is outstanding. But overall, when you look at the performance of the business relative to where it is on a market multiple basis at 35 times earnings, maybe 25 times forward earnings. I think investors just started to see, well, maybe if the growth rates are slowing, that may not be good for the stocks, so they sold it off. But overall, the company continues to excel on the operating basis. Chicken wing prices have come down dramatically over the past year. They were a record high last year. That's going to be a big benefit over the next quarter or two. But if they do have some rising employment costs down the road,

that may impact some of the growth rates. And they have them now in the DC area, is that correct? Oh, yeah. They have one right up the street, up here in Crystal City. We had a two-day member event this week. It's actually the biggest event we've ever had here at The Motley Fool, with members of our Motley Fool One service, Supernova, Pro, and MDP. It's really been great. And two of our members, Joan and Richard Morgan, are up from North Carolina. They're actually on the other side of the glass with our man, Steve Broido. So, thank you so much. Long-time listeners, thank you for being here. Let's bring in our man, Steve, as we get to the stocks on our radar this week. James Early, Steve's going to hit you with a question. I hope

you're ready. What do you got this week? I want a good question, Steve. Cebespi, I've mentioned it before. This is a Brazilian water and sewage company. You know me, I like the sewage part, but they're both necessary. No one's going to stop flushing their toilet in a recession. 25% of Brazil's fresh water gets leaked out of the pipes before it gets to the destination. But thanks to Cebespi's efforts, that number is dropping gradually. So it's 51 or 50.1% owned by by the state government, so nothing bad is going to happen to this company. I like it. What's the ticker symbol?

SBS. And it's been beaten down with all this emerging market, you know, kind of fear. Steve? How does a private company have so much control over what usually is controlled by a municipality? It depends. You know, actually in the U.S., people think water is all public, but there are many, many privatized and increasingly more private water companies. The private companies just do a better and more efficient job of that.

Jason, what do you got? Well, I'm glad we figured out this whole Latin Steve Broido Twitter thing, because in honor of Latin Steve B., I'm going to go ahead with Twitter here, because I feel like they came with a good earnings quarter here. This was their first reporting as a public company, and I think that through all the noise, we saw a good pullback in that this stock really tanked, because it was tremendously overvalued. It's about the same size as LinkedIn. LinkedIn's going to bring in about twice the revenues as Twitter this coming year. But all engagement metrics, advertisers are realizing some return on those advertisements.

I think there's a future there for Twitter. Steve? Just bought Twitter. Likely it exists in 30 years. I think Twitter does exist in 30 years, Steve, yes. Andy Cross? With the Super Bowl now a pass, I'm turning to the world's most popular sport, going to soccer, football around the world, international football, global football. I'm looking to Manchester United. Man U is a symbol.

It's one of the world's most valuable sports franchises. They report earnings next week. What's interesting with Man U right now is that they are struggling on the field for the first time in like 15 years, and that potentially has a very big impact on their revenue growth for next year. And so I want to hear how the business leaders talk about, and they do have conference calls, talk about their performance on the field

relative to the performance off the field for the investors. Soccer aficionado Steve Brodo, question about Manchester United. What's the biggest mistake I can make playing soccer? Is there something I can do that's just terrible? Score a goal on your own team. But seriously, I would never do that. You probably would not, Steve, yeah. Is there anything, just a tip for me?

Head-butting? If you're unaware of the goal post and you're the goalie and you ram your head into the side. That would be bad. And that has happened. Yeah, that is actually dangerous. Red cards. Red cards are pretty bad.

Yeah, watch your rampant profanity. You don't want to annoy the referee. Oh, my God, no. They swear all the time. I mean, they swear at the refs, I think. I think it's terrible. I'm like, you know, there's no border between the refs and the players. Up next, we will head across the pond to talk with technology writer Charles Arthur.

Stay right here. This is Motley Fool Money. Glory, glory, man united As the Reds keep marching on Glory, glory, man united Glory, glory, man united Glory, glory, man united As the Reds keep marching on Welcome back to Motley Fool Money. I'm Chris Hill. Just a few weeks into 2014, and already we've had big news from some of the biggest technology companies in the world. Here to help us make sense of it all is Charles Arthur. He is the

technology editor of The Guardian newspaper. He's also the author of Digital Wars, Apple, Google, Microsoft, and the Battle for the Internet. Charles, welcome back to the show. Hi, good to be back. So let's start with Microsoft, the big story this week, the new CEO, Satya Nadella. By all accounts, This seems like a guy who is highly respected, but some people are saying, you know what, they went the safe route. This was a safe choice to replace Steve Ballmer as CEO. Do you think that is accurate? And if it is, is he too safe a choice?

I don't think he was a safe choice. I mean, he's been at Microsoft for 22 years, but he's come out of the enterprise and the cloud computing side particularly. And that, I think, is, I mean, that's where Microsoft's, the enterprise, you know, the big businesses, that's where its strength is. That's where, actually, it makes most of its money is from its enterprise customers because they're the ones who keep on buying Windows licenses and they keep on buying Office licenses and they keep on buying Windows Server licenses. But the cloud division is relatively new, and that's where a lot of the growth has to be in the future. So having that sort of device agnostic approach where you're thinking more about how do we get onto lots of people's devices, how do we serve lots of people at the same time, I think that's actually an important skill to have.

And I think that coming out of those twin disciplines is possibly more useful. I mean, a lot of people ahead of this were looking at outside candidates. They were sort of saying that Microsoft needed a big shakeup, and I think that is true. They're also looking at internal candidates, and a lot of people were wondering if Stephen Ellip, who came back from Nokia, where he was running the handset business and the rest of it, whether he was going to be taking over as chief executive because he had experience running the office division in the past. Clearly, they passed over him for Nadella, and I don't think it's necessarily what you call a safe choice, and it sounds to me as though he's looking to shake Microsoft up. I think he wants to get rid of a lot of the politics that has, frankly, slowed it down in the past. Do you think the choice of Nadella indicates anything with regards to more consumer-facing devices? If putting Nadella in the CEO office gives any sort of indication as to where Microsoft is going with respect to tablets, with respect to phones, or any other device for that matter?

Well, I don't think it does. I mean, Steve Barmer last summer put out a memo about Microsoft, you know, an internal memo saying we have to turn ourselves into a devices and services business, which is fine as sort of as far as it goes. Then you have to think about the fact that you're really either one or the other. If you're going to sell devices, you're going to be a bit like Apple. You make your money on the devices and services are a sort of add-on to keep people interested in it. So iCloud, which provides free, is basically its add-on to keep people interested in the hardware, which is where it makes its profit. If you look at Google, Google provides Android to lots of handset makers,

and it provides it free, and then it makes its money from the services that it provides. So it monetizes people doing searches. It monetizes people sort of using mobiles in various ways. And you can sort of be one or the other, but it's rather hard to sort of be in between. You can't be sort of a bit of a device maker, you know, making some money out of the device because you'll eventually get beaten by one or the other company which does it sort of to the hilt. So, you know, a company which either like Google provides the services free or like Apple makes the money on the devices and sort of has the services as a sort of sweetener. So I think that he'll have to think about what Microsoft wants to be. And I suspect that it would be better off, given its roots are in software, focusing on being a services company, which is, of course, where he's come from.

He's come from the cloud computing side. And the expansion of what they're doing with Azure and all the other Microsoft cloud computing services suggests to me that he'll look at trying to get Microsoft services onto more devices. and possibly the Nokia handset business, which they're buying, maybe they'll just sort of run that pretty much at a break-even or even at a bit of a loss, rather as Google did with Motorola, which it is selling off to Lenovo. Microsoft can afford to run a mobile phone business that basically pretty much gives their handsets away

if it can get those into enterprises and sell more profitable services to them. One of the people who's going to be helping Nadella figure out the future of Microsoft is Bill Gates, who it was announced this week, moves out of his position as chairman of the board of directors and is becoming what is termed a technology advisor to Nadella. To me, that was more surprising than the choice of Nadella itself. The fact that Gates was giving up the chairmanship this soon, moving to this position. Does this tell us anything about where they're going? Because there are some people out there, Charles, saying, well, look, if Gates is going to be a technology advisor and spending, in his own words, a third of his time doing that,

then that's really just back to the future with Microsoft. They're just doubling down on Bill Gates, and that's not necessarily a good thing. Yeah, my feeling with Bill Gates is that he got a bit itchy being the chairman and watching things not quite go as he wanted them to go. I mean, he's sort of pretty much withdrawn from the company in the past couple of years in terms of his real close involvement in it but uh i i get the feeling that he's always just sort of had to sit on his hands um and has wanted things to be done slightly different so when he stopped being chief executive he was actually chairman and chief software architect for a while and then in 2005 or six uh ray ozzy came in and he took over the title of chief software architect which is a very fuzzy

sort of title no one was quite sure what it meant and steve ballmer actually sort of got rid of him in 2009 10 or so um but i think that bill gates wants to do that sort of role basically thinking about what should we be doing where should we be going because that's something that he was always pretty good at bill gates was always good at sort of seeing how the long term would would shape up but uh he tended to be sort of too optimistic about how quickly it would happen so that was To me, always his slight flaw as a visionary was that he expected things to happen too soon, though I think that's actually true of most people. They sort of expect that these incremental changes will sort of create a tidal wave of change

and it'll happen tomorrow, whereas actually it takes years for them to come true. But, yeah, I think there is a risk that you'd sort of have too many chiefs and that things would start to get a bit confused as to, well, who's making the decisions here? I mean, certainly one of the things when I was researching my book that I heard from people who worked at Microsoft was you'd sort of be in a call with Bill and with Steve Ballmer, and then Bill would get called off to go and do something else, and Steve would give you one piece of advice. And then they'd sort of swap over, and Steve would get called away to do something, and Bill would give you completely opposing advice, and which one do you go with? And I suspect that there's some risk of that happening again. So, yeah, there could be some tension there, and it'll be interesting to see quite how that plays out. You're listening to Motley Fool Money, talking with Charles Arthur. He's the technology editor

at The Guardian and the author of Digital Wars, Apple, Google, Microsoft, and the Battle for the Internet. Let's talk about Apple for a moment, because in the most recent quarter, they had record sales, and the company is obviously a cash machine. But when you look at the stock, Charles, it's still not really moving. It's not reflecting the amount of money that they're making. And I'm wondering if they are now at this point in 2014, where Microsoft was a decade ago, where it was becoming more profitable, but the stock wasn't really doing anything. It's an interesting question, isn't it? I mean, it sort of hinges on two questions. First of all, has the smartphone business gone as far as it can? And has Apple got as much to

happen with it as it can and secondly can apple come up with any more categories where it can generate new revenue streams uh and new customer loyalties um i mean horace did you who runs the sim code consultancy you know he says the thing with apple is that it's constantly falling and it's sort of you know every time it launches something uh people say well that's that's got be a failure hasn't it i mean you know the ipod no one thought it was really going to make any headway in the consumer electronics business for the iphone people said yeah but the mobile phone business is really entrenched you know and with the ipad they said yeah no one's actually got on tablets it's been tried before so you know every new thing is a is a failure uh until it's

a roaring success in which case they say well you know you haven't had any successes for a while you know look how long it's been since you launched the ipad um so in that sense you know apple apple is constantly failing and falling um you know but but that's sort of how it is when you're when you're running you know always you're always falling over when you're running it's just what you know you put a foot out in front of you and and that saves you each time so for apple the question is will it be able to come up with some new category and um from the indications about meetings that it's been having with the fda people it's been hiring it seems like it's looking to do something with personal metrics measuring what you're doing measuring your health um whether

that's a category that's going to be big enough to really drive a whole new revenue stream hard to know then again it might replace ipods which are falling off pretty fast the other question is the smartphone business because that's sort of half at least of apple's apple's revenues and we could guess probably about the same amount of its profits um there you know sign this deal with china mobile which could be incrementally important um in the united states um its share of the number of people who actually have a smartphone keeps going up it's really interesting comscore has a long-standing uh sample which looks at the installed base that's the number of people who actually have a phone not the not the sort of the data about who's buying a phone

this particular quarter but who's got a phone and apple's share of the number of people only smartphone just keeps on ticking up it keeps going up relentlessly whereas intriguingly the android share has sort of been very steady around 51 apple share has gone up from sort of 36 up to nearly 42 percent now um and windows is miles behind you know windows and blackberry just make up three percent each of the share so for apple i think it feels that it can just keep on digging away at the smartphone market and uh i think its big target this year will be the far east and I suspect that it's going to have a large screen phone later this year, possibly as one of a number of different models, because in the Far East, phones with big screens really sell well. They don't do so well in the States, but I think that Apple really is seeing the Far East as the potential engine for growth as people get more and more money.

I mean, compared to the United States, there's far more room for growth for Apple, far more in the premium segment who it could reach once they actually become rich enough than the market exists in the U.S. and North America. Up next, more with Charles Arthur. You're listening to Motley Fool Money. Welcome back to Money Full of Money, talking with technology writer Charles Arthur. CEO Tim Cook has promised a new product from Apple by the end of this calendar year, so the clock is ticking. Is wearable technology really the safest category to bet on if you're reading the tea leaves because some people are still holding out hope for something related to the television? I'm always amused by the television thing. I think anyone who believes that Apple is going to come up with a television, an actual thing with a screen on, I think you might as

well give that one up now because the television industry is comparatively low volume. It's about 10% turnover per year in terms of how frequently people replace their sets. It's a very low margin, a very, very low margin. And it's one where the high-end segment is really hard to find. And also, it's so geographically diverse that a television that you made for the United States, though you might think that's a big market, actually would not do at all well in Europe just because of different territories, different TV encoding, different ways that the content reaches you.

It's simply not ready for that sort of disruption. What Apple might be able to do with a set-top box that ran some sort of Apple software, I mean, beyond what it does with Apple TV at the moment, I think that's a space that's much more open and more interesting things could happen there. But again, it would have to be looking to different regions, different content, different ways of doing things. And I suspect at the moment it's sort of comfortable with how Apple TV does in just generating incremental sales for the iTunes Store

with things like films, TV series, and so on. When it comes to wearables, well, that's more interesting. You know, Samsung sort of did a pretty terrible thing with the Galaxy Gear. I think everyone agrees. They're rapidly cutting the cost. They were trying to sell it for $300. They've now slashed $125 off that in most places. I would expect another $125 could come off that probably before you might get people interested.

But it's a bit like the market for MP3 players back in the 2000s. You could see that they were going to be good, but at the same time, the ones that were there were really clunky. They were slow. They weren't sort of neat. And lots of people were trying to do them. And then Apple came in with the iPod, and everyone went, oh, okay, that's how you should do an MP3 player. And they did things like it was more easy to maneuver around, it had more useful information, you could transfer information more quickly. And I suspect that they're ready to do something quite similar with wearables,

because there's all sorts of questions that people haven't quite asked themselves about what you want a wearable to do. And it's interesting, I have a Pebble watch, one of the Kickstarter wearables, which does things like tell you if someone's ringing you, it's connected by Bluetooth to your smartphone. And the last two Apple executives I've met have both asked me, oh, yeah, so how do you like that, Pebble? You know, they've been interested in my responses to that. And I sort of take something from that. I suspect that Apple is looking at this sector with quite a lot of interest. You're listening to Motley Fool Money, talking with Charles Arthur, technology editor at The Guardian.

You mentioned earlier about Google and how it was cutting ties with Motorola, selling it off to Lenovo. This was the biggest acquisition by a country mile that Google has made, more than $12 billion, Charles. How big a miss did Google make on this? I know they're not hurting for cash, but I don't think there's any reasonable, objective person who could look at the amount of money they paid, the fraction that they sold it for, and say, oh, yeah, this was a big win. Yeah, it's true. But they sold it for about 2.7 billion dollars to Lenovo of China.

And they paid about 12.5 billion. It's true. When you sort of take various bits and pieces here and there, the gap only comes to about 3 to 4 billion dollars. Well, I'll say only, you know, I like to have it in my bank balance. And some people would say, well, that's OK, because they get all the patents that they bought from Motorola. And actually, you know, the patent hoard is why they bought Motorola Mobility in the first place.

There's a document filed with the SEC by Motorola called Backgrounds of the Merger. It's a proxy thing from 2011. And that shows that the meetings between Andy Rubin and Sanjay Jha of Motorola Mobility at the time, the CEO, was entirely talking about the patents, and Google wanted to buy the patents from them. And Sanjay Jha said, well, look, I'm not going to sell the patents. You know, you have to buy the whole thing in a job lot. Google did. It wasn't able to turn it into a profitable business because it was losing money already.

The other handset makers who were making Android phones didn't like the fact that Google might be in competition with them. So Google sort of set it off in a corner and let it play by itself. And it sort of, you know, money dribbled away down the drain. But equally, it had the patents. Now, the question I think is an interesting one is whether those patents are worth between $3 billion and $4 billion. dollars um and i i think that there are questions to be raised there because actually google has not succeeded in a single uh court case anywhere in the world in asserting any of those motorola patents in fact was bound over by the ftc not to use a number of the standards patents uh things

like wi-fi and h264 which is for video encoding and decoding not to use any of those to try to get sales bans, injunctions against any other company. So the FTC bound them over on that in January of last year. And most of Motorola's patents relate to that sort of thing. And I think it's still an open question. Are those patents really worth that amount? I think that it would be interesting to see if there's some way of valuing those properly. We got just about a minute left. This week, Facebook turned 10 years old. The last time you were on the show a couple of years ago, we were talking about their struggles with mobile, and now it's more than half their ad revenue, where does Facebook go in the next 10 years?

It just goes more and more mobile. I mean, I'm very impressed by the fact that they now have more people who are using it only on mobile than only on desktop, although most people use it on both. And I'm very impressed by the fact that they have more than half their money coming from those people on mobile. I think that both of those are a fantastic coup. And their strategy now, which is to sort of split Facebook into lots of apps that people can jump about between on their smartphone.

I think, is brilliant, actually. So the mobile internet is expanding. There's a couple of billion people on it at the moment. That's going to double in the next 10 years at least, I think. And Facebook can really make hay on that. You can read more from Charles Arthur in The Guardian newspaper. You can follow him on Twitter. And if you're interested in technology, you really should be reading his stuff.

Charles, thanks so much for being here. My pleasure. That's going to do it for this week's edition of Motley Fool Money. The show is mixed by Rick Engdahl. Our engineer is Steve Broido. Our producer is Matt Greer. I'm Chris Hill. Thanks for listening. We'll see you next week.