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Klarna Wants to Replace Humans with AI & Spirit Leverages Southwest Debacle?
00:28:18
Klarna embraces AI & Spirit is ready for the opportunity
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- [00:00]
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- [00:28]
Neal Freyman
Good morning, Brew Daily Show. I'm Neal Freyman.
- [00:31]
Toby Howell
And I'm Toby Howell.
- [00:32]
Neal Freyman
Today, as Southwest tries to calm a spiraling PR crisis, a refreshed spirit wants to steal its customers.
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Toby Howell
Then Klarna filed for its long waited ipo. Will investors buy now or wait until later? It's Monday, March 17th. Let's ride.
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Neal Freyman
Welcome back to the Week and happy St. Patrick's Day to everyone of Irish descent and pretty much anyone else who wants to have a good time. And there are a lot of you. While only one in nine people in the US claim Irish heritage, about 61% of Americans plan to celebrate St Patrick's Day. And that means big business for your local bar, which treats the holiday like the alcohol soaked version of Black Friday. According to Moody's, St. Patrick's Day is the number one day for beer consumption in the US with sales jumping 174% above the average. Toby Dry January has never felt more distant.
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Toby Howell
We could not be further away from those early aughts of the year. But I have to call you out for a second, Neal. You are wearing absolutely zero green right now. Just a startling lack of holiday whimsy on display right here. Plus, you are very vulnerable to a leprechaun's pinch, which is actually the reason you're supposed to wear green in the first place. According to folklore, green makes you invisible to leprechauns, which is a fun fact that I bet will hit a lot harder later today when everyone is having a good time at a bar. Now a word from our new sponsor, Sophos, who I am excited to tell you all about Sophos.
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Neal Freyman
Okay, I'll buy. Why are you excited about Sophos?
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Toby Howell
Well, they provide cybersecurity for growing businesses.
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Neal Freyman
You don't have a growing business though.
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Toby Howell
Yes, but knowing that if I did, Sophos would be there to provide enterprise level tech and real world expertise to keep it safe. It helps me sleep better at night.
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Neal Freyman
Ever heard of putting the cart before the horse, Toby?
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Toby Howell
No, I don't see how that is relevant here. As long as I have my cybersecurity figured out. The business part will come in no time.
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Neal Freyman
I am excited to see what you come up with. In the meantime. If you actually own a business, big or small, you deserve enterprise grade protection with Sophos. Learn more@sophos.com that's so P H O.
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Toby Howell
S.com Colarna the Swedish fintech you use for buy now, pay later purchases, is finally going public after years of anticipation and valuation swings and lots of lattes bought in installments. Klarna filed its IPO prospectus on the New York Stock Exchange under the ticker Clar. Klara was founded in Sweden in 2005 but became a household name during the pandemic when BNPL helped fuel lockdown induced online shopping. But like a lot of its peers, Klarna suffered from rising interest rates in a VC bubble bursting. In 2022, it raised funding at just six and a half billion dollar valuation, an 85% drop from the $45.6 billion it was valued at a year before. But recently Klarna has bounced back, bringing in 2.8 billion in revenue last year and net profits of 21 million, a sharp turnaround from heavy losses just a year earlier. Its one year makeover has given it the confidence to explore this long rumored IPO where it is aiming for a valuation of about $15 billion. Neal, this is a company that arguably might be more interesting for what's going on behind the scenes. Klarna has embraced AI wholeheartedly, replacing 700 full time customer service agents with an in house AI chatbot as well as multiple large SaaS vendors. And now it's writing that increased efficiency into the public markets.
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Neal Freyman
You're absolutely right. There's a lot of juicy storylines to dig into with Klarna's ipo. The A plot is the IPO of a major fintech company and one of the few buy now pay later giants to go public. The B plot is this major test for AI's promise to transform the workforce. As you mentioned, Klarna has bear hugged AI like few other companies have. It's been developing its own in house AI system based on OpenAI guys chat. CBT and its CEO has said the quiet part out loud. While many tech CEOs when asked about whether AI will replace human workers, they kind of hedge a little bit and they'll say no, it's a compliment and we want our human workers to work alongside AI. He's come right out and said that he hopes. He's bragged that AI will automate his workforce and he hopes to dwindle his workforce from 5,000 people working at Klarna at a peak to have ultimately just 2,000.
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Toby Howell
Right. And I do think that he is not someone who shies away from controversy either. I mean, saying that you're replacing 700 full time contract employees to save $40 million annually, that's not usually a popular talking point. But to him, that's exactly where he wants to take this company. Now, some people who have worked at Klarna before have pushed back and said that, hey, maybe this narrative around AI is more of a, of a gimmick than actually something he truly believes in. Because what's a great way to cover up your workforce dwindling from 5,000 in 2023 to 3,500 by the end of 2024. To say that, no, it's not because, you know, we wanted to lay people off. It's because we're replacing them with much more efficient AI. So it's definitely. He's putting his neck out on the line saying this is what we think the future of business is. And you can't really argue with the results. It did have a remarkable turnaround in profitability right around the time where I became big. So maybe he is putting his money where his mouth is now.
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Neal Freyman
In terms of Buy Now Pay later, that sector that has grown a ton over the past six years or so where you can pay online in installments had that big boom during the pandemic. There was that big slump after the pandemic, but now it's coming back in a big way. It is still very popular. I mean, just look at the recent holiday season. From November 1 to December 31, the usage of Buy Now, Pay later services jumped nearly 10% year over year, amounting to $18.2 billion in total online spending. That's about 7.5% of overall online sales. So as much as people bought over the holiday, 7.5% used buy now, pay later, Klarna, affirm Afterpay, are the giants in this space. Whether they will be successful on the public markets is a different question entirely. Affirm went public a few years ago and its stock has fallen 57% since its IPO. And the market is quite turbulent right now. It's not exactly a time when a big company would want to go public. So we are watching to see whether Klarna will actually go public or get cold feet in the next month or so.
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Toby Howell
That's probably the C plot. I mean, you've already taken us through the A plot and B plot. The C Plot is just the health of the overall IPO market, which right now it's, there's a lot of volatility. There's some plunging share prices we've seen earlier in the year. So it's been a pretty cold market, which a lot of people thought that under, you know, this current administration, the IPO market was going to come roaring back to life. There are signs of life. Karna is a big one. There's another company, CoreWeave. They operate data centers. They are filing for an IPO that should value the company at more than $35 billion. So it's been a kind of rocky start to the year for the IPO market. But Klarna is one of those names that could, you know, turn around the whole year if it goes well.
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Neal Freyman
You are well aware that stocks have taken a bruising from the rapid fire tariff announcements coming from Washington, D.C. but there's been another high profile casualty of the policy uncertainty. The US Dollar, the greenback, is having its worst start to a year since 2008, declining more than 4% since New Year's Day. The slump, depending on how long it lasts, could have dramatic impacts on everything from Fed rate cuts to inflation to where you decide to go on vacation. At a very high level, the strength of a country's currency reflects demand for that currency and by proxy, the expectation of economic growth. Generally, if your currency is gaining, it means your economy is looking good. Congrats. And that's been the story for the US Dollar for more than a decade, as America's economic growth has sailed past those of peers like Europe. But events of the past few weeks have shaken those foundations. Trump's trade war with every country on Earth, combined with Europe's massive spending plans to rebuild its military and infrastructure have been ripping through currency markets, sending the dollar to its biggest weekly loss against the euro since 2009. Toby, the dollar is looking a little less almighty, right?
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Toby Howell
Some of the reasons why the dollar is weakened, one, it has been those steep increase in tariffs. But also it is what's happening in Europe that is causing this surge of optimism for that particular economy, which has driven the dollar down sharply. The Wall Street Journal's dollar index has declined seven of the past nine weeks. And the dollar affects so many things. Obviously, global investment flows is a big one. But also, you said the direction of transatlantic tourism, if the dollar becomes weaker, certainly may, maybe more Europeans are going to head our way instead of vice versa, which has been, you know, the, the status quo for the last decade or so. So what are Some implications of a weaker $.1, it might make imports from places like China more expensive, which could potentially actually lead to a boost of inflation, which could make it harder for the Federal Reserve to cut interest rates.
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Neal Freyman
Yeah, strong dollar, which has been the case for a long time, is great for American vacationers Abroad. Recently. The US dollar last year hit its highest level versus the Japanese yen in 34 years, which led to a huge surge in tourism to Japan for the food. And last week we talked about the skiing as well. So why does Trump and J.D. vance, who's the vice president, want a weaker dollar? They've been very vocal about wanting a weaker dollar, and that's because it would boost American manufacturers and exports. If it's. If the dollar is strong, it makes us selling goods abroad much more expensive. Sometimes you hear when the dollar is strong, multinational companies hop on their earnings calls and say, this strong dollar really hit our earnings overseas. I remember companies like Pepsi say, this strong dollar, it's bad for our sales and foreign markets. So they've been quite vocal saying, we want a weaker dollar to help domestic manufacturing because it would make it easier. The US Consumer would be the victim of that. Strong dollar does make things cheaper for American goods. Buying stuff from abroad, a weaker dollar makes stuff more expensive.
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Toby Howell
And so this is actually just a stated policy goal of the Trump administration. Right now. They could actually go as far as to seek, you know, currency agreements or policy shifts that would intentionally weaken the dollar to help us exporters, to help us manufacturing. This is something that has happened before. In 1985, there's a group of governments, they got together and agreed to something called the Plaza Accord. That was against this similar backdrop where U.S. france, Japan, the UK and actually West Germany at the time all agreed to collectively devalue the dollar against their currencies because they thought the strong dollar was hurting the global economy. And that was against a very similar backdrop, which was high inflation, high interest rates in a very strong dollar. So it's a very intentional policy decision by this current administration. Spirit Airlines is back from the dead. The budget airline known for its bare bones flight experience said it has finalized its debt restructuring and is ready to emerge as a beautiful yellow Butterfly from Chapter 11 bankruptcy. What was the first thing it did after finding itself on more solid financial footing? Pick a fight with one of its rivals. Remember when Southwest shocked the world last week by announcing plans to ditch its bags fly free policy, a decision that was maligned by analysts and customers alike, while Spirit CEO Ted Christie decided to jump onto the dogpile as well, saying I think it's going to be painful for a little bit as they find their footing and we're going to take advantage of that. But even as Christie is throwing shade Southwest way, Spirit still has some ducks it has to get. In a row, it still reported a net loss of $1.2 billion last year, more than double the year prior. And it's been the subject of not one, but two doomed merger attempts, courtesy of Frontier Air and JetBlue. So, yes, Neil, Spirit has got some pep in its step, but it's not like it's just smooth sailing ahead.
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Neal Freyman
No, it is much smaller than Southwest Airlines. The way Spirit thinks it can win in the new aviation market is by moving. Moving upmarket is now offering flight options with tiered prices so you can pay more on SPIR to get extra legroom, which is a policy it didn't have before. It's selling these bundled fares that include bigger seat priority boarding, free bags, Internet service, snacks and drinks, which is a big departure from its previous, previous strategy of just selling these a la carte seeds so you can pay for every single little thing. Now it's bundling things together. And, you know, you've seen airlines jockey for position here. Upscale travel is what is making money right now. These Delta is rolled out. You know, Delta has these lounges and the business class like that is where the money is had right now in airlines. And Spirit thinks that it needs to skate where the puck is going to win back customers.
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Toby Howell
And you did mention that Spirit is still a lot smaller than its rival. It's definitely punching up right now and it's going after southwest. Southwest averages 3,600 flights per day. Spirit averages just 700 per day. So this is definitely one of those things where I think it's more of a marketing stunt in a way. Although I will say that a lot of airline CEOs have come out and say we do think Southwest customer base who were attracted to those bags fly free policy is up for grabs right now because that was the main reason people were opting for Southwest as well. As you know, it is the US's largest domestic carrier. But I think that all these CEOs are licking their chops and saying, all right, this is a very disgruntled fan base right now. Of course, I'm going to go out in interviews and say we're coming for your customer base. Come check out Spirit because, you know, a lot of people are mad. I mean, this is a little bit of an exaggeration, but these are both Texas based enterprises, Luka Doncic trading to the Lakers and Southwest getting rid of their bags by free policy. It created similar levels of fury and uproar from specific customer bases. So of course you're going after these, these angry customers right now. Up next, it is our winners of the weekend.
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Neal Freyman
So one day as I was scrolling the web, I got hit with an ad for patio furniture. Dude, I live in a small New York City apartment. Not relevant. So if that's happening to me, imagine the incorrect spaces your B2B marketing could be ending up. If you want to reach the right professionals, start with LinkedIn ads. LinkedIn has grown to a network of over 1 billion professionals and 130 million decision makers. And in this vast pool of potential, you can target your buyers by job title, industry, company role, skills, seniority and more. If you can't believe it, if you think you're wasting budget on the wrong audiences, stop that first and foremost and start targeting the right people with LinkedIn ads instead. LinkedIn will even give you a $100 credit on your next campaign. So you can take LinkedIn ads for a spin. Just go to LinkedIn.com mbd that's LinkedIn.com/mbd. Terms and conditions apply only on LinkedIn ads. What does the future hold for business? Ask nine experts and you'll get 10 answers. It's a bull market. It's a bear market. Rates will rise or fall. Inflation's up or down. Can someone invent a crystal ball? Until then, over 41,000 businesses have future proof their business with NetSuite by Oracle. The number one Cloud ERP bringing accounting, financial management, inventory and HR into one fluid platform. With one unified business management suite. There's one source of truth giving you the visibility and control you need to make quick decisions. With real time insights and forecasting, you're peering into the future with actionable data. When you're closing the books in days, not weeks, you're spending less time looking backwards and more time on what's next. Whether your company is earning millions or even hundreds of millions, NetSuite helps you respond to immediate challenges and seize your biggest opportunities. These download the CFO's guide to AI and machine learning for free at netsuite.com/brew that's netsuite.com/brew netsuite.com/brew welcome to Winners of the Weekend, the Monday segment where Toby and I picked two things that had a better weekend than Rick Pitino. Toby, you won the pre episode fashion show, you catwalk queen. So you get to go first it's.
- [16:57]
Toby Howell
Because I'm wearing green. Neil Holiday spirit never goes out of style. My winner of the week weekend are NASA astronauts Suni Williams and Butch Wilmer, who are about to be reacquainted with a little thing we call gravity. The pair of now infamous astronauts are set to return to Earth after spending three fourths of a year aboard the International Space Station, far exceeding their originally panned mission due to technical issues with Boeing's Starliner capsule. NASA insists that the pair has not been stuck this whole time, but were intentionally kept hanging in zero GS for technical and budgetary reasons. The pair's replacement uber home was actually delivered by Space X last year, whose Dragon capsule has been in orbit for months now. But a separate SpaceX Crew Dragon arrived at the ISS yesterday morning with two new astronauts clearing the way for them to head home. A splashdown off Florida's coast is expected later this week, as long as the weather holds. Neil Just to reiterate how insane this trip was, Wilmore and Williams expected to be gone just a week when they launched on Boeing's first astronaut flight. They hit the nine month mark earlier this month.
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Neal Freyman
Williams and Wilmore have been true champs about all of this, saying that they love being in space and that they're not stranded and that they're staying occupied. And NASA has provided everything for them that they needed on their very much extended stay. And that may somewhat be genuine because astronauts don't get that many chances to be in space. So they've both spent a quarter century at NASA and they've only been to space twice. And so it's unlikely or doubtful whether they'll be going back to space. So for them, this might be their last chance. They've worked their entire life for this. This might be their last chance to ever be in space. So yes, they've had a few months more than planned in space, but I think they're thinking to themselves, this is my last chance. I'm not going be able to go back to space, so might as well enjoy it while I'm here.
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Toby Howell
That's a very optimistic take. One more pessimistic take is the fact that we talked about budgetary concerns. So what is the budget for keeping two astronauts in space, you know, nine months instead of nine days as was originally planned. They're not getting any overtime or additional compensation above their usual salary for the extra months that they've spent working from space. This is according to a former retired astronaut who's familiar with how the government structures these contracts. So I don't know if maybe if you imagine you were meant to be on a project for, you know, a week and then instead you ended up working in nine months, you're right, it is space. It is a very cool place to work. But they're not getting, you know, that overtime pay that you might expect given their situation.
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Neal Freyman
So looking ahead in the next few days after this cruise switchover happens, Williams and Wilmore will eventually descend to Earth, hopefully barring any weather mishaps here on our, on our blue planet. And they will return to their families. We can't wait for them to do that. My winner is law schools because they are swimming in applicants. According to the Wall Street Journal, the number of people applying to the US has nearly 200. Law schools has surged 20.5% compared to last year, making it one of the biggest influx of applicants in recent memory. Some schools, such as the University of Michigan have seen demand surge even more, up 30% annually, making it their most competitive year on record. There are a number of factors contributing to the spike in aspiring 1 LS1 is the current tough job environment for white collar workers. When your employment prospects are dim, you go to grad school to level up. Another could be more tech related. Law offers the prospect of a stable, high paying career at a time when AI advances are threatening certain professional services positions. Also helping the LSAT tweaked its test, which could have attracted more people to take it. And law school applications have historically jumped in election years when the legal profession is in the spotlight as it is now with all the cases surrounding the Trump administration's executive actions. Toby, while this is great for law schools, it is not great if you're applying to one.
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Toby Howell
Yeah, people were saying that when they saw the amount of applications roll in, there was gasps in the room at some of the top law schools. They couldn't believe the numbers were as high as they were. I was doing a little bit of digging and just reading people's reactions as to why they think it is. Obviously there's all those factors yet. Tough job market, election year. These are all things that, you know, pull people into the law profession. But the changes to the LSAT were probably the biggest thing here. They took away the Logic Logic game section, which for a lot of people were. It was just a brutal section for, for most of the test takers. So now people are saying, I'll take the Ellis out. Now that this, you know, horrible section is gone, I'll give it another shot. Which is why you saw so many applicants, because you might as well give. If the test got much easier, you might as well give it another shot. Some people are saying their scores jump 1520 points on this revised test. So I do think that was a big factor with why we're seeing these.
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Neal Freyman
Massive application numbers and we are seeing massive application numbers. I mean, if you're applying to law school, I will say good luck. Georgetown University law Center received 14,000 applications to fill 650 spots. University of Michigan will take 320 people in this class. They received more than 8,900 applications. So you're right, the floodgates have been opened and law schools are about to see their acceptance rate drop dramatically. Okay, it is Monday, so here is what you need to know about the week ahead. The Fed is meeting on Wednesday at a pivotal point for the economy, with tariffs and potentially higher inflation spooking investors. Stocks posted their worst week in two years last week, and the S&P 500 briefly fell into correction territory, down 10% from its record high. The Fed is not expected to lower interest rates as part of Jerome Powell's wait and see approach, but of course his press conference will be appointment viewing for his thoughts on the market mayhem.
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Toby Howell
Yeah, I mean, if you're talking about an economy right now that is gripped by a lot of uncertainty, one theme seems one thing seems pretty certain, and that is interest rates stay where they are. The wait and see approach has been something that we've seen echoed a lot from Jerome Powell because there's just so many economic policies that are up in the air right now. So it's very hard to make, you know, an interest rate decision before you understand which tariffs will go into effect and which won't, which are just bargaining chips and which are not. So wait and see is the name of the game right now.
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Neal Freyman
Disney's live action adaptation of Snow White hits theaters on Friday, but what should have been a slam dunk blockbuster has turned into a colossal dumpster fire. Disney dramatically scaled back promotion following an unending string of controversies since the project was first announced in 2021. The movie is going to cost Disney 450 million all in with production, advertising and prints. And it may be lucky to make back even a fraction of that.
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Toby Howell
Right? It is. One thing that you see these movies do when you invest so much money into creating something like this is you start selling tickets like a month in advance, a month and a half in advance, you try to start recouping your investment. Right now, Fandango only started selling Snow white tickets just 10 days before its release, which just shows how much Disney has kind of shrunk this movie from the spotlight. It had this very toned down opening premiere, so it is one of those things where it could end up being a big egg on the face moment for what should have been just, yeah, pretty much an easy tent pole franchise for Disney to prop up.
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Neal Freyman
The NCAA tournament begins this week, which means it's time to acquire a second or third monitor at work and start developing intense opinions about colleges you only learned about earlier in the day after the play in games. Today and tomorrow, the men's tournament gets going for real. On Thursday, the top four seeds are Auburn, Duke, Houston and Florida. On the women's side, the top four seeds are ucla, South Carolina, USC and Texas. Toby the best week in sports has arrived.
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Toby Howell
I'm very excited right now and I know a lot of you listening probably aren't sports fans, but do fill out a bracket and you might be thinking what is my chances of, you know, snagging that elusive Perfect bracket? It's 1 in 120 billion, so good luck to all you. Maybe flipping a coin is the way to go.
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Neal Freyman
Also in sports, the baseball season will soft launch in Japan this week when homegrown superstars Shohei Ohtani and the Dodgers take on the Cubs over two games. To give you an idea of Ohtani's ridiculous popularity in his home country, tickets at the Tokyo Dome are going for as much as $2,000.
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Toby Howell
I mean, it truly is the eras tour of Japan right now. Ohtani is the biggest face in baseball right now. MLB is trying to expl expand its global reach. So it's just it makes a ton of sense for them to do a little stint over in Japan to start the season.
- [25:35]
Neal Freyman
And finally, in related news to baseball's return, the first day of spring is on Thursday. Boy, am I glad to see you.
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Toby Howell
I am glad as well. But I will caution you because New York actually has a lot more seasons than just for there's winter, there's full spring, there's second winger winter, and then there's Spring of Deception. And I right now I feel like we're in the Spring of Deception because we got some 60 degree days, but I think we're going to get plunged back into one more winter before spring is actually here.
- [26:01]
Neal Freyman
All right, let's wrap it up on that high note. Thanks so much for starting your morning with us. Have a wonderful Monday and a very happy St. Patty's Day. For any questions, comments or feedback, send an email to Morning Brew daily at Morning Broadcom. And if you're enjoying the show, share it with a friend, family member or coworker. Toby who should everyone listening share it with today.
- [26:22]
Toby Howell
I want you to share the podcast with someone who is considering a lot law school. It might be good to arm them with some facts as to what they are up against.
- [26:29]
Neal Freyman
That is a very good point. Let's roll the credits. Emily Milian is our Executive producer, Raymond Lu is our producer, Olivia Graham and Olivia Lake our Associate producers. Uchenowa Ogu is our Technical director. Scoops Dardis is on audio Hair Makeup is splitting the G. Devin Emery is our Chief Content Officer and our show is a production of Morning Brew.
- [26:48]
Toby Howell
Great show Daniel. Let's run it back tomorrow. It.