This is Bloomberg Business Wait inside from the reporters and editors who bring you America's most trusted business magazine, plus global business, finance and tech news. The Bloomberg Business Week Podcast with Carol Messer and Tim Stenebeck from Bloomberg Radio.
Here to ask my brother the worst thing that's happened to him over the last year. He would, no doubt say, the trouble that I'm logging into Matt.
Matt, if you're listening.
Logging into the family Netflix account.
What do you mean? Denny's mentioned it's up about seventeen percent this year. It's pretty much staying just off its highs of the day. The high was up eighteen percent, so it's holding out of the games. Despite the FED talk the focus on rates. Netflix now up almost thirty seven percent year to date.
Wow, so this after the company said it's raising prices for some customers here in the US, the UK, France. It's posted its best quarter for subscriber growth in years. It's a sign that management's confidence in the future, even as rival streaming services lose money. Speaking of rivals, Yeah, Meanwhile, profit at Walt Disney's Sports TV networks fell twenty percent through the first nine months of fiscal twenty twenty three, as the company provided the first peak at that business
on a standalone basis. We got with us a great voice on all things media and streaming. Keita Rogna gothen Tech in, a media analyst a Bloomberg Intelligence. She joins us on Zoom from BI headquarters in Princeton. Gita, I want to get to Disney in a few minutes. First, let's just start with Netflix. Wow, a great quarter from the company. It turns out that cracking down on password sharing actually does lead to people who signing up for Netflix.
Yeah, it absolutely does. And this, you know, it just tells us about the power of the platform, right Tim, because Netflix, I think today is really more like a utility almost, and so people really do want to have this service. It's a must have when it comes to streaming content. And that's kind of reinforced by the fact that, you know, you just look at their subscriber gains in in the third quarter. And what's even more surprising is
the guidance that they gave for the fourth quarter. Apart from the fact that they do expect the subscriber momentum to kind of continue into twenty twenty four, So they do recognize the power of the platform, and I think the real guts move was the fact that they really announced that those price changes, right, so they know that they have a lot of pricing power. They know that people really love their content and are going to sign up no matter what.
In terms of where they announce those price increases is that where they're growing the most.
That's where there are Pooh is the highest, so their average revenue per user number is the highest, So those are the markets that contribute the most in terms of revenue. So yes, they wanted to make sure that they're able to kind of offer a nice variety of different price points.
But they also know that, you know, taking up the premium price, so they increase the premium price plan by about fifteen percent in the US, or instead of costing twenty dollars now it will cost about twenty three dollars, so kind of really forcing you to pay up, but again offering enough flexibility because they left the ad based plan at that low price point of seven dollars. So what they're effectively trying to do is push more and
more people to take advertising. Because though they mentioned that advertising is kind of building it is gaining traction, they still do need a critical mass of subscribers on that ad based plan to really attract the big, big AD dollars and build up a huge business.
One thing I want to ask, do you feel like, following this report, Kita, that it's Netflix when it comes to streaming and everybody else like Netflix just seems to have figured it out, especially when you look at their you know, free cash.
Flow, they certainly have figured it out. I mean, you know, one year ago we were in the midst of this great Netflix correction and we were all scratching our heads about, you know, what is the endgame for streaming, And they've kind of really definitely cracked the code when it comes to building subscriber scale, when it comes to profitability, because you just look at some of the profit metrics that
they threw out there. You know, there was a little bit of concern Carol about their margin trajectory, but they kind of put that to rest because they said that you know, they will get to two to three percent increase in twenty twenty four, so about twenty three percent operating margins. And I think the real positive commentary was they said there's really no ceiling here, so you know, they know that they have a lot of operating leverage
in the model. And it's been a complete shift in the tone in the sentiment from last year and definitely from last quarter. There's a lot more confidence in the story. I think it's emerging as a real clean story now and a lot of levers that they have to pull going out into the next few quarters.
I got to push back on Carol's comment about year to date a little bit. Carol, forgive me, Netflix might be doing very well year to date, but if we take a look at what it's done over the last few years, we are still down geta more than forty percent from those all time highs that were reached a while back in November of twenty twenty one. Where is Netflix right now after that terrible few months that it's stuff for a couple of years ago.
Yes, I think you know, that was obviously the perfect storm, and I think in our minds we had kind of always thought of the total addressable market for Netflix as kind of being this one billion dollar, sorry, one billion
user market. Of course, when they kind of hit the wall and they started even losing subscribers, there was this def definitely, this reset a recalibration of kind of assessing the whole streaming space, and now I think we've kind of finally come to the conclusion that it's probably closer to about five hundred million. That's kind of what Netflix keeps saying over and over again. They're at that halfway point. So you know, out of that five hundred million market,
they're already at two to fifty million. Question is are they going to be able to get to the next two fifty million. I think so, I mean maybe not, you know, total penetration, but I think they'll get to almost sixty seventy percent there at almost sixty seventy percent here in the US, so there's no reason they should be able to get to that in other developed markets as well and kind of really build that base in developing, you know, emerging and developing markets.
You know, I was thinking about the conversation at screen time with Ted Sarandos that Lucashaw had, and I do feel like this is a company, you know, geta that does figure out how to pivot. If you think about the origins of this company, right, like, it's just pretty amazing.
Absolutely. I mean, you know, they introduced DVD. They knew when to get into streaming, they knew when to make that pivot from licensed programming to original programming, and they knew also when to make the pivot just from English originals to you know, originals and all kinds of local languages. And that's actually performing really really well for them. So they've kind of they've they've really known how to kind of adapt and kind of be the leader.
Gita. I mentioned Disney because we got we got to talk a little bit about the peak that we got at Disney's Sports TV network profit. It fell twenty percent through the first nine months of fiscal twenty twenty three. You wrote that the results could help Disney attract outside investors, and you also said the business could be worth as much as twenty two billion dollars based on those newly released figures. Give us your interpretation of what we saw released in that filing yesterday.
Yeah, so those are a little bit of both good and bad news, I would say, Tim. So, the good news is that the top line is relatively stable, so they do generate a pretty hefty sixteen billion dollars per year, both from affiliate fees as well as advertising. This is just the ESPN division, both domestic and international TV channels, as well as their ESPN Plus streaming unit, which is pretty good and you know the fact that it has been pretty stable, hasn't really moved around too much. That's
good news. The bad news is their margins are fairly low. So we're talking about mid teens operating margins. And the reason why this is pretty low and I say it's low because you look at a cable network, and average cable network the typical margins are around thirty to thirty
five percent. So this is a little bit of a different animal because you know, you have sports rights fees, and sports rights fees are not only huge, they also keep increasing pretty rapidly year after year, and so that's one thing that kind of ESPN has to grapple with that reality. So margins are pretty low. EBIT or EBITDA is in decline, so they do have to do something, they have to do it fast. You know, obviously this
is a very very valuable asset. Everybody knows that they have tremendous reach, they have tremendous brand name, so I think you know they're they're of course looking for a distribution partner I think that's kind of why they want to provide this transparency in terms of, you know, their financials. So we'll have to see how it plays out.
So geta distribution partner or do they just want an outright sale of it or do they want to still kind of have some control or connection with it and just kint about thirty seconds.
Yeah, I think they still definitely want to retain the asset. I mean, this is this is a huge asset for them, you know, so I think they definitely want to have some kind of control, but they also need a distribution partner. So they've been looking at different you know, players, whether it's a Horizon, whether it's an Apple. So we'll have to see how that kind of plays out.
All right, So appreciate it. You are our hidden gem. Guita Ranganathan. She's technology media analyst at Bloomberg Intelligence, joining us from BI headquarters in Princeton, New Jersey. But man, I love talking on media with her. She's just so on it and just knows it all.
It's pretty amazing to see Netflix up seventeen percent today, Carol.
Yeah, in a day where we have seen certainly the equity side of things whipsod in the markets. And Netflix is pretty much held on too. And this is when you you know, will have strategists or folks and say, you know, you get a look company by company in this market place.
Sure to the day of the Nasdack's down nine tens one percent.
If you're listening to the Bloomberg Business Week podcast, catch us live weekday afternoons from three to six Eastern Listen on Bloomberg dot com, the iHeartRadio app and the Bloomberg Business app, or watch us live on YouTube.
Want to talk, certainly, that's having an impact in the market. Tesla shares there about one point seven percent of the S and P five hundred, nearly three percent of the Nasdaq one hundred, and they are definitely under pressure today.
Yeah, down ten point three percent as we speak this after third quarter results fall below concessus analyst that's Smiths across the board. Carrol, we're talking profit, we're talking sales, We're talking margins Eland Musk calls to struck a cautious tone on the call yesterday.
You have seen pretty bummed out right. He dialed back expectations for Tesla as years of rapid expansion collide with rising interest rates in a more host conscious consume our interest. Everybody was consumed with how many times he said interest. Dana Hall is senior technology reporter for Bloomberg News. She's back with us on the phone in San Francisco. Danna, thanks for being with us. Gosh, it feels like it was a pretty He was really pretty bummed out here
following this release. But let's go give us first of all the highlights the low lights and then talk to us about his tone on the call.
Yeah, so it was I mean, so we sort of knew that it was going to be a bad quarter because Tesla missed their delivery targets in terms of how many cars they delivered to customers in three Q, so we knew it was going to be deb bad. But even then, they like missed on EPs, they missed on margins. And then what was funny was that it was like this weird thing so that it was a bad quarter, but they announced that they were going to hand over
the first cyber truck on November thirtieth. So initially after the release hit, the stock was actually positive. When we were like, okay, everyone must be excited about the cyber truck. Then the call begins and Elon was like the most dour, down beaten, down trodden CEO like I've heard in a while, and like he has different moods, right, Like usually he's very ebulate. This is like dower Elon. I mean he said things like I'm scarred by two thousand and nine
when General Motors and Chrysler wet bankrupt. That has seared into my mind with a branding iron. Then he talked about the challenges of the cyber truck and he said, we dug our own graves with the cyber truck. Nobody in general digs their own grave better than themselves. And then he spent a lot of time just talking about interest rates and how we have to make our cars more affordable and that when interest rates are high, that
just raises the price of the car for the average consumer. So, I mean, he's complained about interest rates for quite a while, but he was just like he just sounds deflated, and it really brings into question whether Tesla's going to hit their target for the year if more price cuts are to come, you know. So it's just it was it was wild and like you're seeing the stock is down ten percent today. That's a big move for Tuessla.
Does it need a warm puppy or new plan.
I think that, like we were talking, I was talking about this earlier today with some colleagues, you know. I think the one thing that people forget is that the era of free money is over and Tesla's growth story was really fueled by these rock bottom interest rates that lasted for like over a decade. And this is the first time that Tesla has really been in a high interest rate environment. And the automotive industry is very cyclical.
People are very price conference when you have mortgage debt, when you have credit card debt, when like the cost of food is through the roof, when like your your personal paycheck is you know, not going as far as it used to. Like a car is a really big purchase for people, and if you can't afford that monthly payment, you're going to wait. And and unfortunately, like Musk has kind of trained us all to know that, like he
will continue to cut races. So I think a lot of customers are sitting on the sidelines wondering if he's going to cut prices yet again. So there's just a in in, you know, So he's going a little bit of a pickle. I think that you're going to see a lot of analysts change their price targets. You're going to see a lot of forecasts for twenty twenty four come down. And then we also, okay, so now last point.
So they're going to hand over the cyber truck on November thirtieth, we still don't know how much it's gonna cost, Like they still have not given any specs, so that's like a big missing number.
Did this make you feel Dana like it was twenty eighteen for Tesla all over again? When you know, describing production Hell sleeping on the floor of the factory? Is it? Is it that Elon Musk?
It's a little bit. It's like we're in interest rate. I guess we're in interest rate Hell. And yeah, I mean I think anytime a company brings forth a new
vehicle program, there it's tricky. It was just interesting because he did kind of allude to the fact that like getting the cyber truck out in high volume is going to be is going to be hard, and like, you know, you would think that Tesla would have learned these lessons over time, but yeah, this is like a whole new vehicle he said, He's like, oh, the cyber truck has a lot of bells and whistles, and it's like, well, geez,
like do they need all the bells and whistles? Like what I would love to know, Like what exactly is so hard about this truck? Like he kept saying on the call Us last night that they dug their own grave with it, but like why.
Kevin Tynan on our Area yesterday Dana made the point that it's it's you know, every other card that they've built has sort of been based on the same what's the It's not the same is it the same chassis, it's the same platform as how he described it, And this is like so risky starting something completely from scratch, building it out of what is it? Stainless steel? I mean stainless steeliaah yah, it's a big risk for the company.
I did see one, so like they do exist, Like I actually saw one, like driving in my Oakland neighborhood while I was like walking to Trader Joe's and it went by, like you're.
Being followed by Tesla Janna.
I couldn't get a close look, but I was like, oh, there's a cyber truck. Look at that and so like they do exist, but yeah, like it is risky, and I think a lot of the things that Tesla has done, like they announced this new plant in Mexico, and he also kind of slow walks the plant like they're they're gonna, I mean, they're still gonna do it, but they're not gonna they might not like construct it as fast as the originally planned.
Like they just you know, they're.
Just he's he's worried, like he's you know, to his credit, he's like the longest serving automotive CEO right now. Right he has been the CEO of Tesla since two thousand and eight, so he has been through these economic cycles and I think he's pretty astute to them. I Mean, he was also warning like commercial real estate is gonna you know, there's more shoes to drop with commercial real estate, and he was talking about credit like he's he he was like it was interesting to hear him kind of
expound on economics. But like the yeah, the more he talks, the more the stock tanks. And then you're really seeing that sell off today.
As someone who covers this company and the twists and turns of all things that are Tesla and Elon Musk. I do wonder he's gone through different periods. Is this just another different period or something different? You think in the life cycle of this company.
It's a little bit different in that, you know, he has not had to manage a kind of high interest rate environment for quite as long as they are managing in that. Now, consumers do have other options when it comes to evs. I mean, for a long time, we kept hearing that the competition is coming. You know, the competition is not that robust. I mean, the competitors are still selling in pretty small volumes, but there are choices. And then, frankly, I think the big elephant in the
room is that Elon Musk bought Twitter. That is an albatross around him. Eat, He's got this huge debt payment and his buying of Twitter and his sort of public persona as this media mogul has turned off some of his most like loyal consumers. Like, we live in a polarized country and people like used to think that Elon was like this like clean tech democrat, and now they
think that he's this like right wing guy. And you know, I have no hard data on how that yeah, digging into demand, but like, yeah, but there are definitely people that are like for political reasons. I'm never going to buy a car from this guy because I hate what he's on Twitter.
He's you know, he's controversial. You either like him or you don't.
Should have known what that's you know that that would spread. He should have known.
Dnah Hall, so appreciate it, Senior technology reporter for Bloomberg News. You know his slump elon his fortune also slump.
Today you're listening to the Bloomberg Business Week podcast. Catch us live weekday afternoons from three to six Easter on Bloomberg Radio, the Bloomberg Business app, and YouTube. You can also listen live on Amazon Alexa from our flagship New York station, Just say Alexa play Bloomberg eleven thirty.
I wonder if could play Abba in the halls of the Federal Reserve. What do you think?
Good choice? Paul Brannan for this.
Song money, Money, Hey, what's the most important price in the global economy?
Well?
Is it the price of a barrel of crud? A microchip, or maybe a big mass?
I think a big mac?
Am?
I right, is a big mac? Is it a big mac?
I don't know? No, Considering that song.
I think more important than the price of any of those things, Carol, is actually the price of money. For more than three decades, it was falling in now it's going up. Just look at what the tenure Treasury you'll did today came within a Harris breadth of five percent at the highest in two thousand and seven. That has pulled up the cost of mortgages, corporate loans and more.
Yeah, it's a different cost of money, that's for sure. And so we get into this because he writes about this Tom Orlick and Company in the new issue of Bloomberg BusinessWeek, which is on newsstands already online at Bloomberg dot com, Slash BusinessWeek, and of course on the Bloomberg terminal. Tom, by the way, joining us on the phone from Washington, DC. He is chief economist for Bloomberg Economics. So good to have you here, Tom. The price of money is going up.
It does feel like a very very different paradigm. Let's go back for the last ten years or so, money didn't cost us anything, did it, or it felt like it didn't.
It's really interesting, Carol, And we just heard all the news from Powell's speech and his conversation with Bloomberg, Dave Western, and of course day to day it's the Federal Reserve who are calling the shots on the interest rate and driving government bond yields. But there's also something more fundamental going on. The price of money, like the price of the semiconductor, like the price for big mac, is set by the balance of supply and demand, supply of saving
and demand for investment. And for much of the last thirty years, a huge driver of global interest rates and interest rates in the US has been that the supply of saving has been going up, baby boomers putting away money for retirement, China saving money and investing it in US treasuries, and investment has not been that strong, and that's one of the reasons you've had this long term down trend in interest rates. So what we do in this piece today running in Business Week, is we take
a look at those drivers. And what we find is, you know what, that trend, which has been dragging interest rates down for the last three decades, seems to have come to an end. We're already seeing that with the ten year yield now pushing close to five percent. And the case we make is that the drivers of higher borrowing costs. The drivers of a higher price of money, they're actually going to stay in place in the years, even in the decades ahead.
Okay, So take us through what some of those drivers are, Tom.
So, if we think about what's been dragging interest rates down over the last few decades, Well, the supply of saving was going up. You had the Baby Boom generation putting away money for retirement. You had China saving money and pumping it into US treasury. And because growth in the economy was trending down, well, the incentive to invest wasn't really so strong. So he had more saving, more supply of money, less investment demand, and the net impact was to drag interest rates down.
Okay, And so obviously a different environment. And you know, talk to us then about why, you know, because I think about J. Powell today and I feel like fed speakers, you know, constantly remind us higher for longer. What is the changing dynamics paradigm that really speaks to a very different interest rate environment and cost of money going forward? And is it, tom Moore, normal where we're going right? We consistently, I feel like, talk about remind everybody when
money costs nothing. That was the unusual part but helped me out and make some clarity about whether or not that's the case, and are we just getting back more to normal.
So short term, Carol, it's all eyes on the FED, all eyes on whether there's another rate hike or not. But at a more fundamental level, there's also some structural forces which are going to be keeping interest rates high in the long term. Think about the wide wide deficit in the US government finances, all of that government borrowing. Think about how China has stopped pumping money into US treasury. Think about how the Baby Boom generation of now retired
they've stopped saving, their spending down their savings. Think about climate change and the thirty trillion dollars which our colleagues at Bloomberg any app say is going to be required to get to the net zero transition. If you put all of those things together, you've got a picture of
saving coming down, investment coming up. And if we think of it further out, if we think beyond Powell and the next bed move, it's those forces which we think are going to be keeping interest rates high into the medium term.
All right, So I'm going to tell you I consider Tim and I fairly smart.
Fairly sometimes, but we've been talking about your own stuff.
We've been talking about your story a lot, and like trying to understand this concept of Okay, savings down, investment up. That means money costs more. Can you just just.
I know you've talked to us like we're I don't want to say, five thirteen years old.
So think about it like this, if you the interest rate is a reflection of the supply and the demand for money. Now, the Fed can manipulate that in the short term by setting the federal funds rate at a certain level through quantitative easing, but there's also all of these huge macro forces which are determined how much people save and how much people and businesses invest. Right, think about demographics. If the population is young, they're going to
be saving for retirement. If you've got an older population, well they've already retired. They're not saving anymore. They're spending down their savings. Think about the business sector. If the economy's humming, they're going to think investment means more profits. I'm going to invest more for tomorrow. If the economy
is sluggish, well the incentive to invest isn't there. So what we try and wrap our heads around in this Business Week piece, and it I mean, it's certainly not beyond the great minds of Caroll and Tim, but it is conceptually a bit tricky structural forces. What are those
big structural forces driving saving, driving investment? And when we pull those numbers together, what we see is this big transition from a world of a lot of saving and not much investment, the world which was dragging interest rates down over the last thirty years, to a world in the future where there's less saving, more investment, and interest rates go up. And all that means for equities, for real estate, and of course the big one for the cost of servicing the US government debt.
Tom, I wonder, as you guys do this and write it out in this story that's in BusinessWeek, but could something change that? And I think about all those years that Greenspan talked about how productive we were, and could a higher level of productivity, could higher growth rates kind of change your thinking about this?
And there's a lot of uncertainties here, Carol, So I mean, let's just talk about a couple of them. Let's talk about the productivity question which you raise. So if we go into a world where AI is driving huge gains in productivity and huge growth in the econom me well, if growth is booming, people are going to want to invest to get a piece of the profits from that growth. That's going to push investment higher. That would be something
which pushed interest rates higher. Think about the climate change piece of it. Our colleagues at Bloomberg Nies say thirty trillion dollars required to get to net zero on carbon emissions. Is the world going to deliver that thirty trillion in investment or are we going to keep kicking that can down the road. So there's a lot of big questions
about how the future is going to shape out. But when we think about the base case for demographics, for productivity, for the response to climate change, where the place we come out is that the period of falling interest rates is over and really, no matter what how and the team do at the next meeting, in the meeting after that, we're moving into a world of higher interest rates in the years ahead.
So I'm going to go back to history and I've worked with colleagues who talked about paying mortgage rates of fifteen, sixteen, seventeen percent. Is this more logical though? The environment and just feels uncomfortable because we all got really comfy, you know, where money was essentially free.
It felt like, yeah, I mean, it's not better or worse, right, it just changes the pattern of winners and losers in the economy.
Right.
Let's say that you are someone who owns a house and owns stocks, and you're painting on the value of your house and the value of your equities as something which is going to reduce your income in retirement. Well, if we're moving into a high interest rate world, what that means is actually the pressure on real estate prices, the pressure on stock prices is going to be to
come down. And so perhaps people who've been counting on that for a one k equity market investments and those steadily gaining in value to finance their retirement, well, perhaps that's not going to be there the way that they thought it was.
But stock still moved higher in high interest rates and grate environments. Historically, maybe we didn't see what they did, and you know the S and P five hundred did over the last ten years. But I do think Tom, you know this is not We're not in uncharted territory here, right.
So we are not moving into a world where interest rates are going to be higher than they've ever been before. We're moving into a world where the trajectory of interest rates is going from falling to rising. And interest rates, well, interest rates your kind of your opportunity cost of investing in equity. They your opportunity cost of investing in real estate. So interst rates go higher, Well, the opportunity cost of putting your money in equities putting your money in real
estate goes up. And what that means is, on balance, you'd expect more downward pressure on those asset prices.
Well, I think about this whole idea of like when the tide goes out, right, you do wonder the longer this sticks around, whether it's real estate, whether it's corporate ZOM, you know, companies that just shouldn't exist. It was interesting to hear Elon Musk on the call talks so much about interest rates, and you know, we cut up with our reporter down a hall and just this whole concept of you know, Tesla's been a company that has benefited
in this low rate environment. Like it's a different environment. Whether you're a leader of a company, whether you're investor, you're going to look at things right, bottom line Tom differently, and you're going to have to reassess valuations and so on.
So I think that's completely right, Carol. I mean, in a world where money is free, you can build castles in the air, right. You can have a dream that you're going to build an electric vehicle which isn't going to make profits for ten years time or twenty years time, and in twenty years time it's going to deliver a huge profit. And you can find out and that project because money is free, right, And in a world where
money is expensive, that becomes harder. So perhaps some of those kind of Silicon Valley projects become harder to deliver. On the other side of it, well, in a world where money is free, bitcoin looks like a really good idea, Crypto looks like a really good idea, right, and you have kind of speculative frenzies.
Right.
In a world where money is expensive, well, maybe people think a bit harder before piling into these bubbles, and maybe you have financial markets which are a bit less bubble prone.
Six percent not unrealistic. Thirty seconds left, Tom on that tenure.
So it's one of the things that we consider, Carol. So let's think about a world where US deficits remain wide, the government's still borrowing. Let's think about a world where we get serious about climate change and invest the money we need to get to net zero emission. That's where you can start seeing that six percent ten year treasury yield in our model.
Well and to day where we listened so closely to FED Chair J. Powell. I mean, this just kind of fits into this dynamic higher for longer. We certainly got that message, and this story plays so much into that. Tom. Thank you so much, Really appreciate it. Tom more like as chief economist at Bloomberg Economics. This story in the current new issue of Bloomberg BusinessWeek on newstand newsstands now, on the Bloomberg terminal, and online at Bloomberg dot com
slash BusinessWeek. You ready for high rates.
It doesn't matter if I'm ready or not. They're here.
They're here, We're all going to live in it. It feels that way. This is Bloomberg.
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