The No. 2 official at the Justice Department delivered a blunt message last month to Apple Inc. executives: New encryption technology that renders locked iPhones impervious to law enforcement would lead to tragedy. A child would die, he said, because police wouldn’t be able to scour a suspect’s phone, according to people who attended the meeting.
At issue is new technology that Apple, Google Inc. and others have put in place recently to make their devices more secure. The companies say their aim is to satisfy consumer demands to protect private data.
But law-enforcement officials see it as a move in the wrong direction. The new encryption will make it much harder for the police, even with a court order, to look into a phone for messages, photos, appointments or contact lists, they say. Even Apple itself, if served with a court order, won’t have the key to decipher information encrypted on its iPhones.
The meeting last month ended in a standoff. Apple executives thought the dead-child scenario was inflammatory. They told the government officials law enforcement could obtain the same kind of information elsewhere, including from operators of telecommunications networks and from backup computers and other phones, according to the people who attended.
Technology companies are pushing back more against government requests for cooperation and beefing up their use of encryption. On Tuesday, WhatsApp, the popular messaging service owned by Facebook Inc., said it is now encrypting texts sent from one Android phone to another, and it won’t be able to decrypt the contents for law enforcement.
AT&T Inc. on Monday challenged the legal framework investigators have long used to collect call logs and location information about suspects.
In a filing to a federal appeals court in Atlanta, AT&T said it receives an “enormous volume” of government requests for information about customers, and argued Supreme Court decisions from the 1970s “apply poorly” to modern communications. The company urged the courts to provide new, clear rules on what data the government can take without a probable cause warrant.
Relations between the federal government and Silicon Valley have soured since revelations about government surveillance by National Security Agency leaker Edward Snowden —and the criticism of some technology companies that followed.
The new security measures threaten to alter the government’s post 9/11 efforts to intercept terrorists and other suspected law breakers. Last month, Federal Bureau of Investigation Director James Comey said new Apple and Google encryption schemes would “allow people to place themselves beyond the law.”
Robert Hannigan, the head of GCHQ, Britain’s version of the NSA, wrote in the Financial Times earlier this month that U.S. technology companies “have become the command-and-control networks of choice for terrorists and criminals, who find their services as transformational as the rest of us.”
As recently as 2012, Google Executive Chairman Eric Schmidt was on a first-name basis with then-NSA head Keith Alexander, published emails indicate. He and other Google executives participated in classified cybersecurity briefings on hacking threats facing the U.S.
In March, Mr. Schmidt declined a personal request by President Barack Obama for technical staffers from Google and the government to discuss what the NSA does and doesn’t do, according to two people familiar with the exchange.
At a public hearing in October, Mr. Schmidt said NSA snooping would wind up “breaking the Internet.”
Tech companies say concerns that they too easily turn over data to the U.S. government are costing them business overseas.
The dispute resembles the so-called Cypto Wars of the early 1990s, when the Clinton Administration sought to regulate certain encryption schemes like weapons and require that they include a key that could be unlocked by law enforcement. Tech firms resisted, arguing that people should be able to encrypt their information to safeguard it.
A federal appeals court mostly ended the dispute in 1999, when it ruled computer code, including encryption schemes, is protected speech under the First Amendment.
Over time, Washington and Silicon Valley repaired relations. Tech companies generally responded to government requests for data following the 9/11 attacks.
Then came Mr. Snowden’s revelations, beginning in June 2013. The former NSA contractor released documents showing the NSA scanned Internet traffic extensively, suggesting tech companies were complicit in the snooping. Other documents revealed that the NSA had intercepted traffic between Google’s overseas data centers, infuriating Google executives.
In June 2013, Mr. Snowden provided reporters with documents describing a government program called Prism, which gathered huge amounts of data from tech companies. At first, tech-company executives said they hadn’t previously heard of Prism and denied participating. In fact, Prism was an NSA code word for data collection authorized by the Foreign Intelligence Surveillance Court. Tech companies routinely complied with such requests.
More than a year later, tech executives say consumers still mistrust them, and they need to take steps to demonstrate their independence from the government.
Customer trust is a big issue at Apple. The company generates 62% of its revenue outside the U.S., where it says encryption is even more important to customers concerned about snooping by their governments.
These days, Apple Chief Executive Tim Cook stresses the company’s distance from the government.
“Look, if law enforcement wants something, they should go to the user and get it,” he said at The Wall Street Journal’s global technology conference in October. “It’s not for me to do that.”
In early September, Apple said the encryption on its latest iPhone software would prevent anyone other than the user from accessing user data stored on the phone when it is locked. Until then, Apple had helped police agencies—with a warrant—pull data off a phone. The process wasn’t quick. Investigators had to send the device to Apple’s Cupertino, Calif., headquarters, and backlogs occurred.
Apple has long encrypted customer communications through its iMessage and FaceTime services, introduced early this decade. That decision prompted separate complaints from law enforcement.
Shortly after Apple’s announcement, Google said it had adopted a similar encryption scheme on phones using the newest version of its Android operating system, which was released in October.
The announcements set off alarm bells at the FBI, the Justice Department, and other law-enforcement agencies. Officials feared that other companies would follow suit, making even more communications paths difficult to investigate.
Since the Snowden revelations, Google, Facebook Inc. and YahooInc. had begun scrambling information transmitted between their overseas data centers to block NSA spies from listening in. Microsoft Corp. fought a government request for information about users of its Ireland data center, arguing the government had no jurisdiction outside the U.S.
Twitter Inc. this fall sued the government, arguing a recent settlement between the Justice Department and other tech firms restricts what it can say about government data requests.
Soon after Apple’s announcement, the FBI requested a meeting. The task of speaking for the government at the Oct. 1 meeting fell to Deputy Attorney General James Cole, the Justice Department’s second-ranking official. Mr. Cole had previously brokered the settlement about disclosures of government data requests. Apple was represented by General Counsel Bruce Sewell and two other employees, according to people who were there. The following account of what happened at the meeting is based on recollections of those people.
In his fourth-floor conference room, Mr. Cole told the Apple officials they were marketing to criminals.
At one point, he read aloud from a printout of Apple’s announcement, quoting a section in which the company said that under the new system Apple couldn’t cooperate with a court order to retrieve data from a phone even if it wanted to.
Mr. Cole offered the Apple team a gruesome prediction: At some future date, a child will die, and police will say they would have been able to rescue the child, or capture the killer, if only they could have looked inside a certain phone.
His statements reflected concern within the FBI that a careful criminal can shield much activity from police surveillance by minimizing use of cellphone towers and not backing up data.
The Apple representatives viewed Mr. Cole’s suggestion as inflammatory and inaccurate. Police have other ways to get information, they said, including call logs and location information from cellphone carriers. In addition, many users store copies of a phone’s data elsewhere.
During the hourlong meeting, Mr. Sewell said Apple wasn’t marketing to criminals, but to ordinary consumers who store growing amounts of data about themselves on smartphones and are increasingly suspicious of tech companies. Many of those customers are outside the U.S., the Apple representatives said, where phone users want to shield information from governments that are less respectful of individual rights.
If the government wants more information from Apple, the company representatives said, it should change the law to require all companies that handle communications to provide a means for law enforcement to access the communications.
Mr. Cole predicted that would happen, after the death of a child or similar event.
More than once, Mr. Cole suggested there had to be a technical solution—a way to design a phone so that police, with a court order, can access information, without compromising security.
“We can’t create a key that only the good guys can use,” Mr. Sewell responded.
After the meeting, Mr. Cole told colleagues he didn’t expect Apple to back down.
The two sides agreed to a follow-up meeting between technical experts from Apple and the Justice Department. At that meeting, Apple laid out ways in which the government could still collect information about specific phones. But its representatives acknowledged that under the new system, there will be more information on the phones that can be hidden from investigators, even with a warrant.
Later in October, Mr. Comey, the FBI director, criticized the new Apple and Google encryption schemes in a speech, saying the pendulum had swung too far toward protecting privacy, at the expense of law enforcement.
At Apple, Mr. Cook believes consumers will push the pendulum further toward protecting privacy. At the Journal conference, he made a prediction: Consumers will appreciate efforts to protect their privacy once “something major happens.”
“When that happens everybody wakes up and says, ‘Oh my God,’ and they make a change,” he said. “What that event is, I don’t know, but I’m pretty convinced that it’s going to happen.”
During discussions inside the White House, some officials disagreed with Mr. Comey’s approach, according to people familiar with those talks. They had urged the FBI not to speak out publicly, arguing the best chance at a policy change was through quiet negotiations, these people said. Obama administration officials say they plan to keep talking with the tech companies about the issues.
In the debate over phones, government officials repeatedly cite kidnapping or child-abuse cases, in an effort to make law enforcement the focus of the debate, rather than national security. Terror suspects with better-protected data are a serious concern, officials say, but they believe catching criminals is a better public argument to make.
In his October speech, the FBI’s Mr. Comey cited the case of a murdered boy, whom he didn’t name, as one example where data taken from a phone was critical to solving a crime.
That boy, it later emerged, was 12-year-old Justin Bloxom, who was murdered in 2010 in Mansfield, La. His mother, Amy Fletcher, says she has no doubt that phone evidence was critical in convicting his killer. “Everything that was done was done through texts from a damn cellphone,” she says.
Investigators quickly focused on Brian Horn, a cabdriver and convicted sex offender. Mr. Horn’s cellphone was recovered by investigators and sent to the FBI for analysis. The texts showed Mr. Horn lured the boy into his cab by pretending to be a 15-year-old girl looking for sex.
Mr. Horn’s lawyer, Daryl Gold, calls the phone “a crucial piece of evidence.” Before investigators recovered it, he said, “They had a totally circumstantial case.” Mr. Horn was convicted and sentenced to death. He is appealing.
Write to Devlin Barrett at email@example.com, Danny Yadron at firstname.lastname@example.org and Daisuke Wakabayashi at Daisuke.Wakabayashi@wsj.com
The Web—that thin veneer of human-readable design on top of the machine babble that constitutes the Internet—is dying. And the way it’s dying has farther-reaching implications than almost anything else in technology today.
Think about your mobile phone. All those little chiclets on your screen are apps, not websites, and they work in ways that are fundamentally different from the way the Web does.
Mountains of data tell us that, in aggregate, we are spending time in apps that we once spent surfing the Web. We’re in love with apps, and they’ve taken over. On phones, 86% of our time is spent in apps, and just 14% is spent on the Web, according to mobile-analytics company Flurry.
This might seem like a trivial change. In the old days, we printed out directions from the website MapQuest that were often wrong or confusing. Today we call up Waze on our phones and are routed around traffic in real time. For those who remember the old way, this is a miracle.
Everything about apps feels like a win for users—they are faster and easier to use than what came before. But underneath all that convenience is something sinister: the end of the very openness that allowed Internet companies to grow into some of the most powerful or important companies of the 21st century.
Take that most essential of activities for e-commerce: accepting credit cards. When Amazon.com made its debut on the Web, it had to pay a few percentage points in transaction fees. But Apple takes 30% of every transaction conducted within an app sold through its app store, and “very few businesses in the world can withstand that haircut,” says Chris Dixon, a venture capitalist at Andreessen Horowitz.
App stores, which are shackled to particular operating systems and devices, are walled gardens where Apple, Google , Microsoft and Amazon get to set the rules. For a while, that meant Apple banned Bitcoin, an alternative currency that many technologists believe is the most revolutionary development on the Internet since the hyperlink. Apple regularly bans apps that offend its politics, taste, or compete with its own software and services.
But the problem with apps runs much deeper than the ways they can be controlled by centralized gatekeepers. The Web was invented by academics whose goal was sharing information. Tim Berners-Lee was just trying to make it easy for scientists to publish data they were putting together during construction of CERN, the world’s biggest particle accelerator.
No one involved knew they were giving birth to the biggest creator and destroyer of wealth anyone had ever seen. So, unlike with app stores, there was no drive to control the early Web. Standards bodies arose—like the United Nations, but for programming languages. Companies that would have liked to wipe each other off the map were forced, by the very nature of the Web, to come together and agree on revisions to the common language for Web pages.
The result: Anyone could put up a Web page or launch a new service, and anyone could access it. Google was born in a garage. Facebook was born in Mark Zuckerberg ’s dorm room.
But app stores don’t work like that. The lists of most-downloaded apps now drive consumer adoption of those apps. Search on app stores is broken.
The Web is built of links, but apps don’t have a functional equivalent. Facebook and Google are trying to fix this by creating a standard called “deep linking,” but there are fundamental technical barriers to making apps behave like websites.
The Web was intended to expose information. It was so devoted to sharing above all else that it didn’t include any way to pay for things—something some of its early architects regret to this day, since it forced the Web to survive on advertising.
The Web wasn’t perfect, but it created a commons where people could exchange information and goods. It forced companies to build technology that was explicitly designed to be compatible with competitors’ technology. Microsoft’s Web browser had to faithfully render Apple’s website. If it didn’t, consumers would use another one, such as Firefox or Google’s Chrome, which has since taken over.
Today, as apps take over, the Web’s architects are abandoning it. Google’s newest experiment in email nirvana, called Inbox, is available for both Android and Apple’s iOS, but on the Web it doesn’t work in any browser except Chrome. The process of creating new Web standards has slowed to a crawl. Meanwhile, companies with app stores are devoted to making those stores better than—and entirely incompatible with—app stores built by competitors.
“In a lot of tech processes, as things decline a little bit, the way the world reacts is that it tends to accelerate that decline,” says Mr. Dixon. “If you go to any Internet startup or large company, they have large teams focused on creating very high quality native apps, and they tend to de-prioritize the mobile Web by comparison.”
Many industry watchers think this is just fine. Ben Thompson, an independent tech and mobile analyst, told me he sees the dominance of apps as the “natural state” for software.
Ruefully, I have to agree. The history of computing is companies trying to use their market power to shut out rivals, even when it’s bad for innovation and the consumer.
That doesn’t mean the Web will disappear. Facebook and Google still rely on it to furnish a stream of content that can be accessed from within their apps. But even the Web of documents and news items could go away. Facebook has announced plans to host publishers’ work within Facebook itself, leaving the Web nothing but a curiosity, a relic haunted by hobbyists.
I think the Web was a historical accident, an anomalous instance of a powerful new technology going almost directly from a publicly funded research lab to the public. It caught existing juggernauts like Microsoft flat-footed, and it led to the kind of disruption today’s most powerful tech companies would prefer to avoid.
It isn’t that today’s kings of the app world want to quash innovation, per se. It is that in the transition to a world in which services are delivered through apps, rather than the Web, we are graduating to a system that makes innovation, serendipity and experimentation that much harder for those who build things that rely on the Internet. And today, that is pretty much everyone.
—Follow Christopher Mims on Twitter @Mims; write to him at email@example.com.
Ever since the debut of the iPad nearly five years ago, pundits have been talking about the possibility of a post-PC professional existence. But I’m actually living it; I haven’t touched a personal computer in six months and I’m more productive than ever.
If you could peek over my shoulder at the device I’m writing this column on, you might call me a liar. By all appearances, my notebook computer, with its 13-inch screen, trackpad and keyboard, is a PC.
And yet Gartner, the most influential company charged with determining what is and is not a personal computer, has declared that my Samsung ElectronicsChromebook 2 isn’t a PC. Gartner doesn’t include sales of Chromebooks in its quarterly tally of how many PCs are sold.
“We define a PC as a device which is capable for both content consumption and creation, regardless of form factor,” says Mikako Kitagawa, Gartner’s lead PC analyst.
I guess I’m not a content creator.
Chromebooks, in case you haven’t touched one—and market research indicates that you haven’t—are Google ’s answer to Windows and Mac computers. Gadget reviewers who use Chromebooks only when they are paid to often describe them as more limited than a typical PC. But people who use Chromebooks regularly are more likely to observe that they can do pretty much everything that the average PC user needs.
To be fair to Gartner, many Chromebooks, including my own, have the same innards as smartphones so, at least on paper, they seem underpowered. Samsung’s Chromebook 2 has the same processor, amount of memory and even number of screen pixels as Samsung’s flagship smartphone, the Galaxy S5. The only reason the Chromebook 2 works as a PC is that Google’s Chrome operating system is incredibly lightweight—smaller and less taxing on hardware.
I don’t mean to shill for Chromebooks. It’s just that Google is in the vanguard of creating PCs that function like smartphones: light, portable, always on, always connected and relying on the cloud to do their heavy lifting. It’s pretty obvious that in the not too distant future, Apple and Microsoft are going to free their fans from the PC in the same way.
Apple Chief Executive Tim Cook has said that he does 80% of his work on an iPad. I bet it would be 100% if the iPad possessed the characteristics that allow you to create content rather than just consume it: true multitasking and fast switching between applications, plus a bigger screen. But there’s evidence that a larger, so-called iPad Pro is coming. And I bet that Apple eventually will give us a version of its mobile operating system that makes iPads true replacements for notebooks, even those made by Apple.
Then there’s Microsoft’s Surface Pro 3, which is a full PC in tablet form, one of the many two-in-one notebooks that PC makers have been rolling out lately. From the processing power these hybrid devices pack to their snap-on keyboards, they are clearly designed to get real work done.
Yet were I a Surface Pro user, I still wouldn’t be using a PC, according to IDC, Gartner’s leading competitor for tallying how many PCs are sold each year. But Gartner does consider the Surface Pro a PC. According to Jay Chou, IDC’s senior analyst in charge of tracking PCs, the firm doesn’t consider anything with a detachable keyboard a PC. His firm does consider Chromebooks to be PCs, even though the Surface Pro 3 is far more powerful than most Chromebooks.
That Gartner and IDC can’t even agree on the definition of a PC speaks volumes about the strange times in which we live. Is a smartphone stretched into the shape of a laptop a PC? No, says Gartner. What about a PC crammed into the shape of a tablet? Nope, counters IDC.
These delineations are ridiculous from the perspective of the end user. That’s because most of us are entertaining ourselves and getting work done in the one place absolutely all of these devices can access—the cloud.
I store and edit all my photos in the cloud, which also is where all my media are streamed from. Unless you’re editing video, building 3-D models, playing elaborate games or dependent on legacy Windows applications that your company hasn’t moved to the cloud, you don’t strictly need a PC anymore.
At this point in history, booting up a full-fledged PC operating system to write an email is like using a nuclear sub to go on a weekend fishing trip. And a good Chromebook can be had for $300. Personally, I’d rather spend my technology budget on the one thing I truly can’t do without—my smartphone. Surveys indicate that in this respect, I’m typical of every generation to follow the baby boomers.
In short, I’m done with PCs—at least as they are conventionally defined. And I think the majority of long-suffering PC users would be too if they weren’t so accustomed to thinking of computers in the same way they have for decades. Building new technology is easy compared with changing the habits of those who use it.
—Follow Christopher Mims on Twitter @Mims and write to him at firstname.lastname@example.org.
Microsoft Corp. may not be cool, but its sales continue to defy expectations by growing at a much faster clip than those of its business-technology peers.
Microsoft’s revenue rose 11% from a year earlier in the three months ended Sept. 30, excluding Nokia ’s mobile-phone business that Microsoft purchased last spring.
Meanwhile, competitors in corporate technology—such as International Business Machines Corp. , Hewlett-Packard Co. and Oracle Corp. —posted shrinking or slow sales growth.
“Microsoft is bucking the trend,” said Daniel Ives, an analyst with FBR Capital Markets.
Microsoft’s stock rose 3.1% in after-hours trading Thursday following the release of its financial report for the fiscal first quarter. The company’s stock price has reflected strong revenue and profit growth in the past year.
Shares climbed 33% in the past year through Thursday’s market close, far outpacing the S&P 500 stock index over the period.
The company’s market value recently surpassed that of Google Inc. for the first time since June 2013.
The latest quarterly results continue a charmed first year in office for Satya Nadella , who in February was named chief executive, only the third in Microsoft’s history.
Mr. Nadella has focused on many of the same lines of business as his predecessors, and earlier investments in cloud computing and the Xbox videogame console have paid off under his watch.
Mr. Nadella has won over Wall Street with his willingness to cut jobs, favor innovation over existing businesses and de-emphasize products outside Microsoft’s core offerings.
In the most recent quarter, Microsoft’s revenue from software for business customers rose more than 9.5% from a year earlier.
The company had robust growth in both newer offerings such as Microsoft Office 365 (an online version of the popular desk-jockey software suite) and mature products like the version of Windows for computer servers.
Cloud software sold to businesses—primarily Office 365, the Microsoft Dynamics CRM sales tool and the Azure cloud-computing service—more than doubled to $1.18 billion, or roughly 5.1% of total revenue for the quarter.
But Microsoft executives said during a conference call that customers for Azure, which lets corporate IT departments and software developers rent computing horsepower and storage capacity by the hour, also buy the company’s traditional corporate software.
Microsoft’s mobile business remains a trouble spot. Sales of Windows-powered Nokia smartphones rose, but the company continues to lose market share toApple Inc. and manufacturers of phones that run Google’s Android operating software.
Microsoft made less money than it did a year earlier from its mobile-phone operating software business, largely because Android-phone makers such asSamsung Electronics Co. sold more of their inexpensive phones, which generate lower fees for Microsoft. Android phone makers pay Microsoft a royalty for Microsoft patents used in the Google operating system.
Sales of Windows operating software for personal computers also declined, but less than in prior quarters, driven by improving demand for PCs since their 2013 swoon.
Microsoft’s latest quarterly results continue a charmed first year in office for CEO Satya Nadella. Agence France-Presse/Getty Images
The company made more headway with its other consumer hardware products.
Revenue more than doubled for the Surface tablet computer, which sold poorly when it launched two years ago. The Surface Pro 3, released in June, received a more positive reception, the company said. The newer device is positioned more as a laptop replacement than a tablet computer.
Microsoft also sold twice as many Xboxes as a year ago, it said, helped by a $100 price cut for the latest model.
Despite Microsoft’s recent successes, Google tends to get the buzz once reserved for the Redmond, Wash., company.
In an interview, Microsoft Chief Financial Officer Amy Hood was unfazed. “I wasn’t that cool in high school, either,” she said.
Overall in the quarter, Microsoft revenue was $23.2 billion, including the Nokia business, compared with $18.5 billion a year ago. Net income fell to $4.5 billion, or 54 cents a share, from $5.2 billion, or 62 cents, in the same quarter last year.
Microsoft’s profit was weighed down by about $1.1 billion, or 11 cents a share, in costs related to a massive round of job cuts Mr. Nadella pushed through this summer and costs to integrate Nokia’s business into the rest of Microsoft.
Corrections & Amplifications
An earlier version of this story incorrectly said Microsoft’s decline in mobile-software revenue was due to a shift toward lower-cost Windows smartphones.
Write to Shira Ovide at email@example.com
Apple on Wednesday sent out invitations to an October 16 press event on its campus in Cupertino, Calif. It's widely expected to unveil new iPad tablets and Mac computers, as well as talk about its new Mac operating system software.
The event comes about a month after Apple showed off its newest iPhones and its first wearable, theApple Watch. CEO Tim Cook introduced the products during a splashy, star-studded event at the Flint Performing Arts Center, down the road from its headquarters. That venue, at De Anza College, was the same place former CEO Steve Jobs unveiled the first Macintosh computer in 1984, and guests such as band U2 helped Apple usher in its latest products.
This time around, Apple has opted to hold its event in the Town Hall Auditorium at its headquarters -- a much smaller venue than those used for some other recent launches. It showed off the iPad Air, iPad Mini with Retina Display and Mac Pro last year at the Yerba Buena Center for the Arts Theater in San Francisco. The year before, Apple held two iPad events, one in October at the California Theatre in San Jose, Calif., and one in March at the Yerba Buena Center.
Apple this year is expected to show off new iPads and its Mac OS X Yosemite software for computers, which the company revealed at its Worldwide Developers Conference in June.Apple also could introduce new Mac computers, including new iMacs. Recent reports say the iPad could include a gold option,as well as the Touch ID fingerprint sensor found on iPhones since last year's 5S.
Check out new Yosemite specs below:
Apple's iPad, first released in 2010, changed the computing market and spawned scores of copycat devices. Even Microsoft, Apple's longtime rival in the PC market, produced a tablet, introducing the Surface in 2012. Since unveiling the iPad, Apple has dominated the tablet market, most recently ranking No. 1 with 27 percent tablet share globally. The iPad is Apple's second-biggest moneymaker after the iPhone, with about 15 percent of total revenue coming from the tablet.
But the company now needs to find a way to revitalize iPad sales. Apple's tablet hasn't been selling as well as it used to. Sales of the iPad have declined year-over-year and fallen short of analyst expectations for two straight quarters. In the period ended June 28, Apple sold 13.3 million iPads, down 9 percent from the previous year and below the 14.4 million expected by analysts. Apple has attributed the weak iPad sales to a couple of factors -- softer demand and an issue with the number of devices held in channel inventory (which means they're either sitting in stores or on trucks).
In reality, Apple likely has been hurt by a few factors that could continue to plague iPad sales. It's easy for people, when they upgrade, to pass older tablets to relatives or friends. People also don't have the two-year upgrade incentive they get from wireless carriers when it comes to smartphones, and Apple hasn't made big enough changes to the iPad to compel even its most ardent fans to immediately buy the newest model.
In addition, most people who crave a tablet likely already have one, and Apple is going up against dozens of new, inexpensive devices that run Google's rival Android mobile operating system. Consumers also now have the option to buy iPhones with bigger screens, such as the 5.5-inch iPhone 6 Plus, rather than buying one of Apple's iPads -- which currently come in 9.7-inch models for the iPad Air and 7.9-inch models for the iPad Mini.
Cook said in July that he's "bullish" about Apple's prospects in the tablet market. "We still feel the category as a whole is in its early days, and there's still significant innovation that can be brought to the iPad, and we can do that," he said.
Cook expects Apple's new partnership with IBM, announced in mid July, to boost iPad sales. Already, most of the Fortune 500 companies use Apple products, but there are still a lot of ways the company could generate more money from business users. Apple and IBM will work together on pushing Apple devices and iOS apps with business users, and IBM's cloud computing services -- such as device management, security and analytics -- will be optimized for iOS.
Authored by Shara Tibken via cnet.com.
Hewlett-Packard Co. HPQ +5.26% on Monday said it plans to separate its personal-computer and printer businesses from its corporate hardware and services operations, the latest attempt by the technology company to improve its fortunes.
The company will make the split through a tax-free distribution of shares to stockholders by November 2015. If the division goes off as planned, it would give rise to two publicly traded companies, each with more than $50 billion in annual revenue.
H-P also boosted the number of its expected layoffs by 5,000 to 55,000, after identifying “incremental opportunities for reductions.” H-P had previously projected its job cuts to be between 45,000 and 50,000, and it already has shed 36,000 employees under the restructuring program as of the end of the most recent quarter.
A number of big companies, including eBay Inc. EBAY -0.77% in tech, have chosen to break up lately, in part because of a belief that operations with different growth profiles are best managed as separate entities. H-P, which has suffered sharp sales declines, sees better long-term potential for its corporate hardware and services business than for its printer and PC unit, said one person familiar with the plan.
Ralph Whitworth, an H-P investor who until recently was its chairman, said about the news in a text message Sunday: “This would be a brilliant move at just the right moment in the turnaround. It would liberate significant trapped value.” As of June, the firm Mr. Whitworth co-founded, Relational Investors LLC, owned a roughly 1.5% stake in the company.
The impending move, first reported Sunday by The Wall Street Journal, set off a round of speculation in the industry about whether the separation could lead to more deal making.
The Journal recently reported that for much of the past year, H-P held talks to merge with data-storage equipment maker EMC Corp. EMC +1.29% , a deal that would have created an industry giant with a market value of roughly $130 billion. Although the talks recently ended, the separation could pave the way for H-P’s corporate hardware and services business to ultimately be combined with EMC, industry observers said.
The planned breakup is one that Palo Alto, Calif.-based H-P and its investors have long contemplated. H-P came close to hiving off its PC operation in 2011, when it announced the ill-fated acquisition of U.K. software company Autonomy Corp. H-P said then that it was exploring a separation of its PC business, only to decide two months later to hold on to it amid pressure from shareholders, which led to the departure of then-Chief Executive Leo Apotheker.
H-P chief Meg Whitman is slated to be chairman of a PC and printer business, while remaining CEO of a separate company selling corporate hardware and services. Associated Press
At that time, current H-P Chief Executive Meg Whitman nixed the idea of spinning off its PC business. “Together we are stronger,” she said then.
Monday, Ms. Whitman gave a glimpse at why she changed her mind about breaking up H-P—and how her leadership helped the company get strong enough to be in a position for a split.
“Three years ago, you will recall this company was in a fairly difficult position,” Ms. Whitman said on a conference call with analysts Monday.
Now, she said rapidly changing technology means focus is better than unity. “Being nimble is the only path to winning,” Ms. Whitman said on the call.
She credited H-P for three years of hard work rebuilding its financial position, improving executive leadership lineup and introducing new products lines in fast-growing areas like “cloud” computing.
“Today was made possible by our turnaround,” Ms. Whitman said. In 2012, the company reorganized itself to combine the PC business with its more profitable printer operation, helping pave the way for the current plan.
Ms. Whitman is slated to be chairman of the PC and printer business, to be known as HP Inc., and CEO of the other company, to be called Hewlett-Packard Enterprise. Current lead independent director Pat Russo will be chairman of the enterprise company, while Dion Weisler, an executive in the PC and printer operation, is to be CEO of that business.
H-P, which affirmed its guidance for the year ending Oct. 31, said it expects per-share earnings of $3.83 to $4.03 for fiscal 2015. The range doesn’t include one-time charges expected to be connected to the separation. Analysts polled by Thomson Reuters were projecting $3.95 a share.
In the 2013 fiscal year ended last October, the Printing and Personal Systems Group, as it is known, reported $55.9 billion in revenue, about half of H-P’s total. Sales for the operation dropped 7.1% amid fierce competition, compared with a 6.7% decline for company revenue as a whole.
Last year, H-P lost its place as the largest PC maker by shipments, slipping to No. 2 behind China’s Lenovo Group Ltd 0992.HK +0.68% , according to industry research firm IDC.
H-P, founded in a garage in Palo Alto 75 years ago, has been undergoing a multiyear restructuring under Ms. Whitman in an effort to stem sales declines. Aside from the PC and printer business, H-P’s revenue comes fromselling services and hardware such as servers and data-storage systems to corporations, along with software and financial services.
H-P’s shares have risen sharply since the beginning of last year, but they remain well below their highs in recent years—and the even loftier levels they reached during the 1990s tech boom. H-P shares increased 2% on Friday to $35.20, giving it a market capitalization of nearly $66 billion.
In response to lower sales and to provide a lift to its shares, H-P has laid off tens of thousands of employees and cut other costs.
Ms. Whitman has sought to push H-P further into growth pockets such as “cloud” software, but the company has struggled to make headway in such areas.
The recent wave of breakups and spinoffs at technology companies and in the wider corporate world has been fueled by the idea that companies with a narrower focus perform better. The moves in many cases have been well-received by shareholders—and sometimes actively sought by them.
Last Tuesday, online-auction pioneer eBay, where Ms. Whitman was once CEO,announced a plan to spin off its PayPal payments-processing unit. Shareholders rewarded eBay’s decision, pushing the company’s shares up about 7.5% that day.
—Shira Ovide and Michael Calia contributed to this article.
Write to Joann S. Lublin at firstname.lastname@example.org, Dana Mattioli email@example.com and Dana Cimilluca at firstname.lastname@example.org
Comcast Corp. CMCSA -0.67% and Time Warner Cable Inc. TWC -0.70% fired back at critics of their $45 billion proposed merger, defending the transaction against concerns it would make Comcast the gatekeeper of the online and pay TV world.
The companies' comments, filed with the Federal Communications Commission late Tuesday night, were in reply to a first round of comments about the proposed merger, which was announced in February and must be approved by the FCC and Justice Department. Combining the nation's two largest cable and broadband providers would create a company that would control roughly 30% of the cable market, after divesting almost four million Time Warner Cable subscribers, which they have agreed to as part of the deal.
Comcast and Time Warner Cable have presented the deal to regulators as a straightforward cable merger that wouldn't reduce the number of choices for consumers in any market. But regulators have zeroed in on the broadband side of the deal, and are applying intense scrutiny, according to people familiar with the reviews, out of concern that Comcast would become the dominant high-speed broadband provider in almost all of the major urban areas of the U.S.
FCC Chairman Tom Wheeler argued in a speech earlier this month that the broadband market isn't competitive, especially at the higher speeds needed for online video, which is the source of most peak Web traffic. Mr. Wheeler noted most Americans have only one or two choices for high-speed home broadband access, typically their local cable provider, and said 10 megabits per second is the minimum level of speed to stream HD video. That rules out most DSL and wireless providers, which typically offer speeds below 5 megabits per second.
The companies argue that the FCC shouldn't discount competition from slower forms of broadband for the purpose of the merger review. They say 4 megabits per second is fast enough to stream HD video, and that most households have only one or two members, and therefore don't require the 25 megabits per second speeds that Mr. Wheeler has targeted as a goal.
"[I]t makes no sense, when defining a 'market' for competitive purposes, to exclude either technologies or speeds that tens of millions of broadband customers use today and will still use tomorrow," the comments state.
Comcast and Time Warner Cable also say their critics are opportunistically leveraging the merger to try to extract concessions for their own benefit. One company singled out is Netflix Inc., NFLX +1.03% which struck a paid interconnection deal with Comcast earlier this year to speed the delivery of traffic on the back end between their respective networks. The comments note Netflix CEO Reed Hastings initially expressed satisfaction with the arrangement, before later criticizing Comcast and opposing the merger. Netflix has argued that the FCC should mandate that such interconnection deals should be free of charge.
Many programmers also have expressed concern in private over the leverage the combined company would have in negotiations, particularly in areas such as online programming and retransmission consent.
In its comments, Comcast said one of the deal's most vocal critics, Discovery Communications Inc., DISCA -0.89% has demanded "unwarranted business concessions from Comcast as a condition of Discovery's nonopposition to the Transaction."
Write to Gautham Nagesh at email@example.com
Watch the entire merger hearing on CSPAN below:
Amazon.com Inc. AMZN +0.90% is gearing up to more directly challenge Google Inc. GOOGL +0.29% 's dominance of the online advertising market, developing its own software for placing ads online that could leverage its knowledge of millions of Web shoppers. Initially, Amazon plans to replace those ads on its pages that Google chiefly supplies with a new in-house ad placement platform, said people familiar with the matter. In the future, that system could challenge Google's $50 billion-a-year advertising business and Microsoft Corp.'s MSFT +0.18% , they added.
The Seattle-based retailer already has a limited business placing ads on other sites. In a sign that it has larger goals, Amazon is testing ways to expand that program with new types of ads.
"Amazon could use the data it has about buying behavior to help make these ads much more effective," said Karsten Weide, an analyst at researcher IDC. "Marketers would love to have another viable option beyond Google and Facebook FB 0.00% for their advertising."
Amazon has told potential ad partners that it may begin testing the new placement platform, dubbed Amazon Sponsored Links, later this year. The plan, these people said, is to make it easier for marketers to reach its nearly 250 million active users.
The two companies have increasingly been treading on the other's turf as they battle to be the first place that Internet shoppers go to hunt for products and services. Google, for instance, has been invading Amazon's e-commerce business with its product-listing ads and Google Shopping Express for delivery. Amazon has launched its own smartphone and also competes with Google in online storage services.
Amazon and Google declined to comment.
"Amazon knows a lot about how people are searching on the site and consumer preferences and histories. It can use that to tailor advertising in ways that probably nobody else can," said Reid Spice, vice president of media at digital agency iCrossing.
The people familiar with the matter said Amazon's offering would resemble Google's AdWords, the engine that Google uses to place keyword-targeted ads alongside Google search results and on more than two million other websites. AdWords is the foundation of Google's roughly $50 billion-a-year advertising business, and Google counts Amazon as one of its biggest buyers of text link ads.
"Keyword" programs match a search phrase such as "running shoes" and show ads for a shoe retailer on the Web pages that the search delivers.
Amazon now displays several types of ads on its pages, including text-based keyword ads placed by Google and other third parties, as well as product ads that Amazon places itself. EMarketer estimates that Amazon will sell nearly $1 billion in advertising revenue this year, up from more than $700 million last year.
To displace the Google ads on its site, Amazon is building a tool to help advertising agencies buy in bulk for potentially thousands of advertisers, the people familiar with the matter said. Building such a system could enable Amazon to boost its business placing ads on third-party websites. Google offers similar capability for advertisers using AdWords.
Amazon today has an "affiliate" program that offers websites Amazon product ads and pays small commissions when those website users click through and buy a product on Amazon. To attract more websites, and help their owners earn more, Amazon also is testing a way for them to get paid any time a user sees an ad; that initiative was earlier reported by the technology blog Zatznotfunny.com.
Amazon would face big hurdles trying to compete with Google to place its ads on other sites. AdWords launched in 2000, and with more than one million advertisers vying for ad space on the platform, prices get pushed higher—a big attraction for other publishers to use the system. Google says it paid more than $9 billion to outside websites in 2013.
For Amazon, more advertising offers the prospect of more revenue and potentially higher profit margins. Amazon remains primarily a retailer, buying goods from suppliers and selling them to customers with small markups. The company operates on notoriously thin profit margins, and frequently posts losses, as it invests for expansion.
Google's ad-supported business is highly profitable. It generated more operating profit in the first six months of this year than Amazon has since it was founded 20 years ago, according to researcher S&P Capital IQ.
Amazon has other reasons to want Google's keyword ads off its site. It doesn't control the pricing of such ads, Google does. Nor does Amazon want Google to capture data about its customers, based on their searches and which ads they click on.
As Amazon seeks to mimic Google's cash-cow business, Google itself has remade product ads on its site to look more like Amazon's, with images, prices and customer ratings.
Amazon is a big buyer of traditional text ads on Google, but doesn't buy the enhanced product ads. Industry analysts say Amazon doesn't want to share with a top rival details about products and inventory that are a requirement for running those ads.
—Jack Marshall contributed to this article.
Write to Rolfe Winkler at firstname.lastname@example.org and Greg Bensinger at email@example.com