Posts Tagged ‘Apple Inc.’

Tech Investors Prepare to Say Goodbye to Facebook, Google

September 12, 2018

New S&P 500 communication-services sector will include companies currently in the tech, consumer-discretionary sectors

The new communication-services sector in the S&P 500 will include companies previously in the tech sector such as Facebook.
The new communication-services sector in the S&P 500 will include companies previously in the tech sector such as Facebook. PHOTO: MATT ROURKE/ASSOCIATED PRESS

The S&P 500 is getting a refresh later this month that may prove market moving as it plays out.

Index providers S&P Dow Jones Indices and MSCI are officially creating a new communication-services sector to replace telecom, the smallest of the index’s 11 segments. S&P will complete its reclassification Sept. 21, and many others who use the classifications will do so by Sept. 28. Some companies that are currently in the tech and consumer-discretionary sectors will move into the communication group.

As part of this shift, providers of exchange-traded funds need to rebalance the stocks in their sector ETFs while selling the stocks that are moving to new sectors. Facebook Inc., for example, now comprises 5.8% of State Street’s $23 billion Technology Select Sector SPDR ETF but will have to be sold as the social media giant moves into the communication-services sector.

The Communication Services Select Sector SPDR ETF that State Street launched in June to track the new sector has nearly 18% of its assets in Facebook. But it has a comparably small $500 million in assets right now. State Street said it believes the ETF will gather more assets as the reclassification gets closer because investors will want to avoid throwing their portfolios out of whack. But right now, the communication ETF currently holds fewer Facebook shares than the tech ETF will need to sell.

State Street’s funds will be rebalanced, effective after the closing bell Sept. 21. Vanguard began reweighting its funds in the second quarter. As ETF providers and other investors rearrange their holdings, it could move stock prices, some analysts say, though it isn’t clear exactly how this will play out.

“Around the time this occurs, there could be some dislocations depending on how investors are rebalancing their own portfolios,” said Brian Hayes, a quantitative analyst at Morgan Stanley.

For one indicator of how this could affect the market, look to the recent past. Since late July, companies that are staying in the tech sector, like Apple Inc. and Microsoft Inc., have outperformed those leaving, such as Facebook and Google parent Alphabet Inc., according to Morgan Stanley. Amazon, which is staying in the consumer-discretionary sector, has outperformed Netflix Inc., which is leaving.

Many of those moves have been due to idiosyncratic factors, such as Facebook’s earnings results that disappointed investors in late July. But as the reclassification gets closer, performance of these stocks could start to diverge further.

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Write to Ben Eisen at


Stock Investors Don’t Care About 24% Earnings Growth

May 5, 2018

It’s not what have you done for me lately. For companies in the S&P 500 Index, it’s what will you do for me next. And that’s proving a thorny question for U.S. equity bulls.

Image result for bull on wall street

Another week of stellar earnings reports has gone by without any payoff in stocks. Even Friday’s rally, the biggest in almost a month, couldn’t turn the tide. Sure, Apple Inc. had its best week since Barack Obama’s first presidential term, and Mastercard Inc. shrugged off a push by Inc. in online payments. But even as analysts raised S&P 500 profit forecasts for each of the next three years, the benchmark gauge for U.S. equities was flat.

The issue is whether to believe the analysts. Companies could hardly be doing a better job of fattening profits or buying back stock at present. But forces have gathered that lead some investors to wonder if enthusiasm for the future isn’t a little stretched.

“Perfection is priced in,” said Robert Parks, managing director at RJ O’Brien & Associates LLC in Chicago. “S&P earnings are spectacular, but it would be difficult to continue that, and that’s what the market is worried about.”

One concern is profit margins, the difference between revenue and expenses. With the cost of everything going up, how long can U.S. companies keep sending dollars they get in sales to the bottom line? It’s a creeping anxiety. Using earnings before interest and taxes, S&P 500 margins stand at 13.7 percent, according to Fundstrat’s Thomas Lee. They reached a record 14.04 percent in December 2014.

With the 10-year Treasury yield flirting with 3 percent, labor costs creeping higher and commodity prices up, anxiety about margin compression has swirled. Michael O’Rourke, JonesTrading’s chief market strategist, said he heard budding anxiety about rising input costs in quarterly commentary from companies as diverse as Caterpillar Inc., 3M Co. and Paccar Inc.

Image result for Caterpillar Inc, photos

“All of these costs now exist, and are rising in a way that they haven’t for a decade or more,” said Michael Shaoul, the head of Marketfield Asset Management. “It’s too early to tell whether corporate management can pass them on.”

Despite a 6.6 percent gain in Alibaba and a 13 percent surge in Apple, the S&P 500 declined for a second week, slipping 0.2 percent. The Dow Jones Industrial Average lost 49 points, while the Nasdaq 100 Index rose 1.7 percent

Margin deterioration has the potential to terrify bulls because of how much earnings optimism is baked into the S&P 500’s valuation. Even after falling 7.3 percent from its January record, the index still fetches a 20.5 times earnings in the last year. Looking forward, to projected 2018 earnings, the multiple falls to a more palatable 16.2. Based on 2019 expectations, it’s a relatively cheap 15.3.

Getting there won’t be easy, however. S&P 500 companies are in the process of reporting profit growth of 24 percent in the first quarter, the most since 2010, and they must repeat that all year to hit analysts 2018’s target of $158.30 a share. Then profits will have to rise an additional 10 percent in 2019 to hit that year’s target.

An increase in inflation is anticipated in those numbers, but probably not a rapid one, particularly in raw materials. General Motors Co.’s costs tied to higher commodity prices will be up to $400 million higher than was expected in January, the company said last month. A $470 million increase in commodity costs is to blame for lower earnings in Ford Motor Co.’s auto sector.

Lee, Fundstrat’s head of research, says there’s nothing to worry about. Only four S&P 500 sectors — tech, utilities, real estate and consumer discretionary — have margins at or near record, he said in a note. The others have room to expand.

Longer term, what matters is the pace of growth in inflation and interest rates, said Bruce Bittles, chief investment strategist at Robert W Baird.

“For months we have been talking about an uptick in inflation and yields reaching 3 percent and the economy approaching a full employment, and here we are,” Bittles said. “Margins are not going to collapse, but I do think that profit margins are going to be more narrow at the end of the year.”


Credit Markets to Stock Investors: Calm Down

February 5, 2018

As share prices continue to fall, corporate bond prices remain steady

U.S. corporate bonds offered yields just 1.08 percentage points more than government bonds of the same maturity on Friday.
U.S. corporate bonds offered yields just 1.08 percentage points more than government bonds of the same maturity on Friday. PHOTO:MICHAEL NAGLE/BLOOMBERG NEWS

Stock indexes around the world continued to decline Monday, but investors point to one reassuring factor in global markets: people aren’t getting nervous about corporate credit.

The difference between yields on corporate bonds and less risky government debt continues to narrow, suggesting that share-price declines aren’t because of widespread fears about the financial health of the world’s companies.

Previous U.S. equity market corrections, since the 2008 credit crisis, have been matched by big moves in corporate-credit spreads, as investors sought a higher premium over government bonds to compensate for their increased concerns over corporate health.

S&P 500 declines during post-crisiscorrections*Source: FactsetNote: *2011 peak to 2011 trough, 2015 peak to 2016trough

Currently, that isn’t the case. On Friday, as the Dow Jones Industrial Average recorded its deepest selloff since the Brexit vote in June 2016, spreads on dollar and euro-denominated corporate credit ticked down to their lowest levels since 2007, indicating that bond buyers don’t currently require a greater payoff against the risk that such debt defaults.

For example, while Apple Inc.’s stock is now down about 4% year to date, spreads on the company’s 2029 bonds have dropped from 0.80 percentage point to 0.66 percentage point.

U.S. corporate bonds offered yields just 1.08 percentage points more than government bonds of the same maturity Friday, according to IHS Markit ’s iBoxx indexes. The spread on European corporate bonds was even lower, at just 0.82 percentage point.

Iboxx U.S. domestic corporate credit spreadmoves during equity market correctionsSource: FactsetNote: *2011 S&P 500 peak to 2011 trough, 2015 S&P500 peak to 2016 trough
.percentage points20112015-×0.875 percentage points

On Monday, European, Asian stocks and U.S. shares were falling again. The Stoxx Europe 600 was down 1.6%, the largest drop in a year and a half, Japan’s Nikkei 225 dropped by 2.5% and the S&P 500 continued to sell off and was down nearly 2% in early afternoon trading. The spread on European corporate bonds barely budged to 0.83 percentage point.

“I think the resilience of credit to the most recent selloff within equity should provide equity investors with a little bit of comfort,” said David Riley, head of credit strategy at BlueBay Asset Management.

“It suggests credit investors still feel very comfortable with corporate credit fundamentals, the earnings outlook and the ability of the corporate sector to absorb higher rates,” he added.

During previous market turns like the nearly 14% drop of the S&P 500 in February 2016 from its May 2015 high, the spread on the iBoxx U.S. corporate index rose by nearly 0.9 of a percentage point.

Similarly, during the height of the European sovereign-debt crisis in 2011, when the S&P 500 fell 18%, corporate spreads rose by 1.7 percentage points.

Credit spreads at their lowest in over adecadeSource: Factset
.Percentage pointsIboxx U.S. Dollar Corporate SpreadIboxx Euro Corporate Spread2010’12’14’16’1801234567

To be sure, those share-price declines were far larger than the drawdown in global equities over the past week. But so far, there is little indication that the selloffs are based on expectations of significantly deteriorating economic conditions and company profits are mostly beating expectations. With roughly half of S&P 500 companies having reported fourth-quarter earnings so far, 78% have beat analyst expectations, compared with 64% in a typical quarter, according to Thomson Reuters data.

“Really, there is no recessionary risk out there that’s telling you not to invest in bonds paid for by the cash flow of companies,” said Ewan McAlpine, senior client portfolio manager at Royal London Asset Management.

Data on Monday continued to point to an acceleration in global growth that should be supportive for both stocks and credit. The IHS Markit eurozone January purchasing managers index reached its highest level since June 2006, while the U.S. Institute for Supply Management’s nonmanufacturing PMI rose to 59.9, well above the 56.5 expected.

The credit market “is a supportive factor in my view that I don’t think we’ve hit the turn in the equity markets,” said Dave Lafferty, chief market strategist at Natixis Investment Managers.

Under PressureStocks have sold off in recent sessions after astrong start to the year.Source: FactSet
S&P 500Stoxx Europe 600Japan’s NikkeiJan. ’18Feb.-4-202468

So why are stocks falling?

The difference between the two asset classes this week may in part reflect stocks’ more exuberant start to the year. Equity markets drew record inflows and the S&P 500 rose 5.6% in January, its biggest monthly gain since March 2016. Since the beginning of the year credit spreads on both the euro and dollar iBoxx corporate indexes have declined by roughly 0.1 percentage point.

“All of the discussion at the moment that is negative about the equity market, none of it is about the economics, it’s all about those valuations and ratios,” Mr. McAlpine said.

Investors have been debating whether U.S. stocks look expensive, and what valuation should be used to measure that. The S&P 500’s 12-month rolling price to earnings ratio, a popular valuation measure, reached 23.4 in January, its highest level since 2002.

But not everyone believes that the message from corporate debt markets is the correct one.

On Monday, S&P Global Ratings warned that the global proportion of highly leveraged companies, with a debt to earnings ratio above five to one, has risen by 5 percentage points since 2007, to 37%.

Higher debt levels leave companies vulnerable to unexpected fast increases in interest rates, which would make it more costly to pay off their debt.

“When you are seeing this type of volatility it does raise the question of whether credit spreads should be trading near all-time tights,” said Sunil Krishnan, head of multi-assets funds at Aviva Investors. “I don’t think you’re getting very good compensation for volatility.”

Write to Mike Bird at and Riva Gold at

Broadcom Raises Offer for Qualcomm to Over $121 Billion

February 5, 2018

Move aimed at increasing pressure on takeover target in what would be largest-ever technology deal


Broadcom Ltd. sweetened its takeover offer for Qualcomm Inc. in a deal that would be worth more than $121 billion, turning up the pressure on the takeover target in what would be the largest-ever technology deal.

Broadcom said Monday it would pay $82 a share in cash and stock, up from its initial offer in November of $105 billion, or $70 a share in cash and stock. Broadcom said the revised bid—its “best and final offer”–represents a 50% premium to Qualcomm’s share price on Nov. 2.

Combined, Broadcom and Qualcomm would form the No. 3 chip maker by revenue, behind Intel Corp. and Samsung Electronics Co.

The new bid ratchets up the stakes in a hostile standoff that could affect wide swaths of the markets for chips used in data centers and smartphones. Broadcom is a market leader in a variety of chips for wired and wireless devices, including Wi-Fi and Bluetooth chips for smartphones. Qualcomm is a leader in chips that manage cellular communications in smartphones.


  • Qualcomm Expands Licensing Deal With Samsung as Charges Cut Into Profit
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  • Qualcomm Is Slapped With $1.23 Billion EU Fine for Illegal Payments to Apple

Qualcomm, in an effort to persuade shareholders to resist Broadcom’s initial bid, released a presentation mid-January outlining a path to grow adjusted per-share earnings from $4.28 in fiscal 2017 to between $6.75 and $7.50 in fiscal 2019.

It promised that in the event it doesn’t complete its proposed acquisition of NXP Semiconductors NV, which has been held up in regulatory reviews, it would create an equivalent boost to earnings by buying back shares. Qualcomm also promised to shed $1 billion in costs.

Qualcomm in a later letter to shareholders emphasized the difficulty of getting the proposed merger past international regulators regardless of Broadcom’s ultimate offer, saying it was “highly doubtful” the transaction would be approved.

Broadcom and Qualcomm discussed a potential deal as early as 2016, according to regulatory filings. Since launching its offer, Broadcom management has said Qualcomm’s directors refuse to engage. Broadcom responded by nominating its own slate of directors for Qualcomm shareholders to vote on at the company’s annual shareholder meeting, which is slated for early March.

Qualcomm in recent years has been under attack from customers and antitrust regulators who allege the company’s business practices aren’t fair. Apple Inc. is suing the chip maker in multiple countries, and Qualcomm has faced regulatory fines in China, South Korea, Taiwan and the European Union. Qualcomm is appealing some regulatory decisions and fighting Apple in court.

Write to Ted Greenwald at and Imani Moise at

Apple Expects to Pay $38 Billion Tax on Repatriated Cash

January 17, 2018


By Alex Webb

 Updated on 
  • Company also plans $30 billion in U.S. capital expenditures
  • Apple has largest offshore cash holdings of any U.S. company
Bloomberg’s Mark Gurman reports on Apple’s plan to repatriate overseas cash.

Apple Inc. said it will bring hundreds of billions of overseas dollars back to the U.S., pay about $38 billion in taxes on the money and invest tens of billions on domestic jobs, manufacturing and data centers in the coming years.

The iPhone maker plans capital expenditures of $30 billion in the U.S. over five years and will create 20,000 new jobs at existing sites and a new campus it intends to open, the Cupertino, California-based company said Wednesday in a statement. Apple’s shares gained less than 1 percent to $177.27 at 1:26 p.m. in New York.

“We are focusing our investments in areas where we can have a direct impact on job creation and job preparedness,” Chief Executive Officer Tim Cook said in the statement, which alluded to unspecified plans by the company to accelerate education programs.

In its December approval of the most extensive tax-code revisions since 1986, Congress scrapped the previous international tax system for corporations — an unusual arrangement that allowed companies to defer U.S. income taxes on foreign earnings until they returned the income to the U.S. That “deferral” provision led companies to stockpile an estimated $3.1 trillion offshore.

By switching to a new system that’s designed to focus on domestic economic activity, congressional tax writers also imposed a two-tiered levy on that accumulated foreign income: Cash will be taxed at 15.5 percent, less liquid assets at 8 percent. Companies can pay over eight years.

Apple has the largest offshore cash reserves of any U.S. company, with about $252 billion in at the end of September, the most recently reported fiscal quarter.

The company, which opened a new headquarters in Cupertino last year, said it also plans to open another site in the U.S. focused initially on employees who provide technical support to Apple product users. Apple said it will announce the location of the new campus at a later date. The company already has a sprawling campus in Austin, Texas, for supply chain and technical support employees.

“These are probably many capital expenditure initiatives and new site build-outs that Apple was already planning on doing regardless of repatriation,” said Michael Olson, an analyst at Piper Jaffray, who has the equivalent of a buy rating on the stock. “What’s not said in this release is that there is more potential for increased buybacks for shareholders and acquisitions that might not have taken place if it were not for the cash influx from overseas.”

— With assistance by Mark Gurman, and Alexis Leondis

Silicon Valley Reconsiders the iPhone Era It Created

January 9, 2018

Debate over iPhone use by young people reflects the misgivings some in the industry feel toward smartphones’ ubiquity

A tussle this week between prominent investors and Apple Inc. over iPhone use by young people comes amid a nascent re-evaluation of the smartphone’s social consequences within the industry that spawned it.

The smartphone has fueled much of Silicon Valley’s soaring profits over the past decade, enriching companies in sectors from social media to gaming to payments. But over the past year or so, a number of prominent industry figures have voiced concerns about the downsides of the technology’s ubiquity.

They include Apple executives who helped create the iPhone and now express misgivings about how smartphones monopolize attention, as well as early investors and executives in Facebook Inc. who worry about social media’s tendency to consume ever more user time, in part by pushing controversial content.

Those are the kinds of concerns spotlighted in a letter to Apple on Saturday from Jana Partners LLC and the California State Teachers’ Retirement System, or Calstrs, which control about $2 billion of Apple shares. The letter urged the tech giant to develop new software tools that would help parents control and limit phone use more easily, and to study the impact of overuse on mental health.

On Monday, Tony Fadell, a former senior Apple hardware executive involved in the iPhone’s creation, also called on Apple to do more, saying on Twitter that adults are struggling just as much as children with smartphone overuse. Mr. Fadell, who started publicly voicing concerns about smartphones last spring, said Apple and Alphabet Inc.’s Google should add features to their mobile-phone operating systems to allow people to track device usage.

“Just like we need a scale for our weight we need a scale for our digital lives,” Mr. Fadell said in an interview. He said he became concerned about the issue in recent years as he saw families at resorts spending time with devices rather than each other, or couples taking selfies on ski slopes rather than enjoying the views.

Apple late Monday issued a statement defending its parental controls and other protections for children who use its iPhones, noting that it started offering some of them as early as 2008. It said many of those tools can be found in the settings section of its devices.

Mr. Fadell’s comments echoed similar remarks last year by venture capitalists affiliated with Facebook, including Chamath Palihapitiya and Roger McNamee. Mr. Palihapitiya, a former Facebook executive, and Mr. McNamee, an early investor and adviser, have raised concerns about social media’s tendency to encourage users through emails and notifications to open an app, causing people to live in front of their screens.

Facebook last year acknowledged for the first time the negative consequences of time spent on its service, noting that passively consuming information on Facebook leads many users to report “feeling worse.” And Chief Executive Mark Zuckerberg pledged to spend this year working to address misuse of its products in part by “making sure time spent on Facebook is time well spent.”

“There’s a dawning realization of the effects these companies have had on us and a sense that we should no longer just go along with it,” said Roger Kay, an analyst with Endpoint Technologies Associates.

The smartphone has transformed society unlike any previous device. Its ability to substitute for the radio, TV, computer and gaming console has made it so powerful that U.S. consumers now spend more than three hours a day on average on their mobile devices, according to research firm eMarketer. That is an increase of more than a one hour from 2013.

A handful of developers have responded to rising smartphone use by introducing apps designed to help curtail time on devices, including Checky, which tracks how often users unlock a device, and Menthal, which provides a scorecard for device usage. Alex Markowetz, who co-founded Menthal, said Apple should already offer a similar time-spent measurement on the iPhone because customers increasingly want to protect their most important assets—time and intellect.

“That’s the one resource you should be willing to pay for to look after,” Mr. Markowetz said.

Mr. Fadell, who helped develop the iPhone’s hardware, said he has broken “out sometimes in cold sweats” thinking about the device’s social impact. Speaking at the Computer History Museum last May, Mr. Fadell compared creating the device to Steve Martin’s movie “The Jerk.” In the movie, Mr. Martin portrays an inventor who creates a bridge to hold glasses on people’s nose. The bridge sells well until people go cross-eyed and sue Mr. Martin’s company.

“I think about that and when the kids are looking at the digital screen and different pictures are coming up and there’s grandpa, me—am I going to be hated by them for what we created? Or are we going to be like Alexander Graham Bell?” Mr. Fadell said.

Write to Tripp Mickle at


Intel’s Chip Vulnerabilities — ‘It Can’t Be True.’ — Inside the Semiconductor Industry’s Meltdown

January 8, 2018
  • Technology titans work in secrecy for months to fix key flaws
  • Researchers uncover security holes too big to believe
 Image result for Intel logo, signage
Facebook’s Future With Cryptocurrencies
Apple Products Exposed to Chip Security Flaw
The Mounting Concerns Over Intel’s Chip Vulnerabilities

It was late November and former Intel Corp. engineer Thomas Prescher was enjoying beers and burgers with friends in Dresden, Germany, when the conversation turned, ominously, to semiconductors.

 Image may contain: 1 person, beard

Months earlier, cybersecurity researcher Anders Fogh had posted a blog suggesting a possible way to hack into chips powering most of the world’s computers, and the friends spent part of the evening trying to make sense of it. The idea nagged at Prescher, so when he got home he fired up his desktop computer and set about putting the theory into practice. At 2 a.m., a breakthrough: he’d strung together code that reinforced Fogh’s idea and suggested there was something seriously wrong.

“My immediate reaction was, ‘It can’t be true, it can’t be true,’” Prescher said.

Last week, his worst fears were proved right when Intel, one of the world’s largest chipmakers, said all modern processors can be attacked by techniques dubbed Meltdown and Spectre, exposing crucial data, such as passwords and encryption keys. The biggest technology companies, including Microsoft Corp., Apple Inc., Google and Inc. are rushing out fixes for PCs, smartphones and the servers that power the internet, and some have warned that their solutions may dent performance in some cases.

Prescher was one of at least 10 researchers and engineers working around the globe — sometimes independently, sometimes together — who uncovered Meltdown and Spectre. Interviews with several of these experts reveal a chip industry that, while talking up efforts to secure computers, failed to spot that a common feature of their products had made machines so vulnerable.

“It makes you shudder,” said Paul Kocher, who helped find Spectre and started studying trade-offs between security and performance after leaving chip company Rambus Inc. last year. “The processor people were looking at performance and not looking at security.”

All processor makers have tried to speed up the way chips crunch data and run programs by making them guess. Using speculative execution, the microprocessor fetches data it predicts it’s going to need next.

Spectre fools the processor into running speculative operations — ones it wouldn’t normally perform — and then uses information about how long the hardware takes to retrieve the data to infer the details of that information. Meltdown exposes data directly by undermining the way information in different applications is kept separate by what’s known as a kernel, the key software at the core of every computer.

Researchers began writing about the potential for security weaknesses at the heart of central processing units, or CPUs, at least as early as 2005. Yuval Yarom, at the University of Adelaide in Australia, credited with helping discover Spectre last week, penned some of this early work.

QuickTake Q&A: All About That Big Chip Security Weakness

By 2013, other research papers showed that CPUs let unauthorized users see the layout of the kernel, a set of instructions that guide how computers perform key tasks like managing files and security and allocating resources. This vulnerability became known as a KASLR break and was the foundation for some of last week’s revelations.

In 2016, research by Felix Wilhelm and others demonstrated how an early version of speculative execution could make chips vulnerable to data leaks. Jann Horn, a young Google researcher credited with first reporting the Meltdown and Spectre weaknesses, was inspired by some of this work, according to a recent tweet.

Graz team members Michael Schwarz, from left, Moritz Lipp, and Daniel Gruss

Photographer: Helmut Lunghammer for TU Graz

At Black Hat USA, a major cybersecurity conference in Las Vegas, in August 2016 a team from Graz Technical University presented their research from earlier in the year on a way to prevent attacks against the kernel memory of Intel chips. One of the group, Daniel Gruss, shared a hotel room with Fogh, a malware researcher at G Data Advanced Analytics, an IT security consulting firm. Fogh had long been interested in “side-channel” attacks, ways to use the structure of chips to force computers to reveal data.

Fogh and Gruss stayed up late at night discussing the theoretical basis for what would later become Spectre and Meltdown. But, like Prescher more than a year later, the Graz team was skeptical this was a real flaw. Gruss recalls telling Fogh that the chipmakers would have uncovered such a glaring security hole during testing and would never have shipped chips with a vulnerability like that.

Fogh made the case again at Black Hat Europe, in early November 2016 in London, this time to Graz researcher Michael Schwarz. The two discussed how side-channel attacks might overcome the security of “virtualized” computing, where single servers are sliced up into what looks, to users, like multiple machines. This is a key part of increasingly popular cloud services. It’s supposed to be secure because each virtual computing session is designed to keep different customers’ information separate even when it’s on the same server.

Despite Fogh’s encouragement, the Graz researchers still didn’t think attacks would ever work in practice. “That would be such a major f*ck-up by Intel that it can’t be possible,” Schwarz recalled saying. So the team didn’t dedicate much time to it.

The Players

Cybersecurity researchers from across the world teamed up to lay out the extent of the flaw

Note: Fogh was not part of the team that worked on the Meltdown and Spectre papers.

In January 2017, Fogh said he finally made the connection to speculative execution and how it could be used to attack the kernel. He mentioned his findings at an industry conference on Jan. 12, and in March he pitched the idea to the Graz team.

By the middle of the year, the Graz researchers had developed a software security patch they called KAISER that was designed to fix the KASLR break. It was made for Linux, the world’s most popular open-source operating system. Linux controls servers — making it important for corporate computing — and also supports the Android operating system used by the majority of mobile devices. Being open source, all suggested Linux updates must be shared publicly, and KAISER was well received by the developer community. The researchers did not know it then, but their patch would turn out to help prevent Meltdown attacks.

Fogh published his blog on July 28 detailing efforts to use a Meltdown-style attack to steal information from a real computer running real software. He failed, again fueling doubts among other researchers that the vulnerabilities could really be used to steal data from chips. Fogh also mentioned unfinished work on what would become Spectre, calling it “Pandora’s Box.” That got little reaction, too.

The Graz team’s attitude quickly changed, though, as summer turned to fall. They noticed a spike in programming activity on their KAISER patch from researchers at Google, Amazon and Microsoft. These giants were pitching updates and trying to persuade the Linux community to accept them — without being open about their reasons sometimes.

“That made it a bit suspicious,” Schwarz said. Developers submitting specific Linux updates usually say why they’re proposing changes, “and on some of the things they didn’t explain. We wondered why these people were investing so much time and were working on it so hard to integrate it into Linux at any cost.”

To Schwarz and his fellow researchers, there was only one explanation: A potentially much bigger attack method that could blow open these vulnerabilities, and the tech giants were scrambling to fix it secretly before every malicious hacker on Earth found out.

Unbeknownst to the Graz team and Fogh, a 22-year-old wunderkind at Alphabet Inc.’s Google called Jann Horn had independently discovered Spectre and Meltdown in April. He’s part of Google’s Project Zero, a team of crack security researchers tasked with finding “zero-day” security holes — vulnerabilities that trigger attacks on the first day they become known.

On June 1, Horn told Intel and other chip companies Advanced Micro Devices Inc. and ARM Holdings what he’d found. Intel informed Microsoft soon after. That’s when the big tech companies began working on fixes, including Graz’s KAISER patch, in private.

By November, Microsoft, Amazon, Google, ARM and Oracle Corp. were submitting so many of their own Linux updates to the community that more cybersecurity researchers began to realize something big — and strange — was happening.

Tests on the patches these tech giants were advocating showed serious implications for the performance of key computer systems. In one case, Amazon found that a patch increased the time it took to run certain operations by about 400 percent, and yet the cloud leader was still lobbying that every Linux user ought to take the fix, according to Gruss. He said this made no sense for their original KAISER patch, which would only ever impact a small sub-section of users.

Gruss and other researchers became more suspicious that these companies weren’t being completely honest about the rationale for their proposals. Intel said it is standard practice not to disclose vulnerabilities until a full remedy has been put in place. The chipmaker and other tech companies have also said their tests show minimal or no impact on performance, although certain unusual workloads may be slowed by as much as 30 percent.

In late November, another team of researchers at IT firm Cyberus Technology became convinced that Intel had been telling its main clients, such as Amazon and Microsoft, all about the issue, while keeping the full scale of the crisis hidden from Linux development groups.

Prescher, the former Intel engineer, was part of the Cyberus team. After his late-night discovery in Dresden, he told Cyberus Chief Technology Officer Werner Haas what he’d found. Before their next in-person meeting, Haas made sure to wear a Stetson, so he could say to Prescher, “I take my hat off to you.”

On Dec. 3, a quiet Sunday afternoon, the Graz researchers ran similar tests, proving Meltdown attacks worked. “We said, ‘Oh God, that can’t be possible. We must have a mistake. There shouldn’t be this sort of mistake in processors,” recalled Schwarz.

The team told Intel the next day — around the same time Cyberus informed the chip giant. They heard nothing for more than a week. “We were amazed — there was no response,” Schwarz said.

On Dec. 13, Intel let Cyberus and the Graz team know that the problems they found had already been reported by Horn and others. The chipmaker was initially reluctant to let them contribute. But after being pressed, Intel put both groups in touch with the other researchers involved. They all began coordinating a broader response, including releasing updated patches at the same time.

Once inside the secret circle of the large tech companies, the Graz researchers expected they would have the typical 90 days to come up with comprehensive fixes before telling the world. “They said we know it, but will publish it at the beginning of January,” Schwarz said. It had been roughly 180 days since Google unearthed it, and keeping such issues under wraps for more than 90 days is unusual, he noted.

A group of 10 researchers coalesced and kept in touch via Skype every two days. “It was a lot of work on Christmas. There wasn’t a single day where we didn’t work. Holidays were canceled,” Schwarz said.

Their public security updates soon attracted the attention of The Register, a U.K.-based technology news site, which wrote a story on Jan. 2 saying Intel products were at risk.

Usually, flaws and their fixes are announced at the same time, so hackers don’t quickly abuse the vulnerabilities. This time, the details emerged early and patches weren’t ready. That led to a day and a night of frantic activity to arrange what all the companies would say in unison.

Intel put the statement out at 12 p.m. Pacific Time on Jan. 3 and held a conference call two hours later to explain what it said was a problem that could impact the whole industry.

The solidarity was a mirage, though. Rival AMD issued its own statement shortly before Intel’s call began, saying its products were at little or no risk of being exploited. After more than six months of coordinated work, Intel went into lock-down in the final hours and didn’t consult with its erstwhile partners to speed up a public statement, according to a person familiar with what happened.

Steve Smith and Donald Parker, the two Intel executives questioned on the call, argued things progressed in the measured way that Intel approaches any report of a threat to its technology. The difference this time was that their work ended up “in the spotlight,” according to Smith. They would have preferred to complete the work in secret.

Indeed, Intel’s reticence rankled some outside researchers. The company operates on a need-to-know basis, said Cyberus’s Haas, who worked at Intel for about a decade. “I’m not a huge fan of that.”

“Our first priority has been to have a complete mitigation in place,” said Intel’s Parker. “We’ve delivered a solution.”

Some in the cybersecurity community aren’t so sure. Kocher, the former Rambus cryptographer who helped discover Spectre, thinks this is just the beginning of the industry’s woes. Now that new ways to exploit chips have been exposed, there’ll be more variations and more flaws that will require more patches and mitigation.

“This is just like peeling the lid off the can of worms,” he said.

— With assistance by Mark Bergen, and Dina Bass

iPhones and Children Are a Toxic Pair, Say Two Big Apple Investors

January 8, 2018

Two activist shareholders want Apple to develop tools and research effects on young people of smartphone overuse and addiction

Teens took a group selfie with a smartphone in New York’s Times Square on Dec. 1.
Teens took a group selfie with a smartphone in New York’s Times Square on Dec. 1. PHOTO: DREW ANGERER/GETTY IMAGES

The iPhone has made Apple Inc. and Wall Street hundreds of billions of dollars. Now some big shareholders are asking at what cost, in an unusual campaign to make the company more socially responsible.

A leading activist investor and a pension fund are saying the smartphone maker needs to respond to what some see as a growing public-health crisis of youth phone addiction.

Jana Partners LLC and the California State Teachers’ Retirement System, or Calstrs, which control about $2 billion of Apple shares, sent a letter to Apple on Saturday urging it to develop new software tools that would help parents control and limit phone use more easily and to study the impact of overuse on mental health.

The Apple push is a preamble to a new several-billion-dollar fund Jana is seeking to raise this year to target companies it believes can be better corporate citizens. It is the first instance of a big Wall Street activist seeking to profit from the kind of social-responsibility campaign typically associated with a small fringe of investors.

Adding splash, rock star Sting and his wife, Trudie Styler, will be on an advisory board along with Sister Patricia A. Daly, a nun who successfully fought Exxon Mobil Corp. over environmental disclosures, and Robert Eccles, an expert on sustainable investing.

The Apple campaign would be unusual for an activist like Jana, which normally urges companies to make financial changes. But the investors believe that Apple’s highflying stock could be hurt in coming decades if it faces a backlash and that proactive moves could generate goodwill and keep consumers loyal to Apple brands.

“Apple can play a defining role in signaling to the industry that paying special attention to the health and development of the next generation is both good business and the right thing to do,” the shareholders wrote in the letter, a copy of which was reviewed by The Wall Street Journal. “There is a developing consensus around the world including Silicon Valley that the potential long-term consequences of new technologies need to be factored in at the outset, and no company can outsource that responsibility.”

Obsessive teenage smartphone usage has sparked a debate among academics, parents and even the people who helped create the iPhone.

Two teenage boys use smartphones in Vail, Colo., in June 2017.
Two teenage boys use smartphones in Vail, Colo., in June 2017. PHOTO: ROBERT ALEXANDER/GETTY IMAGES

Some have raised concerns about increased rates in teen depression and suicide and worry that phones are replacing old-fashioned human interaction. It is part of a broader re-evaluation of the effects on society of technology companies such as Google and Inc. and social-media companies like Facebook Inc. and Snap chat owner Snap Inc., which are facing questions about their reach into everyday life.

Apple hasn’t offered any public guidance to parents on how to manage children’s smartphone use or taken a position on at what age they should begin using iPhones.

Apple and its rivals point to features that give parents some measure of control. Apple, for instance, gives parents the ability to choose which apps, content and services their children can access.

The basic idea behind socially responsible investing is that good corporate citizenship can also be good business. Big investors and banks, including TPG, UBS Group AG and Goldman Sachs Group Inc. are making bets on socially responsible companies, boosting what they see as good actors and avoiding bad ones.

Big-name activists increasingly view bad environmental, social or governance policies as red flags. Jana plans to go further, putting its typical tools to work to drive change that may not immediately pay off.

Apple is an ambitious first target: The combined Jana-Calstrs stake is relatively small given Apple’s nearly $900 billion market value. Still, in recent years Apple has twice faced activists demanding it pare its cash holdings, and both times the company ceded some ground.

Chief Executive Tim Cook has led Apple’s efforts to be a more socially responsible company, for instance on environmental and immigration issues, and said in an interview with the New York Times last year that Apple has a “moral responsibility” to help the U.S. economy.

Apple has shown willingness to use software to address potentially negative consequences of phone usage. Amid rising concerns about distracted driving, the company last year updated its software with a “do not disturb while driving” feature, which enables the iPhone to detect when someone is behind the wheel and automatically silence notifications.

The iPhone is the backbone of a business that generated $48.35 billion in profit in fiscal 2017. It helped turn Apple into the world’s largest publicly listed company by market value, and anticipation of strong sales of its latest model, the iPhone X, helped its stock rise 50% in the past year. Apple phones made up 43% of U.S. smartphones in use in 2016, according to comScore , and an estimated 86 million Americans over age 13 own an iPhone.

Jana and Calstrs are working with Jean M. Twenge of San Diego State University, who chronicled the problem of what she has dubbed the “iGen” in a book that was previewed in a widely discussed article in the Atlantic magazine last fall, and with Michael Rich of Harvard Medical School and Boston Children’s Hospital, known as “the mediatrician” for his work on the impact of media on children.

The investors believe both the content and the amount of time spent on phones need to be tailored to youths, and they are raising concern about the public-health effects of failing to act. They point to research from Ms. Twenge and others about a “growing body of evidence” of “unintentional negative side effects,” including studies showing concerns from teachers. That is one reason Calstrs was eager to support the campaign, according to the letter.

The group wants Apple to help find solutions to questions like what is optimal usage and to be at the forefront of the industry’s response—before regulators or consumers potentially force it to act.

The investors say Apple should make it easier and more intuitive for parents to set up usage limits, which could head off any future moves to proscribe smartphones.

The question is “How can we apply the same kind of public-health science to this that we do to, say, nutrition?” Dr. Rich said in an interview. “We aren’t going to tell you never go to Mickey D’s, but we are going to tell you what a Big Mac will do and what broccoli will do.”

Write to David Benoit at

Appeared in the January 8, 2018, print edition as ‘Investors Prod Apple On Child iPhone Use.’

The Limits of Amazon

January 1, 2018 Inc. is a colossus. In the near future, it could even surpass Apple Inc. as the world’s largest publicly traded company.

But whether you think it will get there depends on how big you think the market is for the products and services Amazon is best at. One secret to Amazon’s amazing scalability is this: Not everything is an Amazon business.

Amazon is the largest online retailer in the U.S. by a huge margin. In cloud-computing services, it is the world leader by nearly every measure. With the Echo speaker, it was the surprise early leader in voice-based computing, and that business has exploded as well.

Meanwhile, Amazon is leasing planes and buying semi trailers to compete with FedEx and UPS for delivery of its own goods. This year it is on track to spend as much on video content as Netflix did in 2017.

A wide-body aircraft emblazoned with Amazon's Prime logo is unloaded at Lehigh Valley International Airport in Allentown, Penn., in December 2016.

A wide-body aircraft emblazoned with Amazon’s Prime logo is unloaded at Lehigh Valley International Airport in Allentown, Penn., in December 2016.PHOTO: MARK MAKELA/REUTERS

And though no one knows what Amazon will do with Whole Foods, its push into physical retail has rival Wal-Mart scrambling to match Amazon in other ways, such as e-commerce.

All of these moves fit into Amazon’s core mission as a data-driven instant-gratification company. Its fanaticism for customer experience is enabled by every technology the company can get its hands on, from data centers to drones. Imagine the data-collecting power of Facebook wedded to the supply-chain empire of Wal-Mart—that’s Amazon.

There is one major problem with the idea that Amazon will eat the entire universe, however. Amazon is good at identifying commodity products and making those as cheap and available as possible. “Your margin is my opportunity” is one of Chief Executive Jeff Bezos’s best-known bon mots. But this system isn’t very compatible with big-ticket, higher-margin items.

Could Amazon’s Lab126—famous for both the successful Echo and the failed Fire phone—ever produce something as premium as an iPhone or an OLED TV? Its success in electronics has come from driving their prices to the very bottom.

The same goes for Amazon’s other businesses. For example, could Amazon Studios, which has shown little ability to create hits, ever produce a franchise like Marvel’s Avengers or HBO’s Game of Thrones?

Amazon Chief Executive Jeff Bezos and MacKenzie Bezos, his wife, at the Vanity Fair Oscar party after the 89th Academy Awards in February 2017.

Amazon Chief Executive Jeff Bezos and MacKenzie Bezos, his wife, at the Vanity Fair Oscar party after the 89th Academy Awards in February 2017. PHOTO: DANNY MOLOSHOK/REUTERS

How Amazon Does It

Amazon now increasingly makes its money by extracting a percentage from the sales of other sellers on its site. It has become a platform company like Facebook Inc. or Alphabet Inc.’s Google, which serve as marketplaces for businesses with less reach of their own.

There are likely a million active sellers on Amazon’s marketplace, says Euromonitor International, a consumer-spending research firm. (Amazon says it has two million sellers total, but many may not be active.) In 2017, 66% of the money Amazon shoppers spent world-wide was for goods sold by companies other than Amazon, Euromonitor estimates. Amazon typically takes a 15% margin from other sellers, and can generate extra revenue by warehousing and delivering their goods, as well.

Eventually, Amazon could become the ultimate platform for retail, the “retail cloud” upon which countless other online retail businesses are built, said Juozas Kaziukėnas, founder and chief executive of Marketplace Pulse, a business-intelligence firm focused on e-commerce. “Maybe eventually you can even outsource your manufacturing to Amazon,” he added.

Amazon famously adheres to the rule that any new business should be built by a team small enough to be fed with two pizzas. These teams are “a way to scale thousands of product categories,” said Benedict Evans, partner at venture-capital firm Andreessen Horowitz, because they are nimble and can have independent profit-and-loss statements.

A customer at a coffee bar in front of an pop-up store inside a Whole Foods store in Chicago in November.

A customer at a coffee bar in front of an pop-up store inside a Whole Foods store in Chicago in November. PHOTO: DANIEL ACKER/BLOOMBERG NEWS

Think of Amazon as an umbrella company composed of disconnected and sometimes competing businesses, though critically they can access common infrastructure, including the retail platform and cloud services.

Ultimately, these smaller businesses must feed the core mission. Amazon’s video business isn’t just its own potential profit center; it’s also a way to keep people in Amazon’s world longer, where they spend more money, Amazon Chief Financial Officer Brian Olsavsky said in October. Amazon Prime Video also makes customers more likely to renew their Prime subscriptions, he said.

Whole Foods may one day prove to be a launchpad for swarms of same-hour delivery drones, though for now it’s a brick-and-mortar incentive to customers. Notice how prominently Amazon took credit for the grocery store’s recent price cuts, said Victor Rosenman, chief executive of Feedvisor, a company that helps sellers on Amazon’s marketplace price their goods.

“I grew up in Russia, and it reminds me of an old joke: When the summer is warm, they’d say it was because of the Communist Party,” Mr. Rosenman said. “They’re wanting to build awareness that thanks to Amazon, things are getting better—and cheaper.”

What Amazon Can’t Do

Amazon may be mastering commodity goods; its own Basics line went from about 250 products in 2013 to over 1,500 today. But making items widely available at low prices runs directly counter to the way higher-profit businesses work.

An Amazon Fire tablet in a Best Buy store in Valley Stream, N.Y., on Dec. 6.

An Amazon Fire tablet in a Best Buy store in Valley Stream, N.Y., on Dec. 6. PHOTO: RICHARD B. LEVINE/LEVINE ROBERTS/NEWSCOM/ZUMA PRESS

Amazon may be a dominant player in touch-screen tablets, for example, but to get to that position it not only undersold nearly every competitor, but it also killed off its own tablet lines that more closely resembled Apple’s iPad in quality and price.

Consider the makers of high-end handbags, which limit who can distribute their wares and, as a result, who can buy them. Not surprisingly, many of those brands refuse to sell on Amazon at all.

Yet fashion is one of Amazon’s fastest-growing retail categories, an Amazon spokeswoman says. The company recently launched Prime Wardrobe, which competes with other online retailers that ship assortments of clothes to customers and allow them to try on and return items they don’t want. The company also carries some luxury brands like Hugo Boss, Milly, AG Jeans and Stuart Weitzman.

Cloud computing might not seem to have anything in common with handbags, but Amazon Web Services has limitations similar to those of Amazon’s retail business.

Why hasn’t the massive success of Amazon Web Services hurt the revenue or valuation of its chief competitors? Yes, it’s partly because the pie has expanded so fast, every competitor is growing. But it’s also because Amazon offers a commodity—basic cloud services. Google, Microsoft Corp. and Inc. offer more specialized services, and Oracle Corp., for one, charges a premium on white-glove treatment for business-essential assets.

Ultimately, the strategies that allow Amazon to continue growing will also be its limitation. “If the platform needs to be one-size-fits-all across many, many different product categories, it becomes difficult to create specific experiences for different kinds of products,” Mr. Evans said.

The bulk of our everyday goods and services may one day come from Amazon, and everyone from CVS to Uber should watch their backs. Even so, there will continue to be countless competitors that would never dream of branding any of their products “Basic.”

Write to Christopher Mims at

Bain-Apple Group Sign Letter of Intent to Buy Toshiba’s Chip Business

September 13, 2017

Deal would be valued at more than $18 billion

Image result for Toshiba Corp, signage, photos

A group including private-equity firm Bain Capital and technology giant Apple Inc. signed a letter of intent to buy Toshiba Corp.’s chip business for more than $18 billion, according to people familiar with the matter.

An agreement with the group, which also includes Seagate Technology PLC and Dell Inc., could be announced later Wednesday in Japan, the people said. It is unclear who else may be in the group and its membership could still change.

The agreement would be the latest twist in a contentious sale process that is likely far from over.

Toshiba is seeking to unload the chip unit as part of a survival plan in the wake of huge losses at its U.S. nuclear unit Westinghouse Electric Co., which filed for bankruptcy earlier this year. The Tokyo company has said its plan centers around selling the profitable semiconductor unit, which makes NAND flash-memory chips used for data storage in smartphones, computers and other electronics products.

Write to Dana Mattioli at