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tv   Bloomberg West  Bloomberg  July 3, 2014 1:00pm-2:01pm EDT

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>do i hear the closing bell? i think i do. the long weekend has officially begun. we have got a talk about the action before we head to the beach, and that is because we finally crossed 17,000. historic today. we have never seen this before, breaking above 17,000 for the first to break down only action, we are joined by the chief you justs showed in that package earlier, biggest fireworks planned in the country. today.ery appropriate 17,000.is over ask michael joining us. nice, round number. doesn't matter?
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-- does it matter? it's a very is, benign environment. central banks keep signaling that they will be accommodative. to keepre finding ways buying stocks here. what will be the factor that catches us? iraq, earning season? today, we had the jobs number. when you look at the household numbers, it was something like 700,000 jobs added part-time. people are going to pick on that and say the quality of employment is not good. that is an old story. we are making all-time highs. >> your take on the split between part-time and full-time. >> more people are getting part-time work because these
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people were voluntarily taking part-time work and not leaving the labor force. it could be spun as good news. >> better to have some work that no work. >> suppose we get these good numbers and the fed starts raising rates. what do you do as an investor? we're just reaching for yields. a percent is not much of a yield. much of aot matur yield. inhousehold numbers back october looked very similar and it was shrugged off. it is the world we live in now. in terms of what the fed is going to do, one thing i noticed today was a lot of the wall street economists came out. , ok, we are said moving up our estimate for the -- i don'thike from
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think either one will happen. this is no longer about the economic data. it has become about asset prices. nobody wants to upset the apple cart. bernanke was talking about treasuries a year ago. be higher.d the fed should be doing their job and raising rates here. >> the fed targets don't matter. fine, that does not matter. worsening inflation does not matter. cynical't mean to be here. core pce gets anywhere near that 2% number and we hit the threshold, they will take that and toss it out the window. they don't seem to care. that is fine. they will raise rates in the context of an s&p 500 30% or more higher from here. the market has to be ready and it has to be prepared properly. when is that going to happen without that fear that they will
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make the brazilian fx rate go higher? toi actually listened christine lagarde speaking with janet yellen yesterday afternoon. ms. yellen said we are going to keep doing what we are doing. i don't think she is saying in the same context. what she does not want to say taper tantrum ahead of time. trying to give us metrics on when they start to raise rates. if we get the same kind of drop of the unemployment rate we have been getting, we will be well below six by the end of the year. that will pull it forward. question is preparing the markets and how they do that without the tantrum. >> with the difference? we are at records already. what is the difference?
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>> the taper tantrum. to be extra sure that we won't have another one of these reactions. it has to be managed carefully. it will be very deliberate. >> the president of the fed talking biotech. >> it is very deliberate. call him down on biotech. everything else, keep partying. -- calm down on biotech. >> thank you for your perspective today. have a great july 4. we will be back next week. ♪
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>> the name means little rice, but chinese phone maker xiaomi has big ambitions. only four years old, already more popular in china than apple and worth a staggering $10 billion. now, xiaomi, china's number
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three phone maker, is going global, launching in 10 new countries this year. so how have they become apple's biggest threat in china? we reveal the secrets to xiaomi's success in a bloomberg special, "xiaomi rising." welcome to this special edition, i'm emily chang. it is one of the fastest-growing companies in the world. one of the fastest growing tech markets. we are talking about xiaomi, a company that is only four years old and already sells more smartphones in china than apple. we will take an in-depth look at xiaomi's meteoric rise, its charismatic leader, and the global plan. i want to start by bringing in cory johnson and brad stone. brad recently traveled to xiaomi where he attended the mipad tablet launch. and interviewed xiaomi executives.
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an in-depth look. you spent 10 days there. that is a long time. this is a company called the apple of china. is it really? >> i think in a lot of ways it is. in just four years, it has built a brand that consumers love, they covet. the remarkable thing is it has grown very fast, sold 18 million smart phones last year, but left a lot of customers disappointed. those phones are hard to get. they are maturing the supply chain so they can build the demand, but customers are hanging out outside. it's like a carnival. >> people were on train 15 hours just to go to this event. >> they are drawn to the company and the star power of the executive, lei jun, who has a long career in chinese technology. he was a prolific angel investor. he is really a star of the chinese technology scene.
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>> he brought together seven other tech titans, who could've been ceo's of their own company, to form xiaomi. it has been called the avengers, the dream team. >> it was a symptom of his huge ambitions. starting a mobile phone company, very expensive, difficult to do. a lot of people thought, how can you compete with apple and samsung? one of the things he did was partner with a former google executive lin bin, and others, and form the company. there is one that handles miui, the operating system. one in charge of manufacturing, another one, the phones. >> when you look at the numbers, does xiaomi show the promise of becoming a global player like apple? >> not yet, but the growth is intriguing. the business model is interesting, too. the way that they have done things that other android phone
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makers have not been able to do, creating a brand that is customized enough to be a different user experience but a different business model. selling products online only, having support that customers can get to but not the full retail experience that causes them to raise costs and inventory. the company had some weird inventory problems early. they were sitting on inventory that went stale. that is one of the secrets about running a successful technology business, and one thing that apple does not get enough credit for. how they never really got stuck sitting on product that was not hot. they somehow engaged demand accurately, made enough customers happy, without sitting on top of these things. look at microsoft, writing done down hundreds of millions of dollars in inventory with the surface. xiaomi is doing this quite well
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in an interesting and different business model. regardless of how successful this company is, a lot of people will look at their ideas and see if they can run with them. >> a deeper dive into the business model later in the show. right now, i want to bring in crid yu, a former executive at google in china. he is with us from london. as someone who has worked in china, building technology company, what do you think of xiaomi's rise, how impressive is it? >> very impressive. one thing we need to point out is, xiaomi is impressive not because it is a low-cost copycat, which is easy for us in the west to think of them as that. they have gotten this far because of a product at an affordable price, but as brad mentioned in his article, their business model is actually very disruptive and they are not a global power yet, but the business model could be disruptive to someone like apple or samsung.
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>> part of that business model is selling directly to consumers, no retailers. they cut out the middleman. >> that is a 25% margin that the retailers are taking. they also do not advertise. they rely almost solely on social media and on the free press attracted to the founding team's star power. that is the question, can they afford that over to other countries? >> the google dna that runs to this company is very interesting to me. i wonder, from your standpoint, what do you see from this company that has taken notes from google? >> there is definitely a flavor of commoditizing later and then giving it away. xiaomi is not giving away the hardware, but many are speculating they cannot make much margin on that. they are ok with that. the second thing we have to remember is xiaomi is very dependent on the android ecosystem, being compatible with it.
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android is a google-backed os, the most popular on the planet. xiaomi, the miui is a variant on top of that. it is important for xiaomi to stay in sync with google and android. >> if google was a more active participant in the chinese ecosystem, if it had not reorganized its operations, had pure android in china with apps like google maps, do you think miui would be as successful as it is? >> i do think so. i certainly think the miui, if you think about the way they do development, that is the other thing people do not appreciate is the innovation. apparently, it is based on user feedback. they push out software on a weekly basis. that is also a very google
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thing, to launch something and continuously innovate on it. they have not called it a beta, but you can imagine people called their phone the beta phone. >> also involved was a longtime executive from google. they all came with their different backgrounds, brought their own superpower, if you will, to give xiaomi what it has used to get to the top. >> there is irony here. the reason that he felt free, had the entrepreneurial spark, is because a lot of those google workers based in beijing, felt like their work was being lost by google's reorganization in china. he told me that was basically the spark. google, in some ways, set him and some of the early founders and employers free to work with lei jun. to build this company.
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>> we will be talking about lei jun, who he is, more about the company. thank you, cory johnson, crid yu. former google executive. xiaomi may be huge in china but the company has global ambitions with plans to enter 10 new markets this year alone. we will look at whether xiaomi has what it takes to go abroad and possible entry into the united states. ♪
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>> welcome back to a special edition of "bloomberg west: xiaomi rising." we are taking an inside look at the chinese company that launched just four years ago but is now grabbing a bigger share in china than apple. here is a look at their rise from scrappy start up to smartphone technology power player. by the numbers.
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xiaomi may be a new kid on the block, but the company is no longer little. lei jun helped to found the company in april 2010. four months later, they launched their first official android-based firmware called miui. in 2011, they took on the smart phone with the mi-one. every year they have introduced new products with great fanfare, so how did xiaomi rise so far so fast? first there is the price. at $270, the flagship mi3 costs less than half the cheapest iphone in china. then there is the business strategy. they sell directly to consumers online with limited quantity available. a recent web sale brought in $241 million in orders. when the mi3 launched last year, xiaomi sold over 190,000 phones in nine seconds. they plan to triple shipments
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from 19 million to 60 million phones by the end of the year. and xiaomi just dropped the little from its domain name, proving that the start of is starting to think a lot bigger. xiaomi has been a smashing success in china but can it be a major player in the rest of the world? xiaomi executive certainly hope so. editor-at-large cory johnson is with us as well as brad stone, and former google executive crid yu. they are trying to expand to india, russia, brazil. can they be as successful abroad as they have been in china? >> they certainly have challenges. one is proximity to the supply chain. they work with other companies, they sell the phones as soon as they get them. when you extend into other countries, you extend the supply chain. more difficult cost, you have to
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increase the price. >> the inventory issue they are trying to avoid. >> you also do not have the same star power of the chinese founders. in other countries, people buy phones through carriers. xiaomi cells directly through their lines. >> leading the effort is hugo barra, former google executive, who xiaomi poached from google. crid, what do you think he brings to the table, can he be the one that makes this company successful abroad, as they have been in china? >> i think of anyone, he is a great hire. one thing that we said before, xiaomi is, miui, the core ip of xiaomi is a variant of android. these are also harmonious with the android ecosystem and google. hugo is a software guy. we talked about the price of
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handsets, but the strategy of xiaomi is to make money on software and services. i think we have a lot to see from xiaomi in terms of how it makes money. most people think that it makes small margins on the handsets just to get adoption, so when they start to pick up the services, whenever they might be, we will be in for a show. >> will xiaomi try to expand in the united states? can they do it? we spoke to hugo barra about this. take a listen. >> the u.s. is not in our plans this year. it is an insanely competitive market. getting there requires working hard. we will work up to that, we do not know when that will be, but that is the goal. >> that is the goal. can they do it? >> they have a lot to prove. this market is controlled by a couple major carriers, verizon and at&t. i do not see any , but they will evolve.
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>> there is a fundamental change in the way that the mobile business is working right now, led by t-mobile, taking away the plans, subsidies, and letting the consumer pay over time through their monthly bills. it is a big change in the phone business, and this could get accelerated with the iphone 6 this fall. a carrier would be locked into the payments of the phone, but the phone would not be subsidized. the carriers love this, phone makers kind of love this. if that would change the u.s. business model, that can start to open up companies like xiaomi, who have a different model. where the consumer pays for the phone. >> steve wozniak thinks xiaomi products are good enough for the u.s., when he visited in january, said that they were good enough to break the american market. one of the interesting points that you spoke with you go about in your article, brad, was about the even cheaper bargain
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basement price phone, like a $50 phone. tell me more. >> a lot of companies are pursuing that. crid made a good point, they need to evolve their soft or and get their margins there. we have not seen a lot of that from xiaomi. they had a social network which tencent eventually swamped. if they can make money on services, they can drive the phone. now they know they do not need to make more money on a handset. >> brad stone, cory johnson, crid yu in china. we are continuing our discussion. how can xiaomi price their phones so cheaply? we look at their unusual business strategy and why it is critical to their success. ♪
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>> welcome back to a special edition of "bloomberg west: xiaomi rising." i'm emily chang. we are looking at the launch of xiaomi, launched four years ago and already one of the dominant smartphone makers. lei jun is known as the steve jobs of china, but who is he, and how has he helped to drive xiaomi's success? take a look. xiaomi cofounder lei jun may not like his company to be compared to apple, but one look at him onstage and you cannot help but think about steve jobs. it is not an accident. as an engineering student, he read a book about jobs and decided to emulate him in style and substance.
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>> he has his hands in many places in the chinese technology community, so he understands the holistic view of what consumers want on mobile devices, the internet in general. >> before starting xiaomi, he spent six years at chinese software companies, working his way up to ceo, one of the same time, founding an e-commerce company and investing in a social site. in 2010, he teamed up with a former google engineer and a few other accomplished founders, and xiaomi was born. but while apple may have inspired lei to start the company, he is quick to point out the differences. >> a lot of people think we are china's apple. i feel this only captures part of it. i feel we are different from apple and more like amazon's kindle. >> a little apple, a little amazon, and thanks to its ceo, becoming a big threat to both.
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for more on the man behind xiaomi, i want to bring back brad stone. also with us is the managing partner and early former xiaomi board member. also an early investor in xiaomi. thank you for joining us. i have to talk about the t-shirt. he used to wear the black t-shirt all the time and not anymore, is that on purpose? >> [laughter] definitely. some interesting press after his first product launch. the comparisons to steve job was too much. >> he did not like the comparisons. >> he reveres steve jobs very much and he does not want people to confuse that he is the next steve jobs. >> who is lei jun? he could have retired 10 times
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already, was very wealthy, but decided to start a smartphone maker. why? >> it is interesting, when i met him, learning the scale of his ambitions. most entrepreneurs think abuot one weapon and going to a war with that weapon. he is building an entire military apparatus. i will have the funds, a browser, the entire ecosystem of taking advantage of the mobile internet revolution. what really drives this is financial, the impact at the global level. that is what got him going. >> lei jun had some scars from his earlier e-commerce forays. an apparel retailer in china. amazon china. he did not sell joyo for a lot to amazon. what did he learn?
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>> he was an early entrepreneur in the internet space in china. he had kingsoft and a few other companies before doing xiaomi. every single one, he felt that he did not capture the right trend in the right way. when he was doing his start, others like jack ma were just starting out. seeing all of these other giants and he wanted to try hard with his company. he thought he was the hardest working guy in the business. how come their market cap is a lot smaller? he thought the mobile was the next big trend and nailed it. >> in your story, you say he works six days a week? 10-10? >> maybe seven. i could have an e-mail that i sent to him at midnight and he will respond at 1:00. can talk until 2:00.
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>> would you say he is on the scale of robin lee, jack ma, is he that big? >> he is. the question is how much bigger he goes. xiaomi is a unique company brand where it has the capability and aspirations to go global. with an internet company wrapped in the candy of colorful hardware, you see the opportunity to go into other markets that historical internet chinese companies have not been able to go for. >> you invested early on. why a company that was trying to crack a mature smartphone market, why did you think lei jun had what it takes? >> when they first spoke to me in late 2009, he had the idea that he would start a company that would do os, app, and hardware, a crazy idea. iphone made it work, but that was steve jobs. he had a different view with china. he had done some of the same
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business before in his previous companies, so i thought if anybody could pull it off, it would be him, but they were lacking the hardware piece. that was the risk early on, there was no hardware guy on the team. for the first six months, his job was recruiting. that is why you have this amazing cofounding team. >> the avengers. >> and he gave out a lot of options. >> he found his hardware guy, and he created the ming phone series for motorola. >> they went to see every single supplier on earth, even low-level managers, asking for inventory. on the day of the earthquake in japan, they went out the next day to talk to sharp to ask for lcd screens. people were afraid of japan.
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they went. >> lei jun does not speak english. jack ma is an international ambassador for alibaba. can lei jun get to that level? >> if you look at the culture, of these cofounders, almost all of them are global, they come from google, microsoft, there is a bilingual-capable culture there. i think the long-term trend, like with the hiring of hugo barra, you will start to see more global talent coming onto the platform and scaling up the company. >> there have been comparisons to apple, it looks a lot like the iphone, some aspects have been copied -- >> we did not say that. >> some people have said that. >> is there any truth to it?
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>> they have come with their own flavor. i would say it is, pound for pound, one of the best phones out there. they really focus on building something based on essentially a live operating system. they have these users telling them what to do, and that is a fundamental difference between the design model. it feels like he set out to create something that was economically feasible for chinese consumers. he knows exactly what consumers want to buy. un created an ecosystem where every consumer can voice
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opinions on a weekly basis. people get recognized. >> how much of the local love is just like a deep-seated desire to have a local chinese favorite? >> there were a lot of local brands. lenovo, a lot of reputable firms. xiaomi came out with the way to get so many people involved that it was really special. we will continue this conversation after the break. coming up, they made their first waves outside of china when they poached. o barra.they poached hug ♪
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edition ofa special bloomberg west. many people have never heard of hugo barral the day said he was leaving for the chinese upstart. how did they convince them to make the move? we are back with two early investors who influenced his decision. i know you are the one who connected to go with lei jun and xiaomi. how did you do it? >> it started with an e-mail. hugo.ow he is doing very well at google because he's such a key manager. he gets a lot of recruiting.
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we talked about it. the world is you worse. you can do anything. you are in a great spot. do something incredible. the opportunity was, could you take this company global and be the ambassador for the face of the sun brand? -- this young brand? the ball started rolling. it took about one year. harmonization of opportunity, culture, timing for the company. the company had to get to a certain scale where hugo could be employed. all of those things have to fall into place. >> how much is he going to adjust the business model? incredibly well in taiwan. interaction is something that precedes itself.
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originally, it will be harder for you go. hugo.der for i think he is perfect for this company to expand internationally. >> he's is about to start getting more ambitious. india, brazil, mexico. that is a long supply chain. what are the prices going to start to look like? >> they have built a global supply chain. they have plants in mexico. brazil.om mexico to india will be coming out of facilities in eastern asia. choices in india will make it easy for xiaomi to penetrate. >> can the brand translate as well as a dozen china to other
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does in china to other countries? isthe business model, which the efficient, sustainable, scalable -- can they put the pieces together and customize internationally? >> we had an interesting quote from lei jun. >> i'm not that interested in being a big company. i hope to be a good company. focusing seriously on a few products. this is my personal goal. i hope to have a small company where i can be on the front line of the product line. i have no interest in being a boss. >> what? >> the company raised $90 billion. at $10ue of the company billion. what is the capital situation now? is cash flow and
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net income positive. he will be raising money only to price the stock. is a way to value the company when recruiting executives. i laugh at that segment because he's very modest. xiaomi can be a gigantic company. >> i have heard the russian buying privateen shares. has that repriced the stock? >> there are rumors that it's more than $10 billion now. >> we don't want rumors. >> we haven't confirmed yet. >> what do you think is next for xiaomi? will it go public? >> i think it keeps going. team to findhe
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that narrative. >> they have a phone, a tablet, a smart tv, which apple does not have yet. are we going to be seeing more smart devices? a family of other things? >> don't think there is any boundary to their ambition. the brand is very malleable and ansive beyond the phone. >> in his letter to employees last year, lei jun said he was saying imitation from lenovo. selling low-priced handsets online only. what does that mean for xiaomi now that the cat is out of the bag? i can't imagine samsung will let xiaomi come into the market and it. the pric underprice
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t.aomi the >> they have come with an internet way of doing things. others will have to adjust accordingly. google inft can beat search -- >> there is the quality of the brand. they have achieved the scale with that community of users. it is not just a producer of phones. onis a life platform -- live form. -- live platform. everything will be internet-enabled. china is the manufacturing center of the world. can xiaomi have a family of gadgets?
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,any people design in-house selling on the mi ecosystem worldwide. thank you for sharing your slice of the xiaomi story. the comparisons are thrown around all the time. is xiaomi the apple of china? we will make a conclusion, next on "bloomberg west." ♪
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>> welcome back to a special edition of "the merck west -- bloomberg west." sent shockwaves
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throughout the world when they started out selling apple in china. how did they sell more smart phones than the iphone? they just took aim at apple's ipad. how similar are the two companies? can they pose a real threat to apple outside of china? stone.hnson and brad you they have an edge because they have an mascot? for $16.ell these fans ands a lot of brand loyalty in china. they sell things other than phones. >> this is a tech company with chinese characters. the says as much about apple in china as it does xiaomi. 5c is $700.seve
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easy for xiaomi to come in and underprice it. had its handreally behind its back in the chinese market. they have not been on china mobile until just recently. they have not had the freedom to open a business in china like they would. on a global basis, you're apple -- those numbers are not even close. >> they are opening china retail stores. they have the partnership with china mobile now. samsung is the number one smartphone seller in china. apple is number four, behind xiaomi. i wonder they have what it takes to get to the top. the challenges
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supply chain. they sold 18 million phones last year, but they left a lot of customers disappointed. those phones are hard to get. the mi3 is only now fully available. there challenges execution. getting the suppliers to produce these phones. terms of overvaluation, is maybe $10mi million. the interesting comparison is how the business works. not what the business is today. >> the brand as it compares to apple? >> in china, just as strong. outside, not even close. rising, and rising fast. how high will it go? that does it for our special, xiaomi rising. ♪
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>> it is the only game the whole world cares about. >> it is the simplest of games, the most democratic. >> two companies care about it very much. adidas and nike. >> we are in the football business 365 days a year. >> there are plenty of ways to get your game out on the field.

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