Netflix's Business Model Is a Ticket to Bankruptcy, Bibb Says

Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Right now, there is a lot of focus on media companies, particularly as the shift from cable networks to online advertising takes hold, and we are very lucky to have with us today. Porter bib managing partner Media Tech Capital Partners in New York. He is better known as being the first publisher of

Rolling Stone. He has been on both sides of the industry, from the content side at Rolling Stone as well as being an investment banker specializing in media, entertainment and to chnology ventures. H Porter, thank you so much for joining us. Uh. You know, after Time Warner reported earnings yesterday, shares across the board of Walt Disney, twenty Century Fox, CBS, Viacom all fell because Time warners showed that they expect AD sales that were far below where analysts were expecting. A

bit yes, a bit. Well they were a bit, but but the trend that was already down, that's right, already ratcheted down. I'm wondering, in five years, do you think that these behemous Walt Disney, twenty for Century, Fox, etcetera. Will all exist as independent companies. I think that's unlikely. UM NBC already is not an independent company. ABC is

already not an independent company. You have CBS UH standing alone, and Fox and Fox foxes desperately trying to become a global media company with the rest of Sky Broadcasting, which they're trying to acquire in the UK. So they answer is no, they're not going to be any more independent linear networks standing alone anymore. Porter Who are the big advertisers? Are they automobile companies? I mean, are they the ones that really power most of this ad revenue. Historically that

has been the case. It's it's packaged goods products like Procter and Gamble or Gillette, UH and autos. But today they are not the big advertisers. Big advertisers are UH, Internet companies like Travago, insurance companies, UM and pharmaceutical products. And basically because they they little known secret is that The people who are watching linear television are baby boomers and and beyond, and they're the prime prospects for all

this pharma and the meds. It's true whenever I watch certain shows that my husband and they have, you know, add after ad if every disease you can think about, I think maybe we're not the demographic they're trying to reach. You know. I don't know why they have that golden retriever in every yet either, but that's enough. I'm waiting for Congress to say, we can make a health program work if we just eliminate the hundreds of millions of

dollars that each farmer company is spending on on television advertising. Well, so let's talk about whether there is anything that could revive the ad sales for these companies or is this just the beginning of it even more rapid decline. Well, it's it's a transition, it's not a decline. Advertising actually is up. The upfronts that that the major networks have just experienced. UH posted a low single digit UH increase in terms of total advertising sold and also the cost

for a thousand the rates that they're charging. The real message though, is that those rates are twenty five or thirty below what they were even five years ago. So that's that's because the audience, the network audience of linear television networks is shrinking faster than the cable cutters are are cutting out of cable television pay TV and going to the internet. Porter, I wanted to throw a couple of names at you and just get your thoughts. Start

off with Amazon. Well, Amazon is probably the smartest player right now, and they they are one of the new media companies. You have Google, Facebook, Netflix, um, uh and Amazon. And Amazon is essentially using Amazon Prime as a an inducement to buy products through uh Amazon's network, uh and and offering you entertainment and media content that is actually terrific.

And Amazon Prime now has a hundred million subscribers paying the same price as as Netflix charges and get and and the bonuses you get free shipping if you buy anything through the Amazon network. So uh, they're they're probably the most uh lucrative and potentially most profitable player in the new media world. Netflix net. Netflix has also got about a hundred million subscribers uh in the US, and

they're growing there. There's their static here, but they're growing globally because they're they're new, and they're they're offering uh a unique product, streaming product that hasn't been introduced in most of the rest of the world. So they will continue to grow, but financially or economically, Netflix is is

not sustainable. The model that they have uh is uh it's it's it's a ticket to bankruptcy because they own right now off balance sheet more than twenty billion dollars of liabilities for content that they're buying, contracting, or creating as original content, and the subscriber base is not going to support that. Netflix will have to, in my opinion, uh, introduce advertising, which will all of a sudden send the subscriber numbers through the floor. Well back up, because this

is actually quite a big deal. You're saying that netflix Is current business model is a ticket to bankruptcy and that they are going to have to start advertising, at which point they will attract fewer users, which is not which is infeasible. So in other words, they're bankruptcy. No matter what, advertiser are going to drive subscribers away. So

in other words, you think that they're doomed. I think that they're a target for acquisition by a Google and Amazon, A Facebook or one of the telecoms they do not have economically a sustainable business model, but right now be incredibly expensive for any of those behemoths to acquire Netflix, and they could potentially build out some of their own contexts. Why nobody is making offers for Netflix because their stock price and the pe is so extraordinarily high, but that

that will not support uh high level going forward. When do you think this sort of hits a tipping point? Because so far people seem to have endless appetite for Netflix's debt and for anything that Netflix does. As we're in a transition period right now, linear television is still attracting significant audience, and it's a huge amount of advertising, even though that advertising is in decline UH and the

cost per thousand is plummeting as well. But everybody is if you're a major advertiser and you want to reach a significant audience, you're going to buy network television. Netflix is offering more and more television content and drawing away the audiences from the linear networks. And and that's because it's seven's affordable, and and it's very easy to go in and out. But nobody talks about the turn at Netwick. Netflix. They never release any numbers. They don't really tell you

how many people, UM use somebody else's password. Um, there are probably another ten or fifteen percent of people who don't pay for Netflix and who won't if there's advertising that comes in. So I would say in the next three to five years, you're gonna see Netflix hit the wall, and then the stock price is going to come down and somebody's going to pick up the pieces. Thank you very much for coming in and being with us. Porter bib is managing partner of Media Tech Capital Partners. You

can follow him on Twitter at Porter three. All right, let's visit with someone who knows a lot about hedge funds and alternative investor and strategies. Ron Biscardi is the co founder and the chief executive of Context Capital Partners and he joins us here in our studio. Ron, thanks very much for coming in, Thanks for having them tell people what is Context Capital Partners and just add in the summits that you put together so they understand that

it's more than just a standalone company. Sure so, Context Capital Partners is a an alternative investment specialist. Uh we in essence, launch and accelerate alternative fund products, So we work in private equity structures, hedge fund structures. We launched a liquid alternatives platform a few years ago, and of course, UH one of the centerpieces now of our entire business model is context Summits, which is our conference UH that

focuses exclusively on capital introduction. So these are events where investors from around the world are coming together with hedge fund managers and alternative managers to go through a one on one me format where they get to spend a half hour with each other and learn about each other and figure out if there's a match, and if there is, they can spend more time following the event speed dating

basically speedype left spe right. As part of one of the recent conferences that you held, you did a survey which I thought was pretty interesting, and this conference was held earlier this year in Barcelona. I believe in UH, and I thought that the results of this survey we're fascinating because it showed that an increasing number of small family offices and wealthy individuals are are gravitating toward new funds rather than the big established ones. And I thought

that was interesting. Why can you talk a little bit about how pervasive this desire for smaller startups is so I absolutely I can tell you that what's been interesting to watch is how each one of our summits events has grown over the attendance in the prior year, in the midst of one of the worst periods for hedge fund performance, and I think the reason for that is twofold number one. After the crash, you saw investors largely

uh flee to safety. Uh They wanted to allocate into the asset class, but they only wanted to do so into the biggest funds. So the largest funds in the industry accumulated the vast majority of assets following the crash, and I think that has changed. I think investors are now more focused on returns. They're more focused on making sure they're getting alpha with their investment, and that has

led them to go downstream more towards smaller funds. So this is interesting because a lot of people say that in this current environment, the idea of the big macro bet is losing its allure. It's also not performing particularly well and on average. So is this sort of indications an indication that investors see more value in smaller funds that can target specific smaller opportunities over bigger ones that are forced to go for go bigger, go home with

large bets. Yeah. I think that's exactly what's happening. I think most investors believe that it is generally easier to find alpha and generate alpha in smaller, niche er strategies. And some of the top hedge funds in the world are largest hedge funds in the world. It's just like turning an aircraft carrier trying to run these things. So, uh, they have obviously underperformed as a as a group, and I think that's a big part of the driver behind

investors coming downstream. Does any of your money go into any of these strategies? Oh? Yes, I mean in in the core business, uh, where we're launching and accelerating funds, we do a few things. First, we deploy capital. You know, that's largely why everyone wants to talk to us. Uh. And you say deploy capital. Is that the people who you invite you think are great and you've invested with them. Yeah.

So in on the asset management side of the business, we are actually accelerating and launching new fund products with the portfolio managers who run those funds. So our partner capital at context goes into those those specific products and then as necessary, will also wrap services around them so that their institutional quality on day one, because that has also changed post crash. Precrash, you could start in your apartment in this business with five or ten million bucks

and accumulate money over time. But nowadays they really want to see a real business with compliance and technology and investment. Was that the Jensen partners combination that you did, so Jensen, Our partnership with Jensen was really about sort of bringing another offering to this marketplace and adding to our ecosystem.

So Jensen specializes in search for marketing executives in particular, and obviously all the funds who are attending our events are in the market trying to get better at marketing. So we thought that was a really nice complement to the Summits business, providing that search capability as well. So what are some of the smaller niche businesses that are

popular right now? Uh? So, you know, you can't look anywhere in the hedge fund industry without people talking about quant I mean it's really become uh must have in certain categories. And the you know, whether they are small funds are big funds. At our events, the quant strategies are collecting lots of meetings. You know, the the average meeting count that our Miami Flagship event in February was about twenty, but the quant strategies, a lot of them

were thirty to thirty five. What what what? What? What would count as a quant strategy? And if they use an algorithm, does that mean that they could call themselves quants? I mean, you know, I guess at the simplest level that's true, but uh, there are certain strategies where it's just a human can't compete with a computer. And I think if you don't have a quant capability, uh that you can demonstrate to investors that you have an expertise in you're just not gonna You're not going to accumulate.

Do the investors understand the models generally speaking? Probably not so. Like basically the wheel here there based sickly saying, okay, you've handed me a document. Everybody has invested, we love you, we think you're very smart. You've got twenty pH d s on staff, And by the way, here are your back tested results. Because I haven't been in business long enough, and go ahead, there's my money. So I think this came out of a survey we did in Miami. Investors

really are focused on your investment process. To your point, pen they can't really evaluate the code. I mean some are trying to hire software developers to actually dig into the code when the when the manager will let them. But in general they're focused on an investment process because if you have a good process, you can weather lots

of different markets. I think to look at just the performance of a back test or anything like that in isolation is probably a mistake, because every strategy will encounter a market where it doesn't work, and you need to know that the team is prepared to deal with that when it occurs. Just really quick. Any emerging market strategy

is getting hot right now. UH so at in our European survey, UH there was more interest from investors just slightly in UH developed market equities, and so nothing that immediately comes to mind for me. Thank you so much for joining us. Ron Biscardi, co founder and chief executive officer of Context Capital Partners in chief basically UH couple

maker between hedge funds and big wealthy institutions. UH. The Allocator Trends report on Europe from this year's meeting is really quite interesting and demonstrates a lot of counter intuitive trends and Lisa A. Bram Woid's, along with pim Fox, this is Blueberg. Right now, I'm looking at a British pound versus the Euro that is down as its weakest level since October. Comes after Bank of England's Mark Carney said basically the economy is at the mercy of Brexit

and downgraded his expectations for growth. To get a little bit better perspective, I want to bring in Mark Chandler, Global Head of Currency Strategy at Brown Brothers Harriman in New York City. Mark, thank you so much for joining us. You know, we have seen this pervasive weakness in the pound, which is pretty close at this point to the lowest level since two thousand nine versus the euro. How much

further can it weaken? And a good question. I think that what was saying, really it's not just sterling weakness here or the dollars weakness, but we're really seeing euro strength as well. To me that really the move did not begin because it woul happened in the UK, but it really began in April when it became clear that this populoust nationalist wave was not really sweeten across the world. That was primarily a U. S UK event, and that Europe was going to turn its back on it. And

that's what happened. As soon as Kim claid that mccon was going to win, the euros took off and really hasn't looked back. And so this is still for me, I think partly the Euro over But you know, back in two thousand and eight, two thousand and nine euro sterling got above. You just said that the euro, that the euro has overshot, so you're expecting it to reverse

at some point. Yes, I think that what we saw, you know, you know, one of the big drivers now UH that has put the bottom on sterling was the softer than expected us I s M for the service sector. Well today the Eurozone reported it's weakest p M I composite UH form basically over a year. And so I think that the mcclem story is so that the bloom is off the rose there, he's the honeymoon is over. I think we people have exaggerated how how close the the e c B is to really exiting their policies.

I know the leading you had you quote someone someone is talking from Bloomberg talking about how other central banks are getting are like signingly that they also are getting done. But I think what we're gonna get in September is the ECB to say that they're not done. They're not done expanding their balance sheet this year, but they will continue to buy bonds, perhaps at a slower pace, through

the first half of next year. The US balance sheet is going to be shrinking, probably beginning in October, but I think could raise rates again in December, could raise rates again early next year before the ECB even gets done with expanding their balance sheet or raising rates. Hey Mark, I'm wondering if you could explain who or what group of traders actually moves the needle when it comes to

exchange rates. And I'm thinking about dollar euro right now, because we're at one eighteen and if you've got this bid underneath bonds coming from the European Central Bank, you can make the argument that that's not a really natural situation. Well yeah, I mean so, I think it depends on

the time from that you're looking at. I often find and that's why I tracked the commitmentive traders that you can use on Bloomberg I p SP or the c O T function because I think in the short term, uh, the speculators and have a big role to play in

a sort of momentum traders, trend followers. But what's also happening this year, PAIM is that global investors, the clients here at Broun, these are real money, These are mutual funds, asset managers, unit trust and what these people have been doing have been the big play has been buying European stocks on an unheedged basis and buying emerging market stocks. And so I think that those those portfolio flows are more of a medium term uh more, more of a

medium term driver, you know, markets. It's interesting when you're talking about different flows. I have to think about recent data showing that foreign investors have increased their purchases of US bonds in part because of the weaker dollar gives them a more attractive price point. It makes me wonder, at what point will that end up causing more dollar strength, just because if there is more demand flooding in you

would expect that to be a sort of corollary consequence. Yeah, I know, you're right, that's that's always the funny thing I have to find with the closes. It's almost like for me, like an onion and the closer I. The closer I look at it, take off a layer and

peel back. I just have more layers. Like very I think money is very much mysterious like that, especially these flows, but in general, I think that the the problem is that when the dollar is weak like it is like it has been in the last several months, foreign central banks typically buy the dollar from the basically buying it from the private sector, and so the central bank ownership

of treasuries which is going up. There's another important function that you have on Bloomberg where you can track the Federal Reserve acts of custodian for foreign central banks and their holdings of treasuries and mortgage backed securities. It has been going up quite sharply this year, particularly for China and Japan. China and Japan, but also you know, I'm not sure in these we think that in the pick data,

but in the Federal Reserve custody we don't. Really it's not public who which central banks used the Federal Reserve as a custodian. I personally be surprised if China was a user of the federal reserves, custodial services, but any of it. It's true that central banks have been buying more treasuries, and they've been buying them because the market wants to sell them. The market wants to sell the dollars, and the central banks ACIEM like those dollars and put

them into treasuries. We gotta leave it there, But I want to thank you very much. Mark Chandler, Global head of Currency Strategy, Brown Brothers Harriman. He can be followed on Twitter at Mark making Sense. I want to turn out to trade between the United States and China. And Caitlyn Webber are a government analyst for global trade policy for Bloomberg Intelligence. Caitlin, thank you very much for being with us. Tell us the current state of US China

trade relations and what is at stake for both sides. Well, at this point we're really seeing UM that relationship has it cheerated a lot, really over the last month or so. It's interesting because in the first six months of the year UM it looked like the relationship was improving. Trump the Trump administration declined to name China currency manipulator after

threatening to do so on the campaign trail. Trump Trump administration really linked UM that trade relationship with China, UM oftensibly trying to help ease tensions on the Korean peninsula, try to rein in Piyongyang. Over the past months, UM, after we saw North Korea test to intercontinental ballistic missiles, you saw that, you saw President Trump come out and say you were disappointed in China that they haven't been

successful in sort of controlling North Korea. More. UM, we think that we could potentially see some actions on trade and so UM. There are a couple of investigations that have already been launched on steal an aluminum against that really target China, And over the past couple of days have been there's been a lot of porting that there will be potentially another investigation launched, this time going after

alleged Chinese violation of US intellectual property. Well, Caitlin, I'd love to get some details on the progress that US officials have made on this whole Bioamerica steel plan that President Trump has touted. I mean, how far along are we on that type of initiative or has it fallen

by the wayside. It seems to have fallen by the wayside, at least in the attention that it's getting when that when that proposal was announced back up, I think it was in April, it was you know, there was a lot of news around it, a lot of excitement from the U S steal industry. Um, this is a plan

to include steal in all US pipelines. Now, the Commerce Department was supposed to provide a report to the President UM on the status at that plan, just UM in the last week or so, and we didn't hear really a peep out of the Commerce Department or the President

on the results of that review. UM. So I say, get this at this point, it seems like that, you know, that plan may have stalled, and I think you're seeing a lot of frustration from the U. S. Steel industry into not seeing more results around that plan and around a larger investigation UM targeting imported U S steal that's often referred to as Section two three. They're really hoping for more action to take on these surging steel imports, and they're just at this point not getting it from

the Trump administration. You know, I'm wondering also what pressure President Trump faces from, say representatives from Louisiana and Tennessee. There two extremes on either side of the spectrum here, because louis and Louisiana exports a lot of soybeans to China and has a positive trade balance with China, whereas Tennessee has an extreme negative one and is importing a lot of things and would suffer from many tax that

the US would put on Chinese goods. I mean, are Congressman or other representatives maybe governors getting up in arms at all about this. There's a lot of consensus in Congress and among the business community UM in support for the Trump administration going after China's alleged violation of US UM intellectual property property. UM that's going to complaint for a really long time. There's a lot of consensus around

something needs to be done. So we need to do something to rain in China UM basically stealing our i P. What there is not a lot of agreement on is what the U s should do. You know, what sort of actions we should take in order to compel China to do that? UM. And you know, as you mentioned, if if these talks do fail and the US decides to impose tariffs on Chinese imports and China responds and kind,

there will be um, you know, collateral damage potentially. Um. The US is so dependent on China for consumer goods, for for phones and computers, UM that you know, sort of a broad action against Chinese imports would probably not be very politically popular. UM. So you know, a lot of consensus around something needs to be done, not a lot of agreement on what exactly we should target and how we should make sure that China isn't going after

our exports. Just quickly, give you about twenty seconds. What's next? What do we need to pay attention to? So let's look for the Trump administration's messaging on this so called Section three oh one investigation into I p UM. Let's look to see where they not they're going to promise them some deliverables on that in the next three months. So far this year, it's been a lot of investigations, a lot of talks, but not a lot of action.

We need to see if they're actually going to promise deadlines in terms of delivering some some new limits or some new restrictions. Caitlin Webber, thank you so much for joining us. A truly important topic that we will continue to discuss in the weeks and months to come. Caitlin Webber is governed, an analyst covering global trade policy for Bloomberg Intelligence, and uh, definitely, the rhetoric at least is definitely rattioning up between China and the US with respect

to its trade relationship. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio