At Peak Of Streaming Wars in 2020: LUMA's Kawaja

media business global media businesses. How a lot of these traditional media companies are trying to pivot to more technology driven streaming companies, trying to get that valuation from Netflix. And there's one banker out there who's making it all happen for the technology side of the media business, and that's Terry Kwaja, founder and CEO of Luma Partners Investment

banking based here in New York. I used to work with Terry back in the day at Solomon Brothers and First Boston when he was putting all the traditional media companies together back in the day. Now he's kind of working with the new wave of technology driven media companies. So Terry so much for joining us here in our Bloomberg Interactive Brooker Studio. So again, let's start with a

company like a Disney. These companies are really trying to transform themselves from the old model based upon advertising and subscription revenue to streaming. Can they do it? Yeah? Great to be with you, Paul and Lisa. So here we are in the middle of what is one of the largest industries. Right there's over a hundred billion dollars of advertising and probably another hundred and fifty billion and paid dollars that support the sort of TV slash you know,

video media channel. And all of a sudden, these massive companies with enormous market caps you know the names Comcast, Disney, Charter, Uh, etcetera, all have a crisis beyond existential crisis as they effectively have to swap out their engines while keeping the plane in the air. Right, they got to support those market caps with a fundamental change not only in the technology of the delivery of their media and advertising, but also

the channel in which consumers have chosen to consume their content. Right, So the idea being that they're moving online, and the question is with something like what Disney is doing so far, they've been rewarded more than other companies for investing even though it's not going to make money. How long can that continue at a time when there are big questions about how much subscribers are willing to pay and how many services they're willing to subscribe to. So, look, Lisa,

I think this is early days. So I think all the people looking at the immediate subscriber uh new subscribers and the subscriber churn numbers of say Disney's uh Disney plus App, I think it's way too early to be looking at that. I don't think we're there in terms of, you know, the value proposition. There are still content that hasn't gone exclusive onto Disney. So there's still is some you know, distribution rights on other platforms. We can't fully

judge it yet. And let's face it, we're still in the early days where they're providing subscription a cross promotions. It's it's kind of free, right, you know, if you buy an iPhone, you get Apple TV if you you know, Disney has cross promotions with Verizon. So we're in the early fanfare days of um of streaming, the streaming wars. In fact, you know, we're at the peak of the streaming wars, and we will be at the peak for

the rest of the year. Think about it. When large companies have an existential threat and and a rationale to get a consumer product out, they market the but Jesus out of it. Just remember last fall when Disney Plus was announced and Apple TV was announced. And this year we've got um NBC with Peacock, we have um HBO A t T with HBO Max, and we've got Quimby. So we are going to be in peak streaming wars

all through and beyond. So, Terry, you spent a lot of time with the avert hasing technology companies, companies that make the digital advertising marketplace work. They interacted obviously, that's really the engines of the big advertising giants like Google, like Facebook, like Amazon. Do you expect the technology companies, those big technology companies, uh that have all that cash, all that free cash flow, to maybe get into the

media business itself, into the content business in a bigger way. Well, I believe they're gonna play a major role. And listen, if you set this up as inevitably, it is a dichotomy, a war where it is called streaming wars after all, Right, it's a war, not even just amongst the streaming choices, but between big media and big tech. And and big tech has four major advantages. They've got, as you mentioned, market cap and cash on the balance sheet up the wazoo.

They I mean, they can they vastly outscale the big media companies, and the big media companies are trying to catch up by doing all these you know, traditional mergers just to garner enough scale. But even still they you not compare to big tech. Second is they've got Ui downpat. I mean, your user experience on Apple products or on Netflix is just so much different than your average cable company. Um, even the more advanced ones like Comcast x one, it

just it just doesn't compare. They they've got those kind of chops. Um. So, there are just so many elements why Big tech. And by the way, they have the technology at their court. They were born digital. So the big media companies, and this is the part where I put up my hand and say, thank you very much, need technology. There's not technology native to them. They have to be able to avail their content across the channels that consumers want, which is O, T, T and digital.

And to do that right there's so much complication. There's a loom escape, which is a diagram of all the players in the space, you know, because let's think about it, right across all these channels of linear addressable O, T, T and digital. I'm getting a headache just talking about it. You know, there's different parameters and identifying who a person is, there's different technologies to deliver the ads. It is just

a whole bunch of conflation that needs to be sorted out. Terry, I'm struck by your expertise being absolutely perfect on a daylight today for a variety of reasons. You specialize in coming up with valuations of what companies may become and as they become the future, and I would love to get your perspective on Tesla because right now nobody can justify that the valuation based on current fact. How does one go about understanding value at a time of transformation?

And a company that harbor is at least a dream, if not a reality. So what what? What you're referring to, Lisa, is the complex art of valuing innovation. And I call it art because because for most mature companies with demonstrable financials and revenue and cash flow that we can all analyze and compared to other similar companies. Most of the valuation work we do in those kind of companies I would refer to put in the category of science, right,

the science of its math. It's comparables and plus or minus. You know, you're kind of gonna get it right or right ish when you start talking about the kind of companies that actually that I deal with, that you know, get sold for like twenty times revenue, And people say to me, why did so and so pay twenty times revenue for that business? And my answer is because they didn't twenty times revenue. That it's not as though they did it as a multiplier. To get to the valuation.

We started with what is this worth to you figure out the valuation, and then it's it's division to find out what the multiple was. So when you look at a company like Tesla, I mean, it's basically the future. How do you value the future? I mean, if you were to ask people, you know, rational people, you know, are we moving towards an e you know, an electronic future? The answers yes. So it's just hard to nail down. It's not science. Terry Kawaja. We've got to have you

back and talking energy. I think about talking about this topic. I honestly it's it's such a pleasure having you from every perspective. Terry Kawaja, founder and chief executive officer of Luma Partners Investment Banking in New York, talking about the intersection of big tech, big media, and big dreams at a time of the everything rally, and perhaps we're still in goldilocks territory. Perhaps we're at the very end of it. There is a question of whether to buy junk bonds.

Certainly a lot of people are doing so, with a record volume of global junk bond issuance. In January, joining us down to discussed the road ahead for risk your assets within the fixed income world and beyond. Uh Tad Revel, chief investment officer for fixed income at TCW, which has a hundred and seventy five billion dollars under management. Tad the reason why I wanted to start there. I know you've been barished on high yield for a while. Morning

again some of the risk. I'm wondering what you make of the issuance that we've seen of late, including for example, a pick Toggle deal that is being marketed today to finance a private equity dividend payout. That's probably all the commentary that that you need a pick toggle to finance a dividend to UH to private equity sponsors and LPs. So we haven't seen obviously that level of indiscriminate issuance in the junk bond market probably since the end of

the last cycle. So I mean, first of all, a couple of maybe bigger picture statements about the the below investment grade marketplace. We we plumbed the low and spreads UH seemingly about three or four weeks ago the start of the year. We came into the year with a lot of euphoria. Spreads are actually about sixty seventy basis points wider, so we're we went very quickly from the low three hundreds to the high three hundreds. So there are there's a lot of cross currents going on in

the market. There seems to be a lot more risk discrimination going in the market, which is to say that the double bees have done actually quite a bit better than UH than than the triple ceas and UM. The market is allowing a lot of semi excessive type of transactions to occur, such as the one you alluded to, and on the other hand, it's become also rather skeptical of some of the more levered business models out there

as well. So, Ted, I know from past discussions with you, UH, you know, you cite the concern that we are at the tail end of the economic cycle. What are you seeing in terms of credit quality? Uh, maybe in the portfolio that in your portfolio, or some of the new

deals coming to the market. Well, the UH, I guess a good starting places to start by thinking about how much leverage is embedded now in the in the credit markets generally you've seen moving away from I yield for a moment there, there's something like twenty of the investment grade corporate debt market that's now sporting leverage ratios reported leverage ratios of more than four four turns, meaning more

than four units of debt forever unit of earnings. That's significant because, you know, while this is a vast generalization, I think it's probably fair to say this that if you were walking down the street trip and fell into the office of a major rating agency and the first questions out of their mouth was we've never met you before, but tell us about how much leverage is on your

balance sheet. If you said to them, oh, I've got less than two turns of leverage, less than two units of debt forever unit of earnings, they'd probably say to you, you're probably investment grade. I don't need to know a whole lot more about you, but when you're at about four turns of leverage, it's probably more like, well, you'd better tell me a really good story about your your your business management, and so forth for you not to

be below investment grade. The point being is that with such a large cohort of the investment grade market as I alluded to, over four turns of leverage, the risk of reprising what we've seen in prior cycles, which is that basically somewhere between maybe a quarter to a half of the triple B marketplace tends to suffer down grade into below investment Great, you're probably already in that territory.

So what can you say is that as long as people are willing to extrapolate and say tomorrow will be like yesterday and the cycle will never turn, and the FEDS all powerful and all that, um, you probably don't have to worry about the rating cycle turning more pernicious. But it will at some point because all of the tender, so to speak, is already piled up there. So what are you doing in terms of buying and selling? Well, um, we don't. We try not to respond too much to

obviously to the day to day noise. Is that the way we have always held ourselves out is that you should probably think about the asset price cycle as uh, you know, roughly speaking, the way we've typically characterized it. It has three phases to it. So in the early phase you're supposed to be all in in terms of risk, at least as as it relates to a fixed income investor,

because it's a big beta trade. Is that everything trades wide, and everything trades wide because everybody got their their fingers burnt in the last de leveraging. And so you go down the capital structure, you take on a liquid investments, you sell convexity risk wherever you find it. It's probably gonna work out because even if you did your fundamental analysis wrong, probably isn't gonna hurt you when you get

to the late cycle. The question that we pose to ourselves, but we would pose it to anybody is should you be underwriting credit risk counterparty risk? The same way in the late cycle as you should in the early cycle. Now, if you're a momentum investor, you say, well, of course you should. If anything, maybe you should pile on more. Well, the value perspective says, no, you shouldn't. You're supposed to

be in the late cycle. You're supposed to go back to UH the old Ben Ben Graham dictum about bonds, that it's negative selection and you want to avoid the more sess of levels of risk taking. So what do you do? Okay, you don't put your portfolio in cash, but you probably go as follows. You need liquidity in the late cycle, so you should have some treasuries and agency mortgages, which, by the way, UH agency mortgages have

actually fairly attractive spread levels. UH. For for just sort of ordinary run of the mill yield, there are at least a relatively good UH sampling of opportunities in the investment grade universe. Just because that market at large is significantly levered doesn't mean that opportunities don't come along. Um they do. I mean a year year and a half ago, the blowout in ge spreads may have five five and

a half turns of leverage. There were some issues and concerns that people had, but at three hundred and fifty basis points over treasuries, you're being paid for it. Today. Fast forward, the investment grade market is treasuries. You have to be really selective about what you do, but you should own some. And then you're supposed to go back to the to the premise that we said earlier, which

is what are you not supposed to be owning? Because the last thing a fixed income manager I think really wants to report back to investment committee's boards shareholders is you gave me all this discretion. You trusted me, and you know I bought a bunch of bonds and they're down forty fifty points and they're not coming back. But sorry, you know you should keep me on on board anyway. Um, I think it's implicit in the mandate for a fixed income manager at least. I mean this luck not trying

to legislate for the world. But this is our view of it, is that that's part of the expectation that you'll be prudent in the late cycle and kind of greedy in the early cycle. It's just warrant buffett in bonds exactly. Hey, Tad, thanks so much. For joining us. Tad Rivelle, chief investment officer for fixed income at TCW hundred semi five billion dollars under management based in Los Angeles,

with a consistent conservative view of the fixed income markets. Recently, Warren Buffett throw in the towel on his newspaper holding, saying he just didn't see this business turning around. There is a big existential question facing the entire newspaper industry and on the front lines of it, John Founding, founder

and managing principle at Methusela Advisors. He joins us here in our Bloomberg Interactive at Broker Studios, and John, I see are on the front lines because you've advised UH clear Channel Communications on the eighteen billion dollar buyout Disney Company on his two thousand and six sale of ABC Radio. I'm trying to understand what the new model will be to save an industry that by almost all measures, is dying.

It's a huge question, Um, thanks for having me. Look, the newspaper industry is going to have to remake the revenue model. You can't have a revenue model which was essentially sent advertising based in subscription based, have the advertising side of it go away piece by piece. First digital. First, digital killed classifieds, which was the highest profit component of the advertising model. Then run of Press came under gigantic pressure.

So the digital impact in this industry, as it is in many industries, far far deeper, and until they replace that with a bigger subscription side, meaning the users of the content pay for the content, the newspaper industry is in deep, deep trouble, all right, So the users. We've seen a couple of success stores in New York Times, you know, maybe the Wall Street Journal, dot com, FT dot com, a couple of national, global brands have created that kind of model of subscription model. It's been the

savior of the New York Times company. But we haven't seen many successors or any success stories at the more local level. So what is the future? This is a public policy question. What is the future of local journalism. It's a it's a huge question for the local paper that's not the New York Times, the Times as a national asset. Now, truth be told, the vast, vast majority readers of the New York Times are New York centric or sophisticated urban readers. The largest paper in America, I

believe it or not, as USA Today. USA Today is the largest distribution paper. Um. Yeah, because it has a deal with all the hotels and they can stick it in front of it. That's true. It's it's that free paper that's under your your door. But it is still read in lots of places and picked up in airports and in hotels. And yet it doesn't make it doesn't really make money. It was an asset of Ghanette. They

built it great, um great scope doesn't make money. The question becomes, what would happen if these papers, the Denver Post, the Saltily Tribune, the Chicago Tribune, the Atlantic Constitution, if they go away, And that's the existential question. They could go away, with the exception of a few of these places that are owned by very wealthy parents. The Cox family, extremely wealthy, is not gonna let go of at land At. Jeff Bezos has bought the Washington Post to preserve it

as an asset. But if if, if you don't find a billionaire who wants to run each giant local daily paper as a mission, you have to change who's making money on it. And the right way to change it is look at how much money is being made by Google, Acebook, Twitter, and the digital giants who have access and use all of this content and don't pay a dime for it,

nothing for it. That to me is criminal. And the newspaper industry let the mayor out of the barn, as they say, a long time ago, fifteen years ago, when they should have asserted their copyright privileges and said, don't touch my stuff unless you pay me. And instead, the newspaper industry, like everyone else, thought that access to digital traffic and volume of digital traffic would be the nirvana. Alright,

so how do you corral the mayor? How do you get it back in the newspaper industry has to do. It's like it's like the patient who has a terrible cancer and needs chemotherapy. It's an ugly, ugly experience, but they're going to have to do it. Six of digital traffic on daily papers in America or more is generated and coming out of Google, Facebook, Twitter and the digital

platforms sending traffic to those papers. Therefore, the digital traffic manager at the Albany Paper or the Buffalo Paper gets a call from his publisher saying, we've told those platforms not to not to put our stuff up on their side anymore. And that guy at the top of his head blows off because he's like, well, how am I going to have it be a business? There has to be a negotiated solution where instead of using all of that content for free, they actually pay something into the industry.

And there are perfectly good models for this. In the music industry, there are there are models where users of music content pay reasonable license fees for the use of that whether to the songwriter or the artist or the performer. UM. In the television industry, we've seen real payments go to the television stations from the cable guys who are using the signal. People. Forget, fifteen years ago there was no

such payment. Last year, the cable guys paid twelve billion dollars to the television stations for use of their signal. Why shouldn't the digital platforms do the same? In one minute, what's the fair use collective? Fair use collective as a concept? UM, It's an idea UM that we've been supportive of, and the News Media Alliance in Washington has been supportive of.

It is a It is a position that the industry comes together and a little bit like the music industry, which uses b M I and ascap as the intermediary something, whether it's the Faious Collective or something else, acts as the representative and negotiating on mass with Google, Facebook, Twitter, Apple and people that are using the stuff for free, and gets a fair license payment and then distributes that license payment out to all the papers in a manner

that's reasonable and commensurate with what they generate. Obviously, the New York Times of the World, the Washington Post, they're going to get a significant piece of that because they're they're They're what people are reading. But all of these papers needed. Imagine a world where the Chicago just Chicago Tribune disappears in terms of doing coverage on the state

House in Illinois, or the Denver Post doesn't exist. We are not far from that world, and so the farious collective idea is that these license payments have to be distributed across the industry to sustain these papers. John, thanks for coming in and sharing that commentary with us. Those thoughts so with us. It's really fascinating. I think it really goes to the heart of the matter kind of

a public policy issue. Is local journalism required in the democracy And a lot of people obviously would say absolutely it is a certainly required, but given what happened in the digital world, a lot of these papers are at risk. Well, there's also a business question, how do they make money and at a time when people aren't really willing to pay for it and classified aren't really a thing in the same kind of way where where it's the model. Yeah,

so John and others are thinking about that model. John Shoes, founder and managing Principle Advisors based here in New York City, joining us here in our Bloomberg Interactive Broker's studio talking about that issue. So we had Terry Kawaja, former colleague John's on earlier talking about some of the digital aspects of business. But the other end of the equation is some of the traditional media companies, the print media companies, the local journalists have to figure out a business model,

uh that supports those businesses. Not you know, we only have the New York Times and a couple of the big papers that have made profits on the digital business that needs to change for journalism. Were typically check in

around this time with our Bloomberg Opinion columnists. Today, we're so lucky to have John authors with us, a senior editor for Bloomberg Markets and also a Bloomberg opinion columnist here in our interactive Broker Studios and John, the reason why I'm particularly excited to have you, I'm always excited to have you, is because I'm trying to to understand the narrative around the coronavirus. Right now. We shifted from a fear factor type of translation here too by the

dip Goldilocks kind of reversion. How should we understand this? Okay um. First of all, plainly, it has all the classic aspects of a black swan. I'm not saying the damage that has done so far count Councer as a black swan. But there is the risk of something where we simply cannot estimate the probability of a very serious outcome, and we're not sure exactly how expensive that very serious outcome could be. So you have that automatically is exactly the kind of thing that that markets find it very

difficult to price. Now, what you have at present is a belief that we were in the beginning stages of a reflation recycle at the end of last year. Whether how much of that is down to phase one of the trade deal is is an interesting question, But there were any number of measures from markets, commodities, bonds, et cetera, suggesting reflation. And at this point, what we do know about the coronavirus is that it is going to have a pretty serious effect on Chinese growth. Cannot be otherwise.

They're closing factories, they're shutting down transport. This is plainly a significant deal for China. Now that is is leading to the calculation that it actually reinforces um. It's a difficult way to I struggled with how to put this tastefully in my column. But it's like gold I'm just addressing the nature. It's golden if goldilocks, it's not goldilocks. Normally, a Goldilocks is an economy that's not too hot that you have to raise rates, but not too cold that

you don't get the growth to help investors. At this point, Goldilocks is dealing with a virus rather than with the three bears. And while the while the virus is out there, while the effect on Chinese growth is out there, that locks banks central banks into the kind of low rate, easy money policy that means that we can continue with

there is no alternative. We've got to buy stocks. That is the narrative that is running markets at present, I would say, and the only way that will be overturned within American markets outside of China is if we get a serious breakout beyond Chinese shore. But clearly, I guess what's confusing me is the ripple effects of the slowing Chinese economy. What it means for you know, markets in Europe and and all the trading partners the US and included. It seems like the global g d P hit could

in certain scenarios be materially impacted. And that is kind of what I'm concerned. The markets aren't discounting at the moment. I would say that they are to an extent in that if you take a look at the bond markets, they are in a classic defensive crouch for things to be very bad. And if you look at w T I on your on your on this very show twenty four hours ago managed to get below fifty dollars per

per barrel um. Similarly, if you look at industrial metals, which is we're trying to really is critical that the copper gold ratio is coming close to you know, it's lowest in many decades, so that is being it is showing up in markets. I suppose you still have the issue ahead of us that this really is a horrific

within China. So it's not just a percentage point of Chinese growth, which is a big deal anyway, but it really is the factor that brings an end to the Chinese growth story altogether for a while, and that we're not that we're not ready for h And then you do have again the issue that that that it truly breaks out around the rest of the world, and that is not something that is priced in. You know, the SMP is whatever it is two percent below side that

that is not priced in at all. That's still a risk. But as far as I can see at this moment, we don't have good enough information to start pricing it in anyway. So I don't know that I can have any great issues of people being complacent about that. John Arthur's thanks so much for joining us. We always appreciate your viewpoint. John Authors is senior editor for Bloomberg Markets.

Joining us here on our Bloomberg Interactive Broker studio, and of course you can read John's work and all of the work from our fine Bloomberg opinion columnists at Bloomberg dot com, slash Opinion and on the Terminal at O P. I. N Go on the Ternel. They do great work and we love having them as a resource for Bloomberg Radio. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts

or whatever podcast platform you prefer. I'm Paul Sweeney. I'm on Twitter at pt Sweeney. I'm Lisa A. Bram Woyds. I'm on Twitter at Lisa A. Bramloits one before the podcast. You can always catch us worldwide. I'm Bloomberg Radio.