Netflix Shares At Risk As New Competition Heats Up (Podcast)

And we're seeing some companies make some big moves. We've seen, most notably the Walt dis new company by twenty one century Fox from more than seventy billion dollars in an effort to compete against Netflix. So let's talk media and entertainment stocks. We are pleased to welcome Lara Martin. Lar's senior analyst for Needham Company. She's based in l a but she joins us here in a Bloomberg eleventh three oh studio in New York. Laura, thanks for being with us.

So can anybody compete with Netflix? What is your view on Netflix? To begin with? Because you are one of the few analysts out there that is not planning the table on Netflix. Yeah, right, So I find it's hard to make money when you agree with the crowd, So I take the hate mail that comes with being negative

on Netflix. Um. So my concern about Netflix is that, um, they're get about to get They've been a monopolist with other people's programming for most of the last seven years, and now they're going to get companies competing with them that not only have deeper pockets, but also have a lower marketing cost and a lower content cost because they

own their own libraries. So in the case of Disney and Warner Brothers, which is now owned by A T and T, they have fifty years of program and they've already paid for an amortized so it's a lower cost of content because Netflix has to pay cash for all their original content. And then each of those companies has sisters subsidiaries that they can advertise for free. So Disney owns ABC, they can put their own thirty second spot

telling you that Disney Entertainment exists. Netflix has to buy every single spot of paid media, so it's so they so both of those companies have a lower cost of content and a lower marketing cost in the case of Apple, which spent ninety minutes sort of talking about their news streaming service. They do fifty billion dollars a year free cash flow. Netflix spends thirteen and has to borrow three

of it. If actually Apple started spending thirteen billion, you wouldn't notice because they still have forty billion to buy in shares or paid dividends. Well, which raises a question, because this is speculation that we've heard from a number of people. Could Apple end up buying Netflix? Could Netflix actually get some sort of cash infusion from a third party? Um, maybe I think it is. I think it would be more likely that in the end, Apple will try to

do it itself at the highest brand level. And it's much more likely that the brand consistency is because of the Walt It was would be with the Walt Disney company, which it could buy, and they're similar brand strength. And as you know, you know, Bob Iger's on the Apple board and Steve Jobs was on, So more likely that

Apple would buy Disney. And the problem with Netflix is the day you buy Netflix, you lose read hastings at Ted Surranda's So I don't know what you think the value of Netflix is without those top five managers that founded it twenty five years ago. But it's a lot less because those people are extraordinary, and they won't be employees because they're gonna be with billions of dollars. So let's go back to that Walt Disney deal, probably the biggest M and A trade we've seen in the media

space in a long time. We never thought we'd see Rubert Murdoch sell. At least I didn't think we'd ever see Rupert Murdoch sell this company. Do you think Disney now has the assets to compete against Netflix and the Amazons and the facebooks and the Apples of the world. And I'll point out that Disney has an investor meeting next week April eleven, world presumably they'll unveil some more

details about their streaming business. Yes, I do. I do think it's large enough because actually content creation is a core competence of Disney. I do think you need twenty four by seven programming. What we've seen with ww E, which went first into the over the top streaming, is you have to have ten thousand hours in your library. When you launch, Disney had all Triple A titles, but it didn't have any ten thousand hours. Now they have that ten thousand hours, so I think they have a

really legitimate streaming service. And a lot of the content that you guys everybody's watching on Netflix is coming off and moving to the Walt Disney Entertainment channel while Netflix is raising their price to you. So the concerns about Netflix are legitimate, and there's something that we've heard from

other people as well. Uh, The question is how does an investor value those risks, because right now we're looking at Netflix shares uh that are valued at three give or take, and I'm just wondering where the correct value should be given some of these pressures that really are coming more online now in a way that they never have before. Right Well, the number that I think is the most telling is Netflix trades at ten times revenue.

Apple trades at sixteen times earnings. So if you had to back one of them, anything that goes wrong at Netflix and your ten times, the next closest fang is eight times, and that's Facebook, so it's gonna stop at eight. And then you know, Disney trades at three. Interesting, so it's just really overvalue. It's interesting. One of the things that you know about Netflix, I think I think it's been driving this stock really over the years has been

the subscriber growth. So the question is they have, you know, some hundred fifty millions some subscribers globally. That seems like a heads start, even for an Apple, even for a Disney. Um do you think there's room in this streaming market for multiple streamers? I mean, how many checks are people going to be writing every month? Well, so I think that actually is the best question in media right now, because the average home gets three over the top services,

including skinny bundles. If you think that number stays at three, then what happens is the incumbent Netflix, which has sixty million U S subs, must be losing subs to Warner or Apple or Disney, which means their U sub growth goes negative. Now, can you sustain atten multiple of revenue when your U S subs are negative, even if you can grow, even if you can grow your international subs fasterd offset, which you might not be able to. And I don't think a growth investor can take a negative

sub growth, even if it's just in the US. But these are a lot of ifs, right, And there's a question of the cost point too. And the fact that Netflix has developed a lot of original programming that a lot of people really like, right, I mean, it's not that they're completely reliant on Disney subscriptions. So what do you think I mean, is there any kind of early indication of how many individual packages customers are willing to pay for? Well, I think here's here's a logical consumer behavior.

There is no incentive for you to sign up for longer, more months for Netflix. So when bird Box comes out and it's hit, you can pay ten dollars watch it all, turn it off, go to the Walt Disney Company, watch all the stuff you want to watch. Turn it off. Go to Warner Brothers for ten dollars, watch it turn it off. You know that the marketers in the room are going to give you a discount if you buy a bundle, if you take three months or six months, they're going to try to lock you in for longer

because that's a better business model. Netflix gives you no incentive not to come watch what's hot and leave after thirty days. Laura Martin, thank you so much for joining us. We will not be setting you hate mail. We think your views are really compelling. Thank you, Laura Martin is senior analystic need Um and Company, joining us here in our Bloomberg Interactive Broker's studios. Let's talk oil. W t I is up nearly from its December load to over

sixty two a barrel. What's driving this rise and how high can it go? Fortunately, our next guest has an opinion on that. We welcome Jason Shanker. Jason as president of Prestige Economics, also chairman of the Futurist Institute and a Bloomberg Opinion contributor contributor. He's based in Austin, Texas, Keep it weird, but he joins us in our Bloomberg

eleventh three Yoh studios. Jason, welcome. So again we've had this big roller coaster for oil, you know, crashing there in the fourth quarter last year, but then staging is really strong rally here. What's driving it? Well, I think there's a couple of fundamental things we need to look at with oil, and the first is really important. Here's what's going on with Chinese growth. China's the biggest net

importer in the world at grood Oil. Uh there were a few months of consecutive monthly contractions in Chinese manufacturing. If you look at the private compiled Session Manufacturing Index, and we actually closed in November sort of mid November, below levels that we hadn't seen on the downside uh in terms of a down trend since the last Chinese

manufacturing recession started in December. So crossing below those technicals in the middle of November of and really important, we rose above those levels just this past week because that Chinese manufacturing p m I number that came out on Sunday night surprising number back above fifty after three contractions, So should be no surprise. Biggest net importer in the world of crude oil is expanding again and crude oil

prices close above those recessionary type prices. So how much upside does oil have from here, given the fact that China does seem to be at least stopping the slowdown if you will, well, I think there's a little bit more upside here. We actually saw upside for price during the year, even though this Chinese manufacturing recession was going

on all the all the brief a quarter long. We think that the really most important thing people need to know is that the U S summer driving season is one of the most critical things that drives oil prices presented was always presenting upside risk. I you want to qu two. We now see a little more upside risk. So before we would have set prices maybe sixties sixty five, now sixty five to seventy just reference, we're talking w T I, which is currently sixty two and a half

sixty two fifty in terms of price prepared. So you see that going up to a range of six to seventy. Yeah, we could easily see that because this summer's driving season is likely to be the biggest summer driving season in history. Last year was the biggest. This year is gonna be even bigger. Right, we think wage inflation most recent job report up three point four percent year on year, unemployment rate three percent. Everybody's got jobs, everybody's got money. They're

gonna be going places this summer with their families. So no matter what happens with China, you were always going to get some support at least until the September contract role in the middle of July. All right, So that's demand. Very bullish on the demand from your perspective, But isn't there a lot of supply? Aren't they pumping up this shale oil faster and they can even get it to

the terminal. Right, So there's a lot of supply for oil, which is why oil was slower to recover than a number of industrial medals after the Chinese manufacturing recession that lasted from December until June. Other things rose faster because there was a lot more supply of oil, but it's still rose on trend from mid until uh we saw that pull back then and significantly in October and the November.

So yeah, it's gonna be a bit more dampen than other commodities because we have a higher supply situation, but commodities are bought and not sold, and so big summer driving season means refineries are going to be consuming a lot of oil to meet that demand. And of course, if China can even remain just above fifty, we're gonna be in in this uh all arranging Q two Why not higher than well? This is right? So could we

in spike to see things higher. Yeah, it's possible, but part of the reason we we may not see it higher is because we still have China in a um right in still tepid growth. There's still questions what's gonna happen and trade ward things still going on, right, that's a deal. And of course in Europe, right, Eurozone manufacturing contracted significantly for a second consecutive month. This is a bigger concern. This is obviously outside the Brexit stuff, but

this is Eurozone manufacturing was an all time recording. Because you know that we don't necessarily want to talk about Brexit, right, well yeah, you know, but but but what's going into the Eurozone is is much more than than what's going on with Brexit, right, you're being monetary union kind of a separate deal. But euros of manufacturing was an all time record high in December, slid all last year, and

that wasn't because of bregit concerns. So that was the end of quantitative ease incoming and the Europeans couldn't do it. And they still have negative deposit rates. And so now we see the ECB going more devish. They're gonna kick it back up later in the year. And but but between now and then, um, you know, there's some risk and that's something that kind of limits some of the

upside for say commodities that are consumed on a global basis. Yes, sounds I'm glad you brought up Europe because you know, obviously that looks like China is stabilizing and maybe getting some green shoots of growth there. But Europe, as you just mentioned, very weak across your being, including Germany. So to what extent, what's the risk in your opinion that European growth could weaken even further? Yeah, so there there

is the potential for this. We saw this a few years ago when the European Central Bank tried to reduce the central bank balance sheet from around three point one trilling euros to two and as we know now it's closer to four and a half because that failed miserably. Even apparently trying to slow the expansion of the balance sheet or stopping it is failing miserably. So this means

that more quantitative ease in coming. Until, though that happens, you could see a bit more downside, very responsive economy to that stimulus. Very What's interesting to me is everyone sort of just expects the US economy as a given

to continue chugging along and accelerating this year. And I actually I was looking this morning at the City US Economic Surprise Index, which is at its lowest level since two thousand seventeen, which sort of, uh, to put this into English, means that the greatest proportion of economic reports are coming out below analysts expectation in the United States, UH,

since two thousand and seventeen. And I'm just wondering, you know, especially given the FEDS reluctance to make any move whatsoever, is the U s economy weaker than people expect or think right now? So I think there are some concerns people need to be aware of. I would hearken back to Ben Bernanke's quote at beginning of January that business cycles don't die, they get murdered or don't have old age,

they get murdered. And if we were to um, like inspector, we know around up the usual suspects, what would they be, Well, the usual suspects might be. Um, you know the fact that in twenty eight team we had more I p o s of companies with negative earnings than in in the history of ever. Right, So that's you know that that's something right, So so these these you know, that's

maybe a thing. Right. If we were to say, okay, we learned our lesson in the housing bubble, right, and the financial crisis, but maybe we forgot the lessons of two thousand, two thousand one. It was a long time ago, times ago. A lot of folks on the street, we're not working time right, So that that's the thing. The other thing, of course, is if we look at some of the economic data, we we also do see slower growth in October. You know, we have seen these higher

interest rates. We were expecting four rate hikes last year because of a year and year base effect for inflation. This year we were expecting zero. We're not gonna get any of this year. And that's also a base on a year on year effective inflation. That the other usual suspect than there is the FED where they behind the curve, now they ahead of the curve. Are they responding to slowly to inflation risk? You know that that's also a thing. But I think business investment is at risk this year,

and we saw a recession in business investment. Most people forget, and we could see a US business investment investment recession sometime this year. But we still spec one potent GDP overall for the year, far below some of the higher expectations of economists. But growth nonetheless, that's fairly solid. Jason Shanko, president of Prestige Economics, also the chairman of the Futurist

Institute and a Bloomberg Opinion contributor. In June of two thousand twelve, Roja Gupta, a former CEO of McKinsey, was convicted of insider trading associated with a Galleon hedge fund scandal and sentenced to two years in prison. The Galleon founder was also convicted and sent to prison. Mr Gupta was released in two thousand sixteen and has since published

his new memoir, Untiled Mind Without Fear. We sat down with Mr Gupta earlier this week to discuss his conviction and time in prison, and started things off by asking him why write the book? Well, let me first say why is not written? Which is not try to relitigate the case or to convince lots of people. I'm innocent.

I just wanted to present my viewpoint which I had steadfastly maintained my silence because the matter was sub judice till the beginning of this year, and I wanted to honor the tradition of not saying anything while my appeals were going on. So I decided to write my story, uh one to you know, get my story out in my own words. Second, I actually wanted to write a broader story than just the trial, because in many ways,

I've had an interesting life. Everybody has an interesting life, but I also had an interesting life, and there many lessons learned from it. There were many ups and downs, and I wanted to write it for young people who

could relate to pieces of it, you know. And I wanted to write in a very direct, you know, personal style, giving what I was feeling and going through these experiences, and hopefully some lessons will come out of that, not only in terms of this last few years, but also my own professional career and my childhood, my my life philosophy. And you did have a dramatic rise to the top of the corporate world until this, uh, this conviction one of the largest insider trading cases in the United States.

Who you say in the book that you felt wronged by what happened and that you feel like the true villains of the crisis and of financial markets have not been prosecuted. Who are the real villains? I mean, those of your report on the financial markets would know better. I mean I can say one simple fact. You know, all we did in the aftermath of the financial crisis is h make big fines for banks, which of course the shareholders ended up paying for, and the executives kept

all the abovenesses and all their money they made. And this was the biggest crisis in American history for a long time. Thousands and thousands of people lost their jobs, they lost their pensions, they lost their homes, and banks were held accountable for misdeeds fraud even and yet no one in the senior management of any of the banks who found accountable. Do you think that senior bank executive,

senior financial executives should in fact going to jail. You tell me when when a bank is find billions of dollars in admits to fraud human beings? Do that right? No machines are doing this fraud or this bad practices. So yes, of course I don't think we've held the executives at that time had been held accountable to this day, you maintain your innocence. What do you believe the courts

got wrong? What? As you know, well, insider trading implies that actual insider information was passed, second, that there was criminal intent, Third, that there was consequential benefit and they couldn't prove any of it. There was only some circumstantial evidence in timing of calls, but there was They recorded rather Rutnam for eighteen months. There was not a single conversation between us that passed any insider information. There was no emails, there were no witnesses, so there was Yet

they convicted you, you appealed. I'm saying, you're saying, you know what they got wrong. They didn't meet any of the criteria right. And second, there were twenty two people convicted in the Galleon case or related I don't know what the exact number is. Every one of them had a quid pro co arrangement with raj. How is it that I'm the only person who had no benefit, no arrangement, nothing.

It was jail like jail by and large was okay, except for the fact that you know, as they say, power corrups and absolute power cerrups absolutely, and the prison system is run as if they have absolute power. And they sent me to solitary confinement three times, one time for seven weeks with no severn wis why, uh, you can buy towels in the commissary in prison? Right? I had a bad back, So when you sit in chairs. I rolled up two towels and stitched them for a

little pillow support pillow. And they came and searched my my little bunk area, and they found nothing except that pillow. The towel rolled up was sitting on the bottom of my bed. And the guy said, well, this is tampering with government property. And so they sent me to salitary confinement for seven weeks. And you know, if there is anything I would say, please get that out to the world that this the prison system is run like that.

It's terrible. They want you to, you know, go and hang your head and be repentant, and you know, they don't treat you like human beings. In many of the time, solity confinement you would think is a very quiet kind of place. Everybody is in a single cell and so on. No, it's absolutely the noisiest place in prison because there are steel doors and walls, and people are going crazy. They're

banging streel doors, they're shouting there right now. It's it's u and defines more than two weeks a solitary confinement as severe torture and had seven at seven and this goes on. This does not not just me as a CEO of Mackenzie. You had every CEO and speed out. What's it like now? What happened to your friends? No, there's many no, no, no, many people have stayed by me. I mean, you know, no, vast majority of people have stayed by me. Some have turned away. But you know,

also I was, you know, in a retirement mode. I was spending most of my time in philanthropic things. So when I came out after this seven years, I have no particular desire to go back into the commercial world and in the way I was before or way back when I was fully engaged in the commercial world. So I had no particular reason. And many of the CEOs have honestly retired. It's been now seven nine years. That was Jacque Groupta, a former chief executive officer of Mackenzie

who spent two years in prison for insider treating. His new memoir, Mind Without Fear, is available now and one of the things that he is committing himself to, as we discussed to in that interview and afterwards, was to prison reform because of his experience in solitary confine them well, for many executives, the global economic outlook became more clouded in the first quarter in the U S. A disappointing February jobs reports still concerns over the stability and sustainability

of a strong economy, and key foreign markets like China and Germany continued to struggle. So how are companies reacting to these uncertain conditions. Our next guest has some very interesting data to answer that question. We welcome Sandy Cockrell, Global CFO program leader for Deloitte. He joins us in our Bloomberg Interactive Broker Studio. Sandy, thanks so much for joining us. I know Deloitte does our quarterly CFO survey where you survey a hundred and fifty So CFOs, what's

the survey telling you? Now? Very interesting? Uh? You start off with the view of the macro economies. Uh. Eight percent of the survey CFO said that the North American economy was actually good today, but when you look out a year, only eight percent expected it to approve. So that really lines up with some of the findings around what we're thinking about where the economy goes. About eight percent of the CFOs said that we would either have a slowdown or a recession by the end of Now.

The interesting thing that we found when you compare that to other surveys and especially what economists are saying. Only fifteen percent of those said we would actually have a recession, So most of the CFOs are expecting to slow down. We thought that was pretty important. When you look at Europe, only sixteen percent of the survey CFO said your condy is good right now and only eight percent expected to

approve in a year. Now, if Brexit works out, we would expect those numbers to move up a little bit, but still very very low. With respect to China, only see that see see that that economy is basically performing well today and and when six better in a year. So those are really low numbers when you think about projecting into that. Okay, so can you go into the mind of a chief financial officer right now? This sort

of archetypical typical uh CFO. Are they a pessimistic bunch? No, not really, but I think what what the backdrop think about what they're having to deal with. The number one concern is around trade and tears. Uh. This this survey really does capture multinational companies who has supply chains all over the world, who are trading in foreign markets. So

trade and tariff is incredibly important. So if you go back through or four months ago when they put their fiscal year twenty nineteen budgets in place, now they're having to execute against those, and there's still this cloud of uncertainty that they've got to deal with. Okay, So then here's my question. Are they actually acting on their pessimism by pulling back some of the potential investments? In other words, is is actually the sort of uncertainty directly affecting the

economy and you're seeing that through this service. Well, one of the things that we ask is is it a good time to take on risk? And only of the survey age CFO says now would be a good time to take on risk. That's a relatively low number in the context of the history of our survey, So that really kind of makes your point. Second, when you think about own company optimism, we ask a question about compared to three months ago, are you more optimistic about the

next twelve months or less optimistic? That stands at a net sixteen percentage points, which again is pretty low. So yes, those things are certainly affected. They're thinking, um, they're having to make decisions without clarity, without all information. They would like Secondly, they cited a numbers concerns that drive this thinking just the natural kind of flow of business and credit cycles where we are right there. Um. And then last they cited the slowing growth in China and Europe

is something that they're very concerned about. Well, say, how about internal to their own companies. One of the things that you know where the good news we've seen over the last several years is the economy is approaching or at full employment, some waging increase. Are the CFO is concerned that they just can't find good people? Yes, that that parenthical quarter to quarter for the last three years. The number one internal concern is basically the acquisition retention

of talent. And it's not just in the financial organization, it's across the enterprise. And it's really exacerbated by the fact that moving to digital technologies and tools, um having the people that actually utilize those things. So you're seeing a really a transformation in the workforce and it's a huge concern to CFOs because they're really the ones that watch productivity. Were you surprised by these results? No? No,

not really. The thing I was surprised about was was on the recession, I would have expected more of the CFOs in line with what we hear from leading economists to expect a true technical recession by the end of that surprised us a little bit. And and with respect just sort of putting some historical perspective, Is there sort of a size and scope and how pessimistic CFOs are about one year out? I mean, it's like the most pessimistic.

These These are very low numbers. I'm compared. These are well below our two your averages in terms of that index, that optimism index UM with respect to business metrics, forecast of revenue growth, earnings growth, capex, hiring, and dividends, all those are below their two your two your averages in terms of twelve month projections. So city, how are the CFOs as a group in terms of kind of projecting the future if they're calling for a slow down, maybe

a recession, are they any good at predicting this stuff? Well, what I'd say is over well over half about six of the CFOs actually have created downturn plans, which is good. So they've got scenarios they can pull off the to pull levers in those things, the two levers that they'll pull if we get further into this year and things don't begin to turn around or or deteriorate, are gonna be number one moving to cost reduction programs and second,

look at a headcount. Those will be the two levers as you start seeing pulled, which is going to be concerning when we talk about the strength and the jobs market that could weaken materially if there is some sort of downturn learn or perceived downturn in the relatively near future. Sandy Cockroll, thank you so much for being with us. Fabulous having you here. Sandy Cockroll is Global CFO program leader for Detroit, joining us here in studio. 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 Abram Woods. I'm on Twitter at Lisa abram woits one before the podcast, you can always catch us worldwide. I'm Bloomberg Radio