Transcription
So, let's start with something small. Google and Apple.
The Google Antitrust case was a long-running saga that had a multi-year runup to the judge finding the payments that Google made to Apple to be illegal. It's 20 billion a year. Those payments were essentially bribery.
Let's talk cable. I want to talk Comcast and Charter. Let's go to wireless. There's so much going on in the world of advertising right now.
Let me start with ad agencies. There's going to be massive disruption in elements of the ad agency world. We should care about the health of the economy and the future employment of all our our family and friends. We've seen presentations from people who are developing AI enabled tools that compress 40 jobs into one click of a button. So what you're saying is there are higher scores of industries people can lose their jobs. There's something not quite sitting right with me right now.
[Music]
Hi, this is Steve Eisman and welcome to another episode of The Real Eyes Playbook. And today I have two guests from one of my absolute favorite boutique firms, Muffet Nathansson. And I have with me, Craig Muffett and Michael Nathansson. Welcome, gentlemen.
Thank you for having us.
Thanks for having. So, just to give people an idea of the breadth of just the coverage of just the two of you because your firm covers a lot more. Um, Michael covers Google, Trade Desk, Snap, Roku, Meta, Interpublic, Omnicom, and WTPP. And of course, you have opinions on Netflix and HBO, which we'll talk about. And Craig covers Verizon, AT&T, T-Mobile, Comcast, Cable One, Charter, Altise, Apple, and what's left of Dish. So, there's so much to talk about.
So let's start with something small, Google and Apple. So if we were here, I don't know, six months ago, your firm had a sell rating on Apple. You know, everybody was scared to death about the antitrust situation with respect to Google. Everybody was scared to death by the fact that Apple makes 100% of its manufactures 100% of its products in China. where they assemble them is a different story. But the actual manufacturing takes place in China. So everybody was scared to death about the whole trade situation and then the world changed. So why you guys talk about like where what happened and where are we?
Well, the one thing I would say first of all, thank you for having us on. This is for us to be here.
The one thing I would I would quibble with and what you just said is the reason we had a sell rating on it is the world wasn't scared to death about those things and they should have been.
Yes. Um when when the Google Antitrust case, for those who who weren't following it, this is a was a longunning saga that had a a multi-year runup to uh the judge finding the payments that Google made to Apple, which represent 20% of Apple's operating income, and it's 20 billion a year.
20 billion a year.
And it's like a 100% margin.
100% margin. About 20% of the operating income at Apple and the judge found those payments to be illegal.
Right. The judge in his preliminary opinion in well in the in the ruling um the the judge ruled that those payments were illegal and so we were going into the penalties phase for so what do you do about that the fact that those are illegal and by the way it wasn't it was pretty clear too he was like they're a monopolist they've abused I read the opinion it was there was no he wasn't quibbling about it.
And those payments um our friend Ben Thompson argued I think pretty persuasively that um those payments were essentially bribery.
Right. They were It was Google paying Apple not to be in the search business.
Correct. Um we'll give you $20 billion uh for search more than it than it can justifiably be said to to be worth.
And you stay out of our business.
And you stay out of our business. And the judge found that to be a patent violation of antitrust law. And so when first when the the Biden administration came out and said, "We're asking the court to uh to stop those payments." the stock Apple stock never reacted.
Right?
Then the judge Meta found Apple or it found Google guilty and said those payments are illegal and the stock never reacted. The Trump administration came out and reiterated that we agree with the Biden administration that those payments should be stopped and the stock never reacted. and we put a cell in the stock saying it's just irresponsible to to ignore the fact that the courts are telling you that 20% of Apple's operating income is illegal and that and they've given every indication it's going away. The market turned out to be right because at the end of the day and we'll talk about it in a minute but the at the end of the day the judge in that case judge bad decided we're not going to do anything about it. We're going to leave the payments in place because I can't really figure out what I should do. And that's because the world had changed.
And in contrast, Alphabet, Google's Parent Co. was trading at a absolutely low relative market multiple that the market had really worried about chat GPT's impact on Google search. And if Apple was to enter the search business, maybe they would buy a Perplexity. And all of a sudden, what had been a very nice duopoly in operating systems and mobile with Google controlling their side of the street, Apple controlling their side of the street and sharing and search would be disrupted. So the opposite of Apple, our stock, Alphabet was trading very cheaply and people were very pessimistic about the future.
Yeah, Alphabet. So we kept the buy on thinking it's in the stock price at this point in time. Now, we had spent time with uh two lawyers who've argued in front of Judge Meta. One of the things they said to us is that he's not an activist juror. He's not someone who wants to really, we heard this before the decision, he is not that type of judge who's going to suggest remedies that could be disruptive.
We didn't think, for example, we we didn't buy that they were going to force the the devestature of Chrome and things like that.
Yeah. So, that was.
But you thought he was going to stop the payment.
We certainly thought well either stop it or limit it. Um the fact that that the decision was we're not going to do anything at all was was shocking.
It was shocking.
Yeah. It was a gift.
He basically the opinion basically said world's change I give up.
Yeah.
That's basically what said.
Yeah. You know it's really interesting data point during the case during the remedy phase right. The case ended a year ago August. The remedies were were happening over the summer. Eddie Q, I guess the senior vice president of services at Apple, gets on the witness stand and he says to the judge on the court, "We're starting to see for the first time searches on Safari turn negative."
I remember that.
And the stock and Alphabet stock dropped 8% that day.
I remember that day.
And that was another gift from heaven because it probably said to the judge, "Well, the market is seeing something in search that I don't understand because I'm just looking at the historic record, right? But clearly Chad GPT and AI is disrupting the business in a way that I'm probably too slow to react to. And by backing away from putting his finger on the scale, I think it's a great outcome for Alphabet. But it also is tied to the public markets really looking at Google search as a dead business.
There's a slightly less charitable reading of the same turn of events though that the judge instead fixated on AI as an excuse to not have to do anything new. It could be a combination of both and and said I I'm afraid I'm scared to death of screwing this up and and I did clerk for a federal district court judge one time in my life and I will tell you that the one thing that federal district court judges do not like is being overturned.
Yeah.
It's an embarrassment to them.
Yeah. So, he was going to go out on a limb regardless. This gave him a real easy out not to go out on a limb.
Yeah.
So, let's let's press Apple for a second.
Okay. So, now they're still getting the 20 billion, but is but they still have absolutely no AI strategy whatsoever as anybody could tell. Sales of the phone are doing a little bit better than people thought. So, the stock had a bit of a rally. What do you think they're going to do?
So, this is still a device company.
Yes. Services are great and the services business is is growing nicely, but what's priced into the stock? So, first let's talk about it as a stock. What's priced into the stock is the expectation that there is a super cycle. And the original premise of the super cycle. Remember, this is a stock that ran up enormously last year into the worldwide developer conference with the unveiling of the AI strategy, right? And the the market had rightly sused out, oh, there is a magnificent market opportunity for Apple here because Apple controls your calendar. Apple controls your wallet. Apple controls your email and and controls your contacts. And so there is the there is an opportunity for an agent on your phone trusted by Apple because people trust Apple more than any other tech company by a country mile to integrate all of that and be your AI agent. So I I think there's no question that the opportunity to integrate all those things is a real opportunity. The question is who's going to do it? Because we've got Open AI trying to do it. We've got uh anthropic probably not. Anthropic seems to be skewing now more enterprise. Um, but there are all sorts of companies that are trying to attack the same opportunity.
Yeah, but how are they going to attack the opportunity if they don't make a phone?
Exactly. Well, no, you I think that's one of the problems for Apple is that all these you can if you want AI on your Apple phone, you can get the app and and you can use chat or anything else, but it's not integrated into the whole system.
It's not fully integrated yet. But remember, it was a little simplistic to think that Apple was going to control all that anyway because I I'm a typical example. I have an iPhone. Um, and but I don't use Apple for my contacts. I use Outlook for my contacts and for my calendar. I use Google Gmail for my uh for my mail um or my Outlook for my work mail. And so Apple doesn't really have that sort of privileged position as you might think. And and what's becoming clear is as they fall behind in AI, they're doing what any sensible company would do, and that is they are increasingly moving to partnerships and uh and that's all fine, but the partnerships that they're looking for are almost all cloud-based. Uh remember, most of the activity that's going on right now is cloud-based AI AI, not device-based AI.
Correct. And the problem is if it's in the cloud, it'll probably work even better. But there's no longer any reason to update your upgrade your phone if it's going to be in the cloud. If it's in the cloud, any phone can do it.
So this the thesis that we're going to have a massive upgrade cycle could be wrong.
It looks wrong.
Okay. Well, you know, it's funny. I'm not as bearish on the the lead being lost at Apple. I think the judge meta decision allows Google and Apple to work together on AI and Gemini is a pretty strong model. And there's a history of Google and Apple working together as we talked about. I think the outcome has to be making Siri much better. And I think Siri will be a white label Gemini and all of a sudden it'll be I'm not sure if it's a super cycle, but I think the use case for Siri gets better as time goes on because it's terrible now. It's awful.
We all joke about it, right?
But it's not like it's it's not fixable, right? It's fixable. You see what Chad GPC is doing and Gemini is doing.
The products are great. I just think you haven't yet had the partnership get to that point which which is Siri is just white labelled.
I agree. I just again I just how much extra memory do you need in order to run it? If by the time it gets there if you've got 8 gigabytes of memory and pretty much 3/4 of the base of phones that are out there, then there's not there's not a big super cycle.
I like there's like you know we talked about streaming wars all these years. There's this developing set of uh battles going on where your point about the phone. You've got Meta who wants to make a device. Open AI wants to make a device.
What kind of device does Meta want to make?
We don't know. It's probably some type of ear pod glasses clearly, right? They're making those now.
I know Open AI wants to make a device. They don't think it's a necklace. They don't think it's glasses. Maybe it's earpods as well.
What's that going to do?
Well, it's going to let you talk to a It's going to have AI in your head, basically. You know, do I want AI in my head?
I don't know. You walk down the street, you say, "This guy looks familiar. Who is this person?" Oh, that's Steve, right?
There are all kinds of use. My uh father-in-law is uh is legally blind and macular degeneration for for 40 years now. And uh and it's gotten progressively worse. He just got the meta glasses and he was literally in tears about how life-changing it has been for him really because he can open the refrigerator and say, uh which one is the heavy cream or what's in front of me or um or I'm just looking for uh a glass of water or he when he there's an Uber point me to the uh to the blue Lexus or uh and it doesn't and it's so life-changing for someone who's who's visually impaired. And it's and I think we we shouldn't underestimate the number of use cases for for new technologies like that. They the technologies come out for one purpose, but they get used for all kinds of different things. What I've learned over the years the hard way is to not dismiss products that have, you know, mass quick adoption like Open AI. Do not underestimate the end the end use case for them, the business case for them.
Okay? We we find a way somehow. All right, let's switch gears to something that's depressing. Let's talk cable.
I thought New York football teams talk. I like the Yankees. You open a door to a lot of interr Comcast and Charter because for years and years and years. These were stocks that that people owned. They put it away. They never thought about it. They might have looked at it a year later and would say to themselves, "Still good. Still making lots of money." Brian Roberts would have a stock chart S&P versus Comcast as in their debt. He outperformed for decades until he didn't.
Okay. So now Comcast and Charter sell at like seven times earnings which must be a terrible embarrassment to them. They keep losing customers. So talk a little bit about the a the fundamentals and if you were Brian Roberts what would you what would you say Brian Roberts dude the the stock seven times earnings. You got to do something.
Yeah, it's so the the fundamental story is pretty straightforward, right? I mean, they they were at one point uh let's let's not go back all the way in to the days when they were video players, but when the market finally figured out that they were going to win the broadband wars, they were something close to a monopoly in 75% of the market and and there was a fiber competitor in 25% of the market. And then AT&T started overbuilding fiber and uh and then others started overbuilding fiber and interest rates came way way down during the pandemic to the point where suddenly infrastructure builds uh with a close to zero cost of capital seemed like they made sense to people and and infrastructure builds became the cat's meow of private equity investment. And so you suddenly had huge amounts of fiber construction in the United States competing with cable.
Um, and the narrative, by the way, what's better, fiber or cable?
The narrative is that fiber is better. The technical reality is they are interchangeable. There really aren't any meaningful distinctions between a fiber network and a and an HFC or hybrid fiber coax as it's called network. In fact, in in other countries, there have actually been lawsuits uh because the cable company started calling themselves fiber and the the fiber overbuilder sued them and said, "You can't call them fiber. They're not fiber." And they won in court because the cable network actually was more fiber than the fiber network was. Um, and uh closer to being an all- fiber network than the supposed fiber network was. Technologically, they are largely the same. The debate now is how much of the country is going to be overbuilt by fiber.
Um, the the bears on cable and the bears are clearly carrying the day for the moment believe that 80% of the country is going to be overbuilt by fiber. And so there'll be a competitor in in eight out of every 10 cable households. And by the way, you have wireless broadband or fixed wireless access um that is now suddenly spread like peanut butter all over the country. And so that's going to take 5 10% of the market.
And so it's a declining business.
And so they view the cable b the cable broadband business or internet access as a declining business for cable just like video was 10 years ago. There's a completely different narrative, by the way, that I happen to ascribe to that says first, you can't overbuild 80% of the country. One of my favorite stats is if we we're 50% overbuilt today.
Are we?
Something something in the in the range of 50% fiber.
The It's not We haven't perfectly built the densest 50% of the country and left the next 50 alone, but it's not that far from that, right? I mean, that's the reality. You build places, you build fiber where it's the densest. The seventh decile of population density of the United States, that is the 10% of the country that lives in the the seventh decile, um, is one-third as dense as the as the density of the fifth decile. So, if you're going to go from the fifth to the seventh and the cost per mile stays the same, the cost per home pass is going to triple. Okay? And nobody's making money if the cost per home triple. So I I know everybody says, "Yeah, we'll get to 70, 80, 90."
Okay, so let's say let's say the building stops at 50. So what's what is is there a bull case?
Well, then then I think then you reach something like an equilibrium uh in market in in broadband and the cable business isn't the cable broadband isn't a growing business anymore for subscribers, but it becomes a steady state business.
Okay.
Pricing is still growing, call it 3 and a.5%. So you got 50% of your business with zero unit growth and three and a half% pricing growth. So call that uh 1 and 3/4 or something like that for the overall base. Um, and then you've got a wireless business for the cable operators that at Charter it's now 6% of revenue is growing at 30% a year. So that's another 180 basis points of growth. I'm losing a little bit for video, but overall I'm talking about a low to mids singledigit um growth business that's priced as if it's going to shrink two% a year. Um, and so it's a these are crazy cheap stocks. Crazy cheap stocks.
Yes. But as I like to say, in good times, people like stories. Yes. And in bad times, they focus on balance sheets. And without question, we're in good good market times.
Yes. And so if you're at a cocktail party and someone says to you, "Hey, hey Craig, pitch me owning a cable stock. Give me a story." Is there a story?
The the story Well, I Yeah, I mean, the story is not as bad as you think. It's never a compelling story. That's not a great story, you know, in process. But but but the the story I think there is a story and that is that we're h hurtling toward a world of convergence where where increasingly people aren't buying a cell phone plan, a mobile plan and a broadband plan. They're buying a connectivity plan that works everywhere in the house, out of the house, whatever.
Right? AT&T is building fiber in a lot of places, but at the end of the day, when they've built fiber everywhere they can possibly build it, it will still be less than one out of every four homes in America. What the hell kind of a strategy is it to say, I've got a solution for 24% of the homes in America. And Verizon will have a solution for 18% of the homes in America. and T-Mobile will have a solution for today one and a half% of the homes in America, but maybe eventually call it four or five. Cable has a solution for everybody. They can offer a a broadband plan and a wireless plan to every customer they have today and and and they can do it by the way at a huge cost advantage. So if the world really is going in the direction of convergence, cable wins and the Telos lose.
So what do we have to see for people to all of a sudden say, you know what, maybe there's a story here because every quarter it's the same story. They lose customers and it looks bad.
You know, I don't think you necessarily need to see cable broadband subscriber losses stop and reverse. I think that's probably too much to ask for. I think you need to see them getting meaningfully smaller.
Okay. If the losses get meaningfully smaller, it allows you to focus on the other parts of the story, especially wireless, which is the best part of the cable story.
And do you think we're anywhere close to that?
I think we're close. I think we're close. And but to your point, I think it's representative of a market that doesn't want to invest in slow growth, no growth businesses.
This is you, you've done this as long as we've done this. This feels like the late 1990s terms of just bullcases and narratives. And there's, you know, we saw this too. It's like I I we used to work at Bernstein together and I gave Bernstein some of my family, my parents' money in the 90s when we worked there.
They were value shock.
Terrible performance.
Terrible. So I went to see Roger Herthog, the head of Bernstein's, you know, number two guy at Bernstein. I said, "What should I tell my parents? They've missed on a decade of not owning Cisco, right? JDS Unifiase, America Online." And he said to me, "This too shall pass." And I think that's the mentality. It's like, well, this will work our way. But the problem Craig and I have is the people who used to invest in value are no longer in business. They're gone.
Exactly. I mean, by this way, I always go back to my cocktail party situation. You're at a cocktail party, you're talking stocks. Are people are people going to want to listen to about Netflix? Because that's like a great story. or a story about how broadband losses are going to slow.
Yeah. And so and so we maybe we'll grow revenue two and a half three%. Right. Like I'm asleep already.
Except if you're Okay. So I'm Brian Roberts. Okay. I got to do something more. I if I'm Brian Roberts to get my stock going then just have a quarter where instead of losing I don't know 100,000 subs I lose 25,000 subs. That's that's nice. But.
Well, part of it is put your money where your mouth is, right? Um I managers uh and owners get blasted for buying back stock, but sometimes you have to put your money where your mouth is and buy back stock. And uh and you know, I I I think one of the other things that that Michael and I lament about the market today is that there really aren't the same kind of price discovery mechanisms that there used to be.
Meaning.
Um M&A, it used to be that if a business was really misvalued by the public market, then the private market would take it. they take it private because most of these things were too the the companies were too big. There's been so much consolidation there really aren't take private opportunities. That's not necessarily true of cable anymore. The valuations have gotten so low that they aren't crazy to imagine taking these things private. You know, one small example, but this tells you how completely out of whack it's gotten. Cable one is not a good operator, right? It's their their prices in broadband are too high. Their operating results are awful. Um, but they're generating 33% or I should say they're priced such that they have a 33% free cash flow yield. Wow. There's no risk of them going bankrupt. They're they're their balance sheet. They're they're levered, but they're not overlevered. They're they're um not in at risk of default.
At some point, a private equity guy has to come in and say, "Wait a second. You're telling me I can buy this thing and clip a coupon for 3 years and be money good and then still own the asset um for nothing. And um and then they may be coming.
So I think you'll eventually start to see the private equity world say and by the way the other way to think about it is I I mentioned before that private equity is pouring money into all these fiber overbuilds everywhere. A typical fiber overbuild is costing something like $4,000 per connected home. It's about I won't go through all the math, but figure, you know, 12,300 bucks per home passed and then you eventually get to cost per connected home. So, I could be building at $4,000 per connected home or I could buy uh cable 1 for $1,300 per connected home. At some point, if I'm whether it's Apollo or or Blackstone or somebody else, I'm going to say that doesn't make any sense. I should be putting money by into buying one of these small companies um and not just pouring more money into the ground in these speculative fiber bills.
Yeah. Yeah. If you really want to kick up a firestorm, ask Craig about NBC inside Comcast because Brian has diversified into media and judging by the stock price, it's really not worked, right?
No.
No kidding.
Right. So, it's a subject we don't really ask anymore because the answer is we're not going to diversify. We're not going to do anything major.
Yeah.
Right. I mean, you you know better than anybody, right? The reason companies have a a conglomerate discount is because if I'm an investor and I want to take the free cash flow from the cable business and invest it in pharmaceuticals this year and and energy stocks next year, that's my privilege, right? If Brian Roberts diversifies, he's going to decide what happens to that free cash. He's going to invest it in media. What if I don't want to invest it in media? And so so inevitably there's going to be a discount when you create a conglomerate and and that discount's not going away because um unfortunately I think for the shareholders there's never been any industrial logic or strategic logic for why the media business and the cable business are under the same roof.
Just I I'll give you a rationale that's what he liked right now but by the way you could go back into the annals of of history when there was logic you know John Malone saw what that logic was and that logic was if I own both of them I can extort one side or the other um yeah bill liberty um but then once that became illegal and there it was one of my favorite quotes ever was from Rupert Murdoch who um uh who said you know once they put in all the laws it took all the fun out of being vertically integrated um and so there was no longer any reason to be vertically integrated he he tried to get his hands on Direct TV and then sold it because it just didn't making sense anymore. And unfortunately, that logic was already gone by the time Comcast was turned into a media and distribution conglomerate. There's never been any strategic logic for why they're together. I don't think it's likely they're going to separate, but it is what it is.
Okay. All right. Let's switch gears again. Let's go to wireless.
Okay.
So, you tell me.
We're gonna talk and then we're gonna go and then we're gonna go to advertising.
Okay. So, I've owned T-Mobile for a very, very long time.
You're a lucky man. It's been a fantastic a great stock. And the basic thesis of T-Mobile has been that it's it's the least expensive network. They're the most efficient operator. They operate the best network. And so, every year they pass on some of those cost saves on to their customers and they keep taking share. Is that story still intact?
Um, please tell me because I have a big position.
Well, yes. Yes, but um so this was my number one stock pick for 12 years. Um I I loved T-Mobile and I finally downgraded it. Not partly because.
When did you downgrade it?
Uh about a year and a half ago. And it and it has had another run since.
Um, yes, it has. Uh it or maybe it was even a little longer and it and it turned out to be the right call to downgrade it. It traded sideways. I I just downgraded it to neutral and said it was finally fully valued after 12 years of rallying. Um, and it it traded sideways for about a year and then started to rally again. The problem with with So there's two problems. One is eventually the valuation catches up with the reality. So yes, it's the the best operator and yes it double and uh but but it sells at double the multiple, right? And if you think okay so what's embedded in double the multiple it is a terminal growth assumption that says I am going to grow at three or 4% faster than the industry I'm in forever.
Correct. Now that's a hard thing to do right you can forever is a long time when you have reasonably low interest rates like we have now right and so ultimately you say it's it's now priced in um and the I I still agree that the story is still intact.
The story is still intact. The valuation prices it very fully. And the problem and one of the reasons we've been cautious about the wireless um business for the last 8 months or so um is this is a business that especially T-Mobile still demands from the market uh that you deliver free you deliver uh subscriber growth uh post-paid net ads especially as they call them for postpaid phone subscribers. It's an industry that generates, call it, eight million um phone subscribers every year in the United States. Way above the population growth rate, by the way, which is already a little inexplicable given that it's a fully saturated business. It ought to be growing at about the population growth rate. But out of that 8 million subscribers that are being added every year, we're reducing immigration this year by some estimates by 2 million people. um we're going to reduce student visas by another quarter of a million to half a million. Okay.
So, you've got two and a half million fewer people getting phones this year than last year. And yet the sub the expectation for subscribers is to be actually slightly higher than it was last year. And so we just said that's a bad bet. Now it hasn't shown up yet and maybe maybe we'll be wrong and they'll just keep manufacturing net ads out of out of vapor. But it just seems like a bad bet to say in an industry that grows by eight, if you take away two, it's probably not going to go up to nine.
Right.
I think I learned that in third grade.
Yeah. But you know what? It's funny because ask watching you ask Craig the question is has a story changed, right? What I think's happened in our world since we started being analysts is evaluation, you know, ceilings are no longer a thing as long as the story is intact.
Exactly. Like like I said, today we live in a world of stories and the fact that a stock has a 40 multiple where you once thought it maybe should be a 25 multiple is not relevant in this world until the fundamentals change.
Right. And if you ask me again like on a Netflix which I you know Robert covers for us we have a buy on it now but all those years I'm like I can't see paying 40 times ea da.
Right.
For but nobody cared.
And no one still cares about any of this stuff. You know, it's I I'll tell you a funny lesson that I learned early in my career um in that as a cable analyst when I started with cable um on Wall Street in in 2002, it was still viewed as sort of two twothirds of the people who covered it were were media analysts and one third were telecom analysts. Today it's all telecom analysts and it's moved out of the media world. But.
Thank God.
I I so I would go talk to clients at you know the Fidelities and the Wellingtons and the T-Rose and that sort of thing and it dawned on me, oh I get it. The telecom analysts were engineers in college and the media analysts were were liberal arts majors in college. And so the the the media analysts want to hear a story and the engineers want to hear the numbers. And so once you knew that, you would go in prepared for each meeting completely differently. Um, you realize that this is a media um meeting. We're going to be talking stories. This is an engineering meeting. We're going to be talking numbers. Um, and it it was all you could if you saw what the what the byside analysts um major was in college, you know.
The stories are winning.
Now, no question. Before we get to advertising, we got to talk about what happened to Verizon today. CEO got canned and they brought in Dan Schulman, who used to run PayPal, who did not do a good job running PayPal because I that's a stock that I know pretty well. And now he's CEO. What do we know? If we know anything.
We we know very little, but but I think we can surmise. Um Dan was on the board and Dan is 67 years old in an industry um where historically due to the old longtime legacy of once having been part of the Bell system, these companies have historically um looked for retirement at at 65, right?
So So you can just take those two pieces of data and say this is obviously not a an orderly transition. this is not uh we thought it was time to move on from Hans and so uh and they oddly they didn't name Dan an interim CEO which made sort of obvious that he's interim but um okay.
Uh but they it was surprising to me that they didn't name him but it it has the feeling that this was quite abrupt um and uh that this if if I found out and I admit I don't know so this is pure speculation but if I found out that no one had any idea this was coming a week ago, a week before it was announced. I wouldn't be shocked. Okay.
Um it feels like it happened that quickly. And by the way, uh they then changed the date of their earnings call.
Um, and pushed it back by a week.
Wow.
Uh which I was surprised that the market didn't react more negatively to that because usually that's a bad.
Interesting earnings call.
Yeah. All right. So, let's go to advertising. I'm going to show it to the world.
Here it is. Report two days ago. I actually read the whole thing.
Poor guy. Um, no, it was very interesting. Talk to us about I mean there's so much going there's so much information in this report and so much going on in the world of advertising right now.
Give us a little flavor of what's going on.
It's actually head spinning, right? Yeah. Um, think about.
Before you before you go. Yes. Some of these companies, Omnicom, Interpublic. It's almost like you your those companies were companies you also could have owned for years and not thought about it and a year later you'd come back and say, "Ah, it's up 20%. Wonderful. I'll think about it next year." And now.
They act like death.
Yes. True.
Yeah. There's a bigger statement there about ad agencies, right? So, let me start the let me start with um ad agencies. Yes. Okay. Omnicom WPP.
Interpublic.
Why should we care? Right.
We should care as citizens of New York City. We should care about the health of the economy and the future employment of all our our family and friends. There's going to be massive disruption in elements of the ad agency world. Right? We've seen presentations from people who are developing AI enabled um tools that compress 40 jobs into one click of a button, right? You think about just the process of creating ads, responding to RFPs, putting together marketing plans, right? That could just be done by AI, right? So, we'll start there. Right? So creative messaging means who who's going to make my ad? Hey Mikey, he likes it. I mean I mean AI is going to make that ad.
There's gonna be a few people with a finger on the trigger putting some creative together, but that creative is going to be tested as it is now in on Instagram and Facebook and YouTube and they'll know instantly which is the best ad for you, right? Then they'll know what's best for Craig and they know what's best for me. So the earliest like tip of the spear um AI impact we're seeing is right now on digital advertising right so you see the results out of meta how strong they are is because they're building better more performing ads that are better targeted with greater relevancy right so that's going to be hard to to win that if you're not Meta or YouTube Google long-term or Amazon right so the people investing in AI are seeing dividends right way on the ad side. Okay. At the same time, and that's really more performance marketing, which is small and medium enterprises, people who are trying to sell cups, said the real eyesman playbook. You know, you're not seeing Coke and Pepsi yet playing performance marketing because they're trying to build brand equity, right? What's a Coke? What's a Pepsi? Why should I buy drink it now? That typically has been the domain of large brand driven top of funnel as we say you know linear TV, print in its day where basically trying to sell you on a brand to connect the brand and all its qualities to you the consumer usually needs sound emotion to do it right but you know the top of the funnel is dying quickly right look at our cord cutting monitor we used to have 100 million homes in this country pay for TV we're now down to 60 million right Half the country is paying for TV. In five years time, it could be down to a third of the country, a quarter of the country.
What's Coke and Pepsi going to do?
That's a problem, right? So, they're going to have to basically innovate and figure out ways to do it.
And they're not going to do it with Omnicom.
They may do with Omicmp, but it won't be the same. We need a $10 million commercial with all these people singing on a hillside about how great Coke is, right? So, the ad business is fascinating to me because it's in the midst of disruption. And you clearly see that what's left in linear TV and advertising is all sports. The only thing keeping linear TV from dying is the NFL, the NBA, right? Rder Cup gives big sporting events, right? But all the money as we wrote you know all the money is leaving the world to go to five major platforms.
And they are Google Meta Amazon Microsoft and Tik Tok right something like twothirds of all the US ad spending is going to those five companies.
Two say again two of all advertising spending is going to.
Five companies and that's grown by 400 basis points year-over-year okay.
What remains is a third call it less than hundred billion dollars that's not growing right inside that non- growing enter entity are things like retail media which is a new a new idea.
What does that mean? Retail.
Retail media. Good example. If you're in an Uber back of an Uber going home from a night out at a bar, McDonald's will hit you with a message. Hey Craig, looks like you're an Uber going home. Why don't you stop over this McDonald's on 7th Avenue, get yourself a Big Mac, right? You know, you know Walmart. I go on walmart.com or basically they say to you PNG Michael ordered uh toothpaste a month ago from from Crest looks like he needs it now that's hit him with a message as it goes on the website or Amazon right so that's growing massively quickly connected TV which is streaming is growing very quickly but it's all coming out of you know the linear brand driven world so it's it's terrible it's you're basically losing.
So when you go talk to like the Omnicom people like what are They say.
They don't like me. They're like, "Well, what's going to happen is people will spend more on creative messaging and that money is going to be redeployed into more media spend, right? So brands will save money on their creative, right?" And they're going to probably some truth in that, right? There's going to be a reinvestment just more spend on marketing. The problem is you go from a human time cardbased monetization system where I'm giving you a time card 20 hours worked in this campaign times 50 bucks into a SAS model there's going to be disruption right so In public and Omiccom are merging which is like Coke and Pepsi merging right you know Fox and Disney merging which happened Warner Scripts merging happened typically in our world when you see companies that should never have merged you their competitors merge you know there's problems down the road right that's been the history of observing what we've observed for 30 years together, right? So, there's going to be a bottom in these stocks at some point. They're going they're merging in a month or two, but just the headline risk about changing employment trends should scare all of us, right? I had a very short stint in advertising and I saw I remember seeing the same thing when when uh Meta said that you can send your brand logo to us um and nothing else and we will create a fully produced television ad for you um and start AB testing it that same afternoon and by the end of the day we will have the most effective 15 versions um you just thought the agency business is over. I mean just how how can now obviously initially just like every form of disruption the old Klay Christensen model it starts it's going to be the the smaller brands that never had the ability to advertise before and suddenly have the ability to create something that is a fully polished AIdriven ad um on in Tik Tok. that the technology is going to get better and better and better really quickly. And there's just no way that an army of people can be cost-effective against that kind of a model.
And this is going to blow through industries, right? Like.
Think about law firms, think about accounting firms, right? Just think about all these entry- level jobs where people are just doing rote types of skills.
It's going to be gone.
It's going to be gone. You know, youth I saw just say the the employment unemployment rate in the United States today is 4 and a half%. Youth unemployment is 11.
Yes. And going up.
Yes. The irony we joke with this all the time that if you had a a son or a daughter who is a trained engineer and said, "Look, go to
engineering school, learn how to code, right?"
"You know, now they're coming out. Exactly. Yeah."
"Exactly. You you missed the window, right? And when we hear unbelievably disruptive and we hear about the agencies that basically have built these SAS models they're saying like 30% of their engineers will be gone in a couple years once they reach peak efficiency in building out their models, right? It just be reinforced by AI, right? So once you prove that it works, you'll augment it by using, you know, computer, you know."
"So what you're saying is there are higher scores of industries people can lose jobs or not get jobs?"
"Not not scores, there will be ele there will be levels of industries. You'll still need that to your point, the great creative person, the great media mind to plan, but you don't need an entire team around that, right? Exactly."
"And and then the obvious question is what what are the what are the multiplier effects of those lost jobs? Um, you know, people talked for a long time about autonomous vehicles are going to replace truck drivers. And I I heard somebody saying the other day, well, it turned out that didn't happen. Well, okay, it hasn't happened yet, but do you really think that it's not going to happen? And when it happens and you lose I mean already by the way um the that we're going in a different darker direction I guess but the the first place where AI really started to make a difference in jobs was call centers. Um, the very first place. Call center jobs may seem like a dead-end street type of job. They employ a lot of people. They employed a lot of people and they they employed a lot of people in really important times in that um it it was often a job especially post pandemic that you could do from your home and so there were a lot of single and battered women and that sort of thing that said this is my lifeline. Those jobs are going away um and uh and so you wonder as these types of jobs start to go away what happens and and what's the backfill for those kind of jobs? You can't have an economy where everybody is just working in retail stores selling stuff to each other. You actually have to have some some productive jobs and if the you know if"
"podcasting, you know, it podcast it's funny because you know, we I used to spend a lot of time covering media entertainment and there was a report in the journal this week about how many jobs in LA have been lost in media because of strikes and streaming wars coming to an end and consolidation. Right? You think about, you know, a big part of LA was built on entertainment. And that's now changing. And all those people who had lifelines, even people who providing, you know, the food for the shoots or the, you know, the tape, the gaffer tape to do the microphones, they're not working."
"No, they're not working. Yeah."
"All right, let's change gears quickly. We got one more thing. We got to talk about David Ellison. Paramount. He just bought the free press. He just put Barry Weiss in charge of CBS News. I'm sure half the staff at CBS is having a conniption fit as we speak, but he's also trying to buy HBO. What do you think?"
"Well, first I think that um we sure sold our company to David Ellison because um because I think we Yeah. So, I'll keep it I'll put it that way. So, congratulations Barry Weiss. Great. No kidding. Great transaction. There needs to be more consolidation. There's too many streaming options, right? We've been writing about this for years."
"What's the endgame? Right? Okay, we have three people around a desk. We've got Comcast, Peacock, Warner, HBO, Paramount. Of those three, Paramount will be the low least likely to consolidate because in its former state, they had a terrible balance sheet and not much scale. Right. So, we always thought, oh, Warner and Comcast should get together, right?"
"Right."
"David Ellison has upended the most most logical progression what's going to happen, right? By him showing up with and buying power with a balance sheet and buying Paramount, right, and showing from day one he's committed to building a business, all of a sudden Warner looks like a a possibility for him. And by buying Warner's, he would take Warner Brothers Studio and HBO and merge it with Paramount Plus and Paramount Studios and be a top two or three streaming player."
"And by the way, back to Comcast. Ordinarily you would have thought well Comcast is obviously the one that's going to buy Warner Brothers and they fit together like a glove. So that will be"
"Why do they fit together like a glove?"
"One broadcast network instead of two. So no divestiture of the second broadcast network and the a lot of the shows on Warner's are on NBC. Yes. A lot it's a very complimentary Harry Potter theme parks theme park. So there's a lot there's a really complimentary fit there. But I think in this administration you have to concede and I think even the people in Philadelphia at Comcast would concede. Comcast doesn't have a snowball's chance of getting any any transaction approved in this administration."
"But David Ellison does."
"Yes."
"Shockingly."
"Yes. This is this is um a pay-to-play administration. And if the ask the ask for Comcast would not be um you have to put a bunch of money into some uh some investment that's favorable to the administration. Instead, it would be you have to change the the media bias of NBC to be right-wing, right? Um, and you have to shut down MSNBC and you have to do all kinds of things that would cause half the staff to to quit. And so, um there there is really no realistic chance that Comcast is going to be allowed to play in this consolidation."
"Let's talk about HBO, though. Like if I was running HBO and David Ellison showing up with a check like here, take it. This is such a difficult job now. Take take it please. And why is that not happening?"
"That's going I think it's going to happen because I think to to the big picture point there's too many streaming choices, right? You need to take out a competitor."
"And he realized right away probably when he was buying Paramount that this was the first step out of two, right?"
"Right."
"That Paramount Plus needs HBO, right?"
"And all of a sudden you Who's left? You've got Netflix winner, right?"
"Amazon in for a different business, right? Disney winner and now you have a chance. What does Peacock do in a world that HBO and Paramount are together, right? So all of a sudden he's got global scale. Ellison has said rightly so. His future is in sports, streaming, and studio. Studio box checked. You have Warner's and Paramount, right? Pretty damn good. Streaming, yes, HBO on its own is hard. But look, they've got they have things like uh Yellowstone sitting on there, all this content, and then sports, you'll take all the Turner sports and put it on CBS, all of a sudden they're a legitimate company after that combination. They really are."
"So, you think it's going to happen?"
"I think it's going to happen. I think to Craig's point about politics, why won't it happen? Why won't it happen? Right. The issue has always been, well, regulatory and who cuts the first check. David Ellison will cut the check and regulatory seems like not an issue right now. Yeah."
"And I don't think that Barry Weiss, you know, you started with that hook. I think"
"That helps."
"It does. I think everything they've done has said we will be less adhering to a, you know, a point of view that seen as a liberal point of view. We will be down the middle. And that's all you want is down the middle. That's the pitch to DC. That's the pitch."
"Yeah."
"But also, I think we cannot continue with the structure that we have in place. There needs to be there needs to be consolidation, you know."
"No, I agree. is I mean I subscribe to everything but it's even absurd for me at this point how many things I subscribe to. It's absurd."
"I I agree. Yeah."
"You know it's really um it's sad though because I see this and I think Craig sees in his world too. We rode these horses for 25 years. like this was a great sector to cover the best the personality is a great business model just you know the deals and all the news and now it's going to be consolidated down to a couple players who you know are larger than anyone you know they're larger than the street in terms of they're bigger than the street. Netflix doesn't need the street, they're they tell the street what to do and David Ellison's bigger than the street and all of a sudden you know they just go on their own you know it's like so we're at this point now we're probably the eighth inning of how the sector looks. Yeah."
"So, what's your take on our world, right? So, flip it around."
"You own T-Mobile."
"I own T-Mobile, but I I feel like it's getting a little long in the tooth."
"Yeah, that was Craigslist."
"I own uh most of the I own all the Mag 7 except for Tesla. I own some other tech stocks. But what I I'll tell you is that for the first I've been bullish about the market for a very long time. And um for the first time in a long time I developed a twitch in the back of my eyeball. And the twitch is this is a very interesting statistic. So GDP 2024 was 29.18 trillion. And the consensus estimate this year is for 1.8% growth. So 1.8% times 29.18 is 530 billion. Now you add up Meta, Google, Amazon, Microsoft, Chat, GPT, blah blah blah, what they're all spending on on AI and you get easily over $400 billion. So what that tells you is"
"the rest of the economy,"
"the rest of the economy is not growing."
"So we we basically have the technical term is we have a K-shaped economy and you're starting to see stress. I mean, consumer credit, I mean, you're seeing youth unemployment being a problem. The housing market still stinks because rates, even though they're relatively low relative to history, are much higher than they were during the pandemic. The consumer credit quality is deteriorating slightly, but the consumer is not spending as much. They're there's cracks. So, you know, a couple weeks ago, I had Dan Ies on. Yeah. You know, if you listen to and he was wonderful, but you listen to Dan Ies, you'd buy every single tech stock on planet Earth. But I I'm there's something not quite sitting right with me right now. So I've lightened up a little bit, but I don't know what else to do."
"Yeah. It's funny you say that because what I described about, you know, these big five companies are taking all the incremental dollars out of advertising, right? The ad pie in the US just isn't that big to support that level of capex, right? So we've been asking ourselves, what else can they monetize? Because it's obvious advertising can't support what they're spending."
"Exactly. So, it has to be something else."
"Yeah. We, you know, we we were having this conversation about the the lesson from the '99 bubble was that if you think about the value chain of manufacturers and all the way up through end users, there's a lot of revenue that's created between layers of the value chain. And it's important to tune it out and say, "I don't care. Um, all I care about is at the end of the day what's coming into the value chain from end users and advertisers. Um, so whether it's consumers, whether it's enterprises, including governments and militaries, or whether it's advertisers, that's where the money has to come from. Everything else is is vapor. And so there's no question that OpenAI um is is spreading its money around and that money is real revenue to the companies that they're spreading it to and correct and the companies that are buying chips from Nvidia are spending real money to buy those chips and they're not borrowing by the way. They're not that's coming from their cash flow."
"Yes. But but you still have to think about okay but is the revenue that's going to come in e either is now or soon is going to come into the value chain is it enough to support that level of of investment."
"Well, it can't be just from advertising. So well no, just so it's but it's you know, you can make the case you all those jobs that we're talking about disappearing um that productivity enhancement, it's easy to imagine the bull case that um that if I'm a company and I think well, I could replace a $125,000 employee um and therefore I should be willing if with with an AI bot I should be willing to pay up to $119,000 for the $124,000 for that AI bot. Right? Now, I it may not be one for one, but you get the idea, right? I'll pay a lot for that bot presumably. So, the bull case is that enough companies are doing that that the revenue is going to be sufficient to support all this infrastructure spend. The bare case is no, you've got four people competing for that opportunity and they're going to drive the price down. So, that you can't imagine a scenario where the price of those bots is going to be high enough to support the infrastructure. And I think anyone with"
"Well, by the way, where we are right now, you could say whatever you want. It's too early."
"Yeah. Too early."
"It's too early."
"Exactly."
"You could dream any dream you want."
"There's no counterfactual, right? What I was going to say is I think we would all say with some humility, we don't know the answer to that question yet."
"Oh, I totally agree with that."
"You can't dismiss it. But you can look at the investment levels and say, what's the RO trying to dream the near-term ROIC? It's not going to be very pretty given the spending. Right. Totally. There's gonna be a come there'll be a point of course when we don't know when that point is when someone's g have to prove this makes sense you know and right"
"it's really on Sam Altman's shoulders to prove this makes sense."
"Yeah."
"All right guys that was great. [Music]"
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