CEO Daily: Friday, February 19

The release comes at a critical moment. Apple this week decided to put its vaunted reputation to the ultimate test, launching what my colleague Geoff Colvin correctly calls an epic battle with the U.S. government over the encryption of its smart phones.

The government has chosen its test case wisely. It is asking Apple to unlock the iPhone 5C used by Rizwan Farook who, along with his wife, slaughtered 14 people and wounded 22 others at a holiday party in San Bernadino. Who would dare withhold evidence in such a case? Donald Trump calls Apple’s stance “disgraceful,” and Trump has proven that he has a good sense of the public mood.

Cook is arguing that this is not just a business issue, but one of fundamental political rights. He is building a legal team – Ted Olsen, who won the Citizens United case that struck down campaign finance laws, and Ted Boutrous, who frequently represents media organizations – that suggests he is going to argue encrypted software is protected by the First Amendment’s right of free speech. That’s an argument that could make its way to the Supreme Court – perhaps reaching it next year, when Antonin Scalia’s replacement may swing the balance.

Silicon Valley companies – Facebook, Twitter, Google – are lining up behind Apple in this fight. But the law enforcement and intelligence communities are in lockstep on the other side. Manhattan District Attorney Cyrus Vance said yesterday he now has 175 Apple devices he can’t access in criminal investigations. Senate Intelligence Committee Chairman Richard Burr has proposed legislation that would impose criminal penalties on companies that refuse to unscramble encrypted messages.

Can Apple’s – and Cook’s – vaunted reputations survive this battle? External events – like the shooting in San Bernadino – will matter. This is a big one that bears close watching.

More news below.

Top News

• Pope Francis wades into 2016 race

Pope Francis, not exactly a stranger to the American political scene, has weighed in again – this time giving a very direct answer to a question about Donald Trump's plans to deport undocumented immigrants and to build a border wall. "A person who thinks only about building walls, wherever they may be, and not building bridges, is not Christian," Pope Francis said in a pointed statement. While Pope Francis declined to say whether American Catholics should vote for someone with Trump's views, he is essentially questioning Trump's ethical core. Trump shot back with a quick statement minutes later, calling Pope Francis "disgraceful" and claiming he was proud to be a Christian. Time

• Weekend elections pressure candidates

Two presidential contests on opposite ends of the nation are coming down to their final full day Friday, ahead of weekend elections that could help shape the tone of the Republican and Democratic races. The six remaining Republicans face off Saturday in South Carolina, where Donald Trump holds a big lead in the polls, while Hillary Clinton and Bernie Sanders are competing in the Democratic Nevada caucuses. Meanwhile, former mayor Michael Bloomberg spoke at a book party and elaborated on why he was considering a third-party bid: "This really has been a race to the extremes," he said. Bloomberg

• Tech giants join Apple in FBI fight

The top executives at Twitter, Whatsapp and Google have all made statements this week in support of Apple as the electronic gadgets maker faces a major legal battle after a California judge ordered it to help the FBI in an investigation of the San Bernardino, Calif., shooting. The battle between the FBI and Apple involves privacy: CEO Tim Cook says Apple is against building a "backdoor" into its products for government (and others) to exploit. Notably, Facebook – which owns Whatsapp – also issued a statement of support. Fortune

• Gucci gives Kering a boost

Kering – the luxury goods and footwear group that owns Gucci, Bottega Veneta, and Yves Saint Laurent – reported a big 16% jump in fourth-quarter revenue as the Gucci brand performed particularly well in the final months of 2015. Sales were better than expected at Gucci, which is known for its double-G logo handbags that had fallen out of favor with the fashion crown in recent years. “Gucci has come in with a significant number of new styles that are starting to turn heads—at the same time, it is benefiting from promotions on its former collections,” one analyst noted. Wall Street Journal (subscription required)

Around the Water Cooler

• E.U. set to approve Dell, EMC deal

Dell's blockbuster $67 billion deal to acquire business technology giant EMC may have crossed a key hurdle on Thursday, as Reuters has reported the European Union's antitrust regulators are slated to approve the deal without demanding concessions. The report says the European Union officials will issue a ruling on the acquisition by the end of February. Why is this noteworthy? EU antitrust regulators haven't been particularly sympathetic to giant corporations that they believe hinder competition. But analysts have been worried about if the deal could even close not because of antitrust worries, but in light of a weakening and tight credit market. Fortune

• Nordstrom pulls back on tech spending

Nordstrom now gets 20% of sales online, up from 8% just five years ago, though the growth came at a cost: the upscale department store had to invest in new distribution facilities and equip stores to handle online orders. This year, Nordstrom is planning to spend $300 million on tech and e-commerce. That number sounds big, but it is the same amount as last year, when those investments rose 35%. Why the slowdown in tech investments? One factor is the disappointing forecast for the first half of the new fiscal year, including the expectation that profit on a per-share basis would drop 30%. Essentially, tech expenses have grown faster than sales and Nordstrom is acknowledging it must react. Fortune

• How P&G plans to fix its China business

Procter & Gamble admits it made some critical mistakes in how it approached the Chinese market, and the consumer-products giant has a plan to fix the misfire. P&G boss Dave Taylor, speaking at his first investor presentation as CEO of the maker of Tide and Gillette, called the company's performance in China "unacceptable." The problem? P&G misread the local appetite for its premium products, which hurt the company's ability to charge more and let rivals take market share. So the company is expanding its higher-priced offerings there, including premium diapers and upgrades to Tide. Some analysts warn that it will still take a few years to stem share losses. Fortune