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Warner Brothers Discovery, Here we go again. Folks plans to once again reject a takeover bid from Paramount Skydance for More.
Rejoined by Luke Stillman.
Luke is a managing director ed Madison and Wall. How's this thing going to play out here? It feels like Paramount's got to come in with a higher bid at some point.
Yeah, it's it's an interesting development. So Warner essentially rejecting Paramounts barely improved offer same thirty dollars a share, offer a few extra guarantees. If they want something to move in this discussion, I think it's going to have to move up to thirty four to thirty five five dollars a share. We're in an interesting situation here where it's hard to tell which of these bids is really the higher value one, because of course they're going after different assets.
Netflix wants just the studio and streaming assets. Paramount wants everything, so understandable in that uncertainty that Warner's leaning towards Netflix, the much larger company. What I think is interesting about this is not so much the takeover commentary, but really what it says about the reset that's happening in the TV space, distribution shifting, monetization under pressure. So all this consolidation is a symptom of that pressure, not the cause of it.
What is these strategic reason that Paramount hasn't raised its offer already? I mean, when I saw that Warner Brothers was expected to reject the bid, I immediately look to NSS. Right, No, duh, they're going to reject because they haven't offered any more money. Just because you say Ellison's good for it, and the breakup fees a little bit higher, that's not going to move the needle. Why don't they say, okay, it's thirty three dollars a share.
Well, I think there's plenty of time here. I looked at betting markets the other day. There's a decent shot, according to them, that this drags on into twenty twenty seven. So I think there's five or ten new developments that we're going to get over the coming days and months and plenty of time to potentially raise the.
Oh wait, it's interesting you bring up betting markets and more and more. That's an indicator that people care about. And I wonder if it's because does David Zaslov put down a bet? You know, does Larry Ellison put down a bet? Does you know? Do people in the know you think play in these betting markets?
Well, you know, I don't know if people in the know are playing in the betting markets, but certainly.
The thing is Looke, you know more than everybody else about this stuff. Right, So when you're looking at the betting markets, like, why do you care what these chumps are putting down a how market? That's a question how deep that market is?
Yeah?
Like how representative are those betting markets? Yeah?
Well, look, there's lots of moving parts in this takeover battle, regulatory issues, political connections. So again, I don't think the story's over there when.
The Trump administration would be playing on polymarkets.
Crazy to think.
So, So, Luke, how about this. I'm shocked to hear that there is gambling going on in this place.
Looking at this deal, it feels like it's a nice to have for Netflix, but it's kind of a must have for Paramount because if Paramount doesn't get this deal, I don't know what they do. So how do you think about that? I mean, if I'm Paramoun, I feel like I really got a stretch to get this steal.
Part of the problem in the whole TV space is really the economics don't work anymore. So we're at something we call the PayTV singularity right now. In four Q twenty five is when fewer than half of the households in the US have a PayTV subscription. That's down from nearly ninety percent in twenty ten, and the economics just don't work anymore. Consumers want video more than they ever have.
They spend more on video than they ever have, doing it in a different way, and a lot of the gains aren't going to the streaming platforms of a Paramount. They're going to a Netflix or an Amazon or an Apple.
Do consumers care about I go to the movies all the time, but I'm old, right, and that's because I want to do something with my wife where I don't have to talk to her. Do consumers care about going to the theater? Because if Netflix wins. The worry is that we're going to see the end of the big screen business.
I mean theater bucks office receipts still haven't really recovered since COVID. We haven't seen a new high yet, even though every year we expect everyone forecasts a new high. I think part of it is that people underestimate how engaged consumers are with streaming platforms. Every time we see a price increase or a password crackdown, everyone has a discussion about is this too much? Is this where consumers say it's too expensive, But consumers aren't trying to save
money by cutting their cable subscription. We're just moving that money over and so for a Netflix, HBO or another combination you know, thirty forty fifty dollars streaming bundles is there's plenty of runway for price increasing.
What's amazing here is the value being ascribed by various players in the marketplace for the cable networks business of Warner Brothers Discovery. Those businesses used to trade a ten and twelve times IBADA. They're being valued today around three or four times EBITDA.
Three to four. Is that the Netflix valuation of the paramount evaluation against the problem is those are pretty far apart.
Yes, somewhere in between Bloomberg Intelligence ETHA values is at about four dollars per share. That's about four four and a half five times EBITDA, less than half.
Of what they were, you know, ten years ago.
And part of the problem is the TV ad business is just in permanent structural decline. So it's this seventy billion dollar, slowly melting iceberg of value that is not recovering. As much as broadcasters want to brag about their streaming ad growth, it's just cannibalizing the linear dollars. It's not growing the pot.
By the way, can you weigh in on the trade desk issue. We were just talking with Isabelle Lee about why is trade desk doing so badly? It's sound seventy percent year to date, and to my mind, that's an incredibly value business valuable business model.
Right.
You want to be able to aim your ads at the correct viewers.
Yeah, we just launched a programmatic ad forecast and it is a growing space. The problem for the trade desk is their take rate is really high and there's new competitions, so potentially some challenges there. Not to mention the open Internet, like the TV marketplace is struggling at least compared to big search platforms and big social media platforms.
What's the AI impact on advertising, you guys think these days?
We think the AI impact is not much for search. We don't think it erodes the search business.
Well as I could have made an argument that's the death knell of search, but it hasn't been the case.
It hasn't been the case, and half of search comes from small businesses. They're never going to move to a chat GPT surge for years, They're going to stick with Google. It's not the death knell for social What we're worried about is the open Internet long tail of publishers, where
we think this completely undermines their business. And what they should do is they should license their content as fast and as often as possible with these AI platforms and take that money and pivot to event businesses, to subscription businesses and move away from advertising.
What about on the provider side. My buddy Mark Douglass runs a company called Mountain Right. They got together with Ryan Reynolds on the creative side, and now they have an AI program that allows small businesses to create their own advertisement and then aim it at the right people in their region. Yes, seems like it should be a slam dunk.
Small business CTV B to B CTV. These are a lot of spaces that didn't really exist a few years ago, and now because of some of those AI tools, the creative barrier has dropped much lower. And everybody wants targeted advertising. Everyone wants targeted on TV. And so those are definitely some growth areas. But overall, if you zoom out to the total TV landscape, it's not growing. It's not growing
the pie. And that's why we're seeing consolidation because when the pie stops growing, everyone starts battling over taking share.
You know who gets paid here, David Zaslov, the CEO of Warner Brothers Discovery.
Yeah, he looks like a genius right now, does it? Does? I mean? And he looks like a defender of the creative community, Like he's starting to look like a man of the people.
You know, the best trades in media over the last fifteen years have been sales. I mean, Larry May's in the radio business, Rupert Murdock and the big diversified you know media empire. Now maybe you know the Zaslov and John Malone, all those guys Boom they said had enough. Now it's up for some of the new technologies. When does Google spin out YouTube?
Would that be great?
The thing about YouTube, I mean yeah, I mean YouTube is I think YouTube is core to their business. The thing is, though, you know, advertisers don't think of YouTube as TV, but consumers think of YouTube as TV. Consumers even think of social video as TV more and more so. If you look at how TV broadcasters are positioning themselves, they're still going after the old story. We have brand safe, the most premium content, the live sports you want. Digital
platforms have that. Thursday Night football is on Amazon. The oscars is going to YouTube. You know, the landscape is shifting, and we're not seeing the kind of investments in content or investments in global solutions that we think will need to see for those to turn the business around.
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I obviously the driver of last year, of the year before and really the year before that, driving demand for cybersecurity as well as more industries adopt the technology, and Bloomberg Intelligence says expect more cyber spending and consolidation in the sector. Let's discuss that with Teresa Payton. She's the CEO of Fortalist Solution. She was the White House Chief Information Officer, the CIO of the White House under George W. Bush. Teresa, thanks so much for joining us. How important do you
think cybersecurity will be in twenty twenty six. I feel like I just can't overstate the importance of cybersecurity in AI world.
Yeah, thanks for having me here on a happy New Year's Eve, and yes, I'm predicting everyone needs to get ready for a new wave of attax that we have never seen before, because cyber criminals. As we get better at cybersecurity, they don't give up and suddenly say, gosh, maybe I should be a good.
Person because they've made it harder for me.
Now they just up their game, and so be prepared with AI with I think quantum computing could be available by the end of twenty twenty six and quantum computing is going to be incredible for solving the previously unsolvable problems. But that also means for cyber criminals breaking encryption.
So is AI is quantum computing.
I'm not sure if it's friend or foe here in your world of cyber just you know, technical security.
How do you think about it?
Well as sort of you know, for mankind, quantum computing, if we do it right and get it right on sort of the environmental impacts and issues, is going to be incredible. It's going to allow us to solve problems that we haven't solved before because massive amounts of data volumes mathematical problems, and we truly will see breakthroughs I believe in healthcare, protecting the environment, and a lot of other issues on everybody's minds.
However, in the wrong hands, you know, it's.
A tool, and so the tool is neither good nor bad, it's just how is it wielded. And in the wrong hands, this quantum computing tool could be used to sort of do decryption on previously stolen data that has been encrypted based on yesterday's and today's standards, But with quantum computing, it's no longer safe So if you think about nation states and cyber criminal syndicates who have been stealing data for the last ten to twenty years, and people have said, gosh, they're.
Just sitting on it. They haven't done anything with it.
When quantum computing comes, they may actually be able to weaponize it.
What is that? A lot of people talking about quantum computing these days. I'm watching the stocks. Most of them have not done well this year, but it's coming, right. I remember when Jensen Wong said it's fifteen years out, and now he was like, well, maybe more like five to ten. Yeah.
Based on what I'm seeing, there's been some incredible breakthroughs and several labs around the world, and this is a global race as to who's.
Going to figure out quantum computing first.
And based on what I'm seeing, I really do believe it will be commercially available by the end of twenty twenty six. We've been saying in the next two to three years for over three years now, so I really do believe, based on what I'm seeing coming out out of the lab reports, it will be available, probably only to those with the deepest pockets.
We'll be able to afford.
Quantum computing at the end of twenty twenty six, and then we'll see it become more commercially available twenty twenty seven, twenty twenty eight.
I should amend my issue with surveillance correction. Okay, I'm looking at the Defiance quantum ETF and it actually is up thirty seven and a half percent eight in terms of total return, so it has done quite.
Well, Teresa, As we think, here, what are the risks that we're not even thinking about yet? I mean, it just seems like every time I see a hacking story, it's like I never even would have thought of that, but there it is.
Here.
Are there some things that are really worrying in the back of your mind?
Yeah, I think if you sort of look at my top five list of things I'm worried about going into twenty twenty six, one is around the various AI implementations that have been happening. The lack of governance and guardrails also means that things are going to market and it may not be secure by design, and we're going to find out the hard way where those security is lacking
in these different platforms. I think the second thing that I'm concerned about is again AI is going to be an incredible tool, a great productivity enhancement for a lot of businesses. It's going to democratize data so you no longer have to be the largest company with the best data scientists now to be able to actually leverage and
monetize your own data. But with that powerful tool comes responsibilities, and it could end up in the hands We've already seen this year of cyber criminal syndicates trying to use it to create malware, to create ransomware, to create different types of tack vectors, and take advantage of where we've missed out on secure by design in our software stack.
Hey, you serve Teresa in a Republican administration as CIO under President George W. Bush. What do you think of this Republican administration and it's uh and its effects on cybersecurity?
Well, you know, I'd like to think that regardless of party, that the United States has dedicated public servants and all the departments and agencies.
Who are very focused on security by design.
Sometimes we fire all those dedicated public servants and replace them with Fox News hosts. So what do you think there? How do you how would you grade them?
Well, what I would say is I would focus on the cybersecurity.
Strategy for the administration.
If I were advising them, I would tell them, you need to give a clear and consistent message. You need to let people know who's going to be in charge. We still, you know, have an acting situation over at DHS with cybersecurity, and I would say, the things that you are keeping that are good, and then the things that you are changing to reflect the changes in our modern technology infrastructure. A lot of the things that we are doing the last ten to fifteen years are not necessarily.
Going to serve us.
So it has been a very challenging time for many of the people that have been impacted by the layoffs and government. But we need to look at an opportunity to say who wants to do public service and what do we need to do next with all of this new technology that's being implemented, not just in the departments and agencies, but also in our critical infrastructure, which really needs attention.
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This week marks the end of an era for the man that many regard as the world's greatest investor. Greg Abel, will succeed Warren Buffett Bershire Hathaway in the new year, taking control of a one trillion dollar conglomerate with more than three hundred and fifty billion dollars in cash on hand.
I don't know what you do with that.
Let's discuss with CFR, a research analys Kathy Seaffort. Kathy, let's start with that big slug of cash that's on the balance sheet. It's been there for a long time. They've shown an inability to put that to work here. What do you think the plan might be under mister Abel.
Well, I think this year is going to be a transitional year for the company under Greg Abel, and I think some of the steps he's recently taken have sort of shown that with regard to the cash pile, you know, some of that cash is being held to support insurance liability.
So I don't think investors should think that that cash is all going to be deployed into ask you know, into acquisitions or what have you, you know, I know, given Warren's investment style and value oriented approach, he the sense that I had was he was sort of frustrated with valuations. He was having a hard time finding, you know,
good uses for that cash. My senses, as we head into twenty twenty six, there may be some pressure on greg Able to potentially pay a cash dividend with that or possibly put forth a more structured share buyback program. If they're not going to deploy it into.
Acquisitions, Well, what could they buy with that much cash? Is there anything that you could think of if if you were in charge, that you would try and pick up.
I don't think my compliance folks would like me to speculate. I know who they I know who they might buy. But you know, I think if you look at the Berkshare operating model and you look at the framework, the investment portfolio is sort of barbelled between financial services and technology, and those are names that they like to own as
an equity investor, not necessarily as an operator. So, you know, I think if we look at greg Abel's background in energy and industrials, my senses that he may tilt in favor of those businesses, which makes sense, given what's going on with some of the industrial and energy build out to support AI. And then I think the other area that probably makes sense to look at as the insurance space.
It's a significant business segment for berkshare, and insurance pricing is softening, and when that happens, typically you see an increase in m and a activity. They have in the past added to their stable of companies through acquisitions. I wouldn't be surprised if they do that going forward.
As a non Warren Buffett Accolyte, my first question would be he can't find any investments, that's clear. Why does a company not return that cash to shareholders via that dividends and or buybacks.
That's a good question, and my sense is that Warren Buffett was given a certain level of grace and leeway that Greg may not be given, and there may be a cohort of investors who do agitate for a return of some of that capital. I would not be surprised to see.
That you're getting some blowback in the live chat now, Paul, I know, and you're a dividend guy, I get it. But these investors on that are watching us on YouTube say they better not create a dividend completely wipes out a segment of investors. We do not hold Berkshire looking for a dividend. I invest in Berkshire because they're better with money than I am, and they make some good
points here. So, Kathy, you know, I guess a buyback makes more sense if you're going to try and return cash, right, if you think Berkshire shares are undervalued, well, but.
That's the interesting thing is that they haven't bought back any shares in over a year.
They didn't buy back.
Any shares this year, and so not buying back shares, you have a situation where I believe the Warren Buffett premium is being extracted from the stock. There is not necessarily a significant acquisition plan out there. And then the other pressure is a lot of that cash has invested in treasury securities, and if treasury yields continue their current trend,
we would likely see investment income coming under some pressure. So, you know, there may be I mean, maybe not the people on the Bloomberg chat room, but there may be some large pension funds holding who are not on the Bloomberg chat room who may have a different feeling, you know, where the company is given the position of the company and given its growth prospects, which have not been particularly stellar, particularly on the top line.
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