Today's top story, as Ed highlights, is Google's significant victory in a key antitrust ruling, where it will not have to divest or sell Chrome. This decision has sent Alphabet's shares soaring, hitting a record high and marking its biggest jump since April. Caroline notes the market is up more than a percentage point, rebounding from yesterday’s selloff.
Our guest in D.C. explains that this was a huge win for Alphabet because, ultimately, the judge didn't hand Google "more than a slap on the wrist". There was significant fear that the ruling could reshape the tech and search markets, but it has largely maintained the status quo. Google can continue its practice of paying Apple $20 billion a year for default search engine placement. The only caveat, our guest explains, is that this arrangement can no longer be exclusive, opening up opportunities for Apple to consider other options. Google is also required to share some data, albeit in a very limited, one-time manner, specifically search data, not advertising data, and it must report back to the judge on its implementation. This is not seen as a "huge change or blow for Google".
Google's response to the ruling was celebratory. The judge's perspective on Generative AI was particularly interesting, according to our guest. Despite expectations for a tougher stance, the judge's ruling was conservative, stating that Generative AI is changing the shape of the market. He explicitly "didn’t want to get ahead of that and issue a ruling that would disrupt the market, change the money flow, inhibit innovation".
Brent Hill joins us to discuss the market reaction. Alphabet is up 8.6%, the biggest jump since the first week of April. Hill, whose firm hasn't raised price targets on the stock in response to this ruling, explains their long-standing view: "the last 10 years in tech we’ve maintained that any regulatory insertion into the stocks is not founded". He cites examples with Zuckerberg and Microsoft, where "there’s been no breakout". He believes that "the companies are too big, and regulators want one thing and the companies want one, and they meet in the middle". His firm's strategy is that "you buy a stock on a sphere, and it worked for Microsoft and now Google," a playbook that has held for two decades. He says, “Our view is like there’s been no change. This company is growing, they are, EBITDA at mid-high teen multiple and trading at 14 times".
Caroline asks what this means for Google's competition, given the limited data sharing. Hill acknowledges that consumers' way of looking for information is changing, with many "starting our searches in Perplexity in OpenAI and going to Google". However, he asserts, "we’re not going away from Google". He believes this pressure on Google is "good", as it will force them to elevate their game and better showcase their capabilities, such as Gemini, which he notes is "doing a good job". The core argument is that "you can’t complete the loop without Google, whether a business you are trying to visit or what time the vet closes. There are things you need Google for". He even provides examples where Gemini excels, like finding car models in specific colors or exact car locations. He concludes that we are moving towards "multiple agents and A.I. systems we all embrace that work in concert".
Turning to government contracts, Caroline notes that ServiceNow is aiming to boost contracts by offering agencies discounts as much as 70% on software to drive adoption of its AI tools. This initiative addresses the government's desire to centralize negotiations for the best discounts. ServiceNow's bet, as our guest explains, is to "land new business, take the margin hit a while and two or three years, what do we charge". It's seen as a "win-win situation" for now, improving the government's chaotic software buying process. This trend isn't isolated to ServiceNow; Microsoft has also been discounting, and Salesforce has seen some flattening. Our Senior Research Analyst highlights that offering more flexibility is "part and parcel of doing business in the current era with the government". Given the government's "antiquated systems" and "so much to do," it presents a "big opportunity for the vendors," especially since their margins are high. Ed emphasizes how crucial it is for software teams to be on good terms with the administration, and our guest notes that most investors haven't fully "imputed much benefit from government in the models," suggesting a potential upside.
Caroline shifts the discussion to the "winners and losers" in the generative AI space, noting that software and SaaS companies "have been beaten up over that". The assumption, she says, is often a "zero-sum game," where Gen AI winners imply losers. However, our analyst suggests a different perspective: the next five years will bring "so much more opportunity in software and staff" with more software being written. Incumbents who move quickly will be a "big part of that," and they are likely to "generate more revenue from Gen A.I. before we see facts on their business". While there's hype around AI headlines, especially for companies like Salesforce, the adoption in enterprise will likely be "slower" because AI-facing businesses "has to be trusted and "can’t run off the rails and expose proprietary data or expose them to vulnerability". Incumbents, however, possess "advantages and a lot of hooks in the system to make things work together".
Schlomo Kramer, CEO of Cato Networks, joins us after announcing their first acquisition of an Israeli start-up specializing in AI tools. He explains the rationale: "The AI transformation will dominate enterprising basements in the next decade". This creates a "huge security challenge" requiring a "completely new security set that needs to listen to all of these tens of thousands of conversations and decide what is appropriate for the enterprise according to some policy". He calls this a "whole new category in securities" that will be huge. Cato Networks sees network security cloud service as "the best place to put it". When Caroline asks why they couldn't build this organically, given their $300 billion annual recurring rate, Schlomo responds that "the market is happening at a rate that is unprecedented" and enterprises need a secure AI journey "now". Developing solutions over three years "won’t cut it". Cato Networks also secured an additional $50 million, boosting its balance sheet and aggressive growth targets.
Helen McCabe, CFO of Rolls-Royce, discusses the company's embrace of data center power demand, which is growing exponentially thanks to AI. Rolls-Royce, known for its jet engines, is a pioneer in small nuclear reactor (SMR) technology. Helen highlights a "huge opportunity," with an addressable market of "about 400 equipment of their SMR". They have secured contracts with the U.K. government for three reactors and the Czech Republic for up to six, and are in the final stages with Sweden. They are also eyeing entry into the U.S. market, where nuclear ambition aims to grow from 100 to 400 gigawatts by 2050. Rolls-Royce's advantage, she explains, comes from over 60 years of building nuclear reactors for submarines. Their SMRs are the largest on the market at 417 megawatts, making them "one of the most efficient" and comparable to energy and wind but more consistent, avoiding latency issues. Furthermore, 80% of the SMR construct can be modular, built in a factory "like a Lego block" and assembled on site, significantly reducing construction time and risk. Rolls-Royce is actively engaging with hyperscalers, acknowledging the "growth in AI, the energy required to provide that continuity and resilience". Helen also touches on the company's strong position in defense, with governmental business making up 25% of their revenues, and expects growth in land and naval sectors given increased NATO commitments. She clarifies that Rolls-Royce is not planning an IPO for the SMR unit but has invested over £100 million in the U.S. to support expanded production in defense and data centers, emphasizing the U.S. as an important home market.
We then hear from Richard Socher, founder and CEO of AI search company You.com, which just closed a $150 million Series C financing round, valuing it at $1.5 billion. Richard states the funding is "necessary" because they are scaling, their customers are scaling, and the infrastructure needed to keep AI agents up-to-date is increasing. This involves "real compute" – immediate GPUs and scraping infrastructure – to build out "the best search index for LM's". He points out that while Google built an amazing search index for people to click on links, LMs can search through "hundreds of websites and read the whole text to give you a summary of those answers," a fundamentally different approach requiring investment. Despite significant interest from other tech giants like Meta to acquire You.com, Richard affirms their commitment to building "an enduring company where people can get answers and transform their companies". He sees "so much open space" in the enterprise sector for up-to-date information for LMs, defining productivity in enterprise as "the killer app for LMs". Regarding the Google antitrust ruling, Richard believes it's "a good ruling" but cautions that "it will take years for it to really materialize" due to potential appeals. He doesn't think it will "materially affect us," as AI and agents will search "very differently in two to three years". You.com already partners with companies like DuckDuckGo, feeding search results into LMs "overwhelmed billion times a month," a scale unmatched by other AI startups. He stresses that "you cannot open-source the search index".
Mark Gurman joins us to discuss the "Apple piece of the story". Apple's shares are up almost 3% alongside Alphabet, as the ruling allows Google to continue paying partners for search placement. Mark calls it a "relief for Apple and Google but also a relief for the technology industry". He notes that this ruling sets a "nice precedent," especially as Apple faces scrutiny for its own practices. The ruling mitigates the "short-term headwind of losing $20 billion a year" from the Google deal, which is a significant part of Apple's services business. However, Apple still faces challenges with its App Store business model, as the EU is trying to disrupt it, and a California judge ruled that developers can direct users to the web for transactions, potentially costing Apple 15% to 30%. Caroline highlights the judge's mention of generative AI changing the game in talent. Mark confirms that Apple is "losing from the talent wars again", with Meta leading the pack in hiring top academics and researchers. Apple is "bleeding talent every week," with departures to Meta, OpenAI, and Anthropic. Apple's strategy is to "play in" through "extensive AI partnerships" and by "looking at several companies to acquire" to replenish its talent pool.
Rachel Metz, Bloomberg's AI reporter, then discusses OpenAI's agreement to acquire a product testing startup for $1.1 billion in an all-stock deal. This acquisition aims to help OpenAI "bring out its products" and test features for its offerings like ChatGPT. From a talent perspective, the CEO of the acquired company will take on a new role, leading to management changes at OpenAI, including the creation of two Chief Technology Officers – one for the consumer side and one for the B2B side. Rachel updates us on OpenAI's dynamic situation, noting it's a company "undergoing a lot of change" despite being around for about 10 years. ChatGPT continues its rapid growth, boasting "over 700 million weekly users at this point". She anticipates more changes as the company navigates the shifting industry landscape and aggressive talent poaching by competitors like Meta.
As "Bloomberg Tech" concludes, the market has seen a bounce back since yesterday's selloff. The NASDAQ 100 has rebounded, with Apple and Alphabet being the main stories of the day, showing strong reactions in their stock performance.
