But the Gift Cards

Summary

Slate Money – "But the Gift Cards" (July 20, 2019)

Executive Summary

In this lively and insightful episode, host Felix Salmon (Axios), Emily Peck (Huffington Post), and Anna Szymanski engage in a spirited debate on three major business stories: Elizabeth Warren's plan to rein in private equity, Netflix's shaky business model following a disappointing earnings report, and new research on gentrification. The conversation is marked by robust disagreements, sharp analysis, and humor—especially around the notion of protecting consumers' gift cards.

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Main Topics and Key Insights

1. Elizabeth Warren’s War on Private Equity

[00:44–21:27]

Overview

• The core discussion revolves around Senator Elizabeth Warren’s sweeping proposals to regulate private equity, raising the central questions: Is private equity good or bad? Should it be regulated, and if so, how?
• Warren’s plan proposes shifting more responsibility onto private equity firms, including for pension obligations, restricting certain payouts, improving employee protections, ending "carried interest," and—yes—protecting gift card holders in bankruptcies.

Key Discussion Points

• How Private Equity Works:

  • Emily explains the standard private equity “leveraged buyout” (LBO) model: “The firm comes in and... borrows tons and tons of money to buy the company... they sort of put the debt onto the company that was already struggling... they sell the real estate, and then they make the company pay rent on the real estate... and then they go bankrupt.” (Emily, 03:52)
  • Felix notes that, “by the time they've gone bankrupt, they've already extracted so much money from the company... can still make money.” (Felix, 04:55)

• Warren’s Proposals Detailed: [07:59]

  • Increased PE firm liability for employee pension plans
  • Restricting dividends and payouts in the first years post-acquisition
  • Prioritizing workers in bankruptcy outcomes
  • Protecting the value of consumer gift cards in bankruptcy
  • Abolishing the carried interest tax loophole

• Arguments For and Against Warren’s Plan:

  • Anna contends Warren addresses the wrong problem, focusing on populist anger rather than the nuanced risks and market effects. She doubts whether her measures would improve outcomes, warning: “If all of these proposals happen, that would be the end of the private equity industry… the private equity basically doesn't work in a world like the one that Elizabeth Warren is proposing.” (Felix, paraphrasing Dan Primack, 03:14)
  • Felix pushes Anna to clarify if heavy leverage (and PE’s practice of “shoveling debt” onto portfolio companies) is needed for prosperity or simply enriches PE owners at others’ expense: “If your whole way of getting your magnificent returns... is to do financial engineering and shovel debt down onto portfolio companies... then that's not how finance should work.” (Felix, 11:47)
  • Emily questions what’s so objectionable about protecting gift card holders: “What is the harm?” (Emily, 21:27) Anna replies, “that’s probably fine.” (Anna, 21:38)

• Debate Over PE’s Social Utility:

  • Anna claims, “if all of the deals that private equity engaged in ended up going really poorly… it would be unlikely that this would be a type of investment strategy that would continue.” (Anna, 14:58)
  • Emily and Felix challenge Anna to give examples of positive PE deals; Anna cites Pret A Manger as one.
  • The group agrees that some abuses have occurred, especially during exuberant markets, but disagree over whether market forces alone are eliminating bad PE practices or if regulation is needed.

Notable Quotes

• “She wants to protect gift cards if a company goes into bankruptcy... which I thought was funny—or interesting, anyway.” (Emily, 07:59)
• “The private equity she's describing is actually much more of like a kind of 1980s. If you actually look at private equity in the last like 10 years… a lot of private equity target firms actually did better during and post crisis.” (Anna, 05:49)
• “No one's pouring them into wine glasses. The wine is not good. So I'm sad that I cannot recommend drinking wine in cans.” (Felix, 44:17)

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2. Netflix’s Business Model – Is It Sustainable?

[21:44–32:11]

Overview

• In light of Netflix’s earnings miss and subscriber losses in the US, the hosts dissect the streaming giant’s financial model, dependence on original content, and the underlying risks of its debt-fueled growth.

Key Discussion Points

• Changing Content Economics:

  • Netflix blamed the weak quarter on a lack of major hit shows, and outlined a model increasingly dependent on new exclusive hits, shifting away from licensing back-catalog TV. (Emily, 22:38)
  • Felix: “What Netflix used to do is... monetize this vast pool of intellectual property that people weren't valuing properly... That model... doesn't work anymore because people have realized how valuable it is.” (Felix, 26:28)

• Debt Dependence and Subscriber Growth:

  • Anna emphasizes, “Netflix only exists because of the public debt market... The one number they really care about is subscriber growth. And that's why this actually was a big deal.” (Anna, 23:50)
  • Netflix needs to continuously produce expensive hits to retain and add subscribers—unlike a tech company, whose one-time investment scales infinitely.

• Market Size and Future Growth:

  • Can Netflix achieve the global scale (outside China) that its valuation requires?
  • Anna is skeptical: “I've always questioned this idea that Netflix is going to be able to create the type of content that is going to appeal to people everywhere...” (Anna, 28:23)
  • Felix: “Netflix can never be taken over by private equity. They don't generate any cash.” (Felix, 30:03)

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3. Rethinking Gentrification

[32:11–39:34]

Overview

• Inspired by a Philadelphia Fed and University of Chicago study, the hosts discuss new evidence that gentrification may have fewer negative effects than its reputation suggests.

Key Discussion Points

• The New Study:

  • Finds that those who remain in gentrifying neighborhoods are generally better off, children especially benefit, and displacement rates are only slightly higher than in non-gentrifying neighborhoods.
  • Emily: “The paper does make a very convincing case that gentrification's basically fine... And the kids and the people who stay have it a little bit better anyway.” (Emily, 33:51)

• Cultural Change vs. Economic Benefits:

  • Anna: “Gentrification is not shown to cause significant displacement... The benefits that it brings, especially to the children of people who remain there, vastly outweigh any of the negatives.” (Anna, 33:04)
  • Emily voices discomfort about three white hosts evaluating gentrification, noting studies don’t capture the “squishier” cultural concerns.

• Amazon in Queens – A Mistake?

  • All three reflect on whether Amazon’s scuttled Long Island City HQ could actually have been beneficial.
  • Felix jokes that complaints about gentrification are the most certain outcome of any neighborhood change.

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Notable Quotes & Memorable Moments

• On Private Equity:

  • “Down with the gift card!” (Anna, 00:43)
  • “If your whole way of getting your magnificent returns... is to do financial engineering and shovel debt down onto portfolio companies... then that's not how finance should work.” (Felix, 11:47)
  • “Give me one [good example].” (Emily, 14:48)
  • “The benefits that it brings, especially to the children of people who remain there, vastly outweigh any of the negatives.” (Anna, 33:04)

• On Netflix:

  • “Netflix only exists because of the public debt market. Otherwise there is no Netflix.” (Anna, 23:50)
  • “There aren't that many businesses in the world where you can hike your prices by 20% and the vast majority of your customers...say, oh, yeah, that's fine.” (Felix, 30:34)
  • “Netflix can never be taken over by private equity. They don't generate any cash. Nobody, no private equity firm's gonna take them over.” (Felix, 30:03)

• On Gentrification:

  • “I do feel like neighborhoods change. Yes, they always change. And that's a good thing.” (Anna, 35:14)
  • “Amazon then picks up its wall and goes home and says, you know what? If you're going to complain about it, we're just not going to build here at all.” (Felix, 38:16)

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Timestamps for Key Segments

• 00:44 – Main topic preview; PE, Netflix, gentrification
• 02:26 – Elizabeth Warren’s critique of private equity
• 03:52 – How LBOs and asset-stripping work (Emily’s explanation)
• 07:59 – Specifics of Warren’s PE reform proposals
• 14:49 – Good vs. bad examples of private equity
• 21:44 – Netflix’s quarterly miss and business fundamentals
• 26:28 – Netflix’s shift from licensing to original shows
• 28:23 – Global scale: Can Netflix really grow worldwide?
• 32:11 – Does gentrification really displace people?
• 33:51 – Philadelphia Fed/Chicago study details; Amazon HQ2 debate
• 39:34 – Numbers round (Amazon Prime day glitch, Turing on £50 note, canned wine sales fun)
• 44:17 – In-depth take on canned wine and beverage trends

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Tone and Style

The discussion is humorous, sometimes sarcastic, but always grounded in sharp analysis and skepticism. Felix gently mocks business jargon and market hype; Anna provides technical detail and a skeptic’s voice, while Emily brings practical consumer questions and a social lens. The chemistry is familiar, bantering, and the disagreements are good-natured but substantial.

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Takeaways for Listeners

• Elizabeth Warren’s private equity reforms would dramatically reshape the industry, potentially ending the LBO-driven model as it exists, but some see this as a necessary correction, others as overreach.
• Netflix faces real challenges as it shifts from a tech-like, business-scaling model to a costly content churner vulnerable to changing tastes and rivals.
• Gentrification’s negative reputation may be exaggerated, at least in terms of displacement and overall outcomes, though cultural concerns remain complex.
• Sometimes, the real crisis is... what happens to your Target gift card if the store goes bust?

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This summary was crafted to provide both a thorough recap and an engaging read, staying true to the tone, structure, and insight of the original Slate Money episode.

Transcript

[A]

Hello, and welcome to the but the Gift Cards edition of Slate Money, your guide to the business and finance news of the week. I'm Felix Salmon of Axios. I'm joined by Emily Peck of the Huffington Post. Hello. Who has gift cards in her wallet and she doesn't want them to go worthless when the company goes bust.

[B]

I do have a gift card in my wallet, actually.

[A]

We are also joined by Anna Shymansky, who is a meanie who hates gift cards and thinks they should go bust.

[C]

Down with the gift card.

[A]

Down with the gift card. We are going to have a jolly, argy bargy debate about not really about gift cards, although they do enter into it, but about private equity. It's. Is it good? Is it bad? Should it be regulated? If it should be regulated, how should it be regulated? And of course, in general about Elizabeth Warren, who is, you know, she has her plan for that, you will be surprised to hear. We're going to talk about her plan. We are also going to talk about Netflix and whether its business model makes any sense. And we are going to talk about gentrification and whether it maybe isn't as bad as people think it is.

[B]

Are you going to tease Cats?

[A]

Oh, we are also going to have an amazing Slate plus segment. You should probably subscribe to Slate plus just to listen to this segment. It's kind of incredible. All about CGI Cats. You're going to have to listen to that one. All of that coming up on Slate Money. Let's talk about Elizabeth Warren because she has a plan for how everything in the American financial system is broken. And she wrote the plan down on Medium, which is where she writes her plans. And I read her plan on Medium and I kind of liked it. Yeah, I mean, it kind of made sense to me. She was like the finance sector of the economy, it's meant to be the Vaseline, which keeps the economy moving smoothly. And it's clearly not doing a very good job because if you're a poor person, you spend as much on fees and finance as you do on food. Yeah.

[B]

She said it's basically hoovering up all the, the money instead of helping people get more money and making.

[A]

And she has this, she has this wonderful little riff about. It's more than just a riff. The centerpiece of it really is this whole attack on private equity and how if you kind of get to the bottom of it, they're kind of exploiting the whole concept of limited liability to basically cap their downside with unlimited upside. And if things go bad, then a bunch of Blameless, you know, pension funds and stuff wind up bearing the brunt.

[B]

I think it was really interesting because, I mean, Bernie Sanders, also running for president, similar to Elizabeth Warren, has also sort of railed against private equity. But what Elizabeth Warren has done is not only railed against private equity, but explained how it works and offered some solutions and proposals to sort of rein it in a little bit.

[A]

Well, I mean, more than a little bit. I will say that my colleague Dan Primack, who has been like, you know, the emperor of the private equity beat for decades, is kind of convinced that if all of these proposals happen, that would be the end of the private equity industry. The private equity basically doesn't work in a world like the one that Elizabeth Warren is proposing where the private equity companies themselves are on the hook for the debt that they.

[C]

No, if you can't do LBOs, you've done a private equity so well.

[A]

I mean. Okay, wait, so let's. Let's slow down here a little bit because Anna needs to unpack that a little bit.

[B]

Can I just say, this is my understanding of what you just said, but this is how Elizabeth Warren sort of explained how private equity works and sort of what it looks like to me, an angry person looking at what happened to, like a Sears or Toys R Us or whatever. It's like the firm comes in and they buy this company, and instead of just buying it outright with cash, they borrow tons and tons of money to buy the company. Then once they have the company, they have all this debt, and instead of like keeping the debt in their own private equity space, they sort of put the debt onto the company that was already struggling when that's the reason they kind of bought it. And then they also do things like if the company like the Sears owns a bunch of real estate and that's like its best kind of asset. They're like, let's sell the real estate. And they sell the real estate, and then they make the company then pay rent on the real estate. So they kind of load up the company that was already struggling with debt, take away its valuable assets. Then when things don't work out because they have no actual strategy for turning around the business, then they say oopsies, and then they go bankrupt.

[A]

But by the time they've gone bankrupt, they've already extracted so much money from the company in terms of sales of property and dividends that they've paid themselves can still make money.

[C]

So what you're describing is are bad private equity deals. And this is my problem with the War and Peace I think that there are valid criticisms of private equity. I think that there have been some models like the 3G model, which I've criticized in the past, which I do think the market itself is now showing is not working particularly well. Also I think there are valid criticisms of private equity for many people in the industry that say because this might be a little in the weeds, but because of how they smooth their returns, they inflate their risk adjusted returns.

[A]

In the weeds. Yes.

[C]

Yeah, but, but that's actually important. I mean, it's actually a real legitimate concern because right now you have a lot of institution.

[A]

Wait, let's stick on Warren for the time being.

[C]

But, but my point is, what Warren is doing, in my opinion is she's not actually trying to fix a problem. She's trying to appeal to rage. And the reason I say that is because what she's doing is she's not looking at like all of private equity. The private equity she's describing is actually much more of like a kind of 1980s. If you actually look at private equity in the last like 10 years, a lot of private equity target firms actually did better during and post crisis than similar. Non.

[A]

Okay, let me, let me stop you there because we, there's a lot to unpack there. And I want to go slowly because I think that Anna is, you know, very versed in these kind of things and I want to just like go through this a little bit slowly so we can understand what we're saying. When you say that she's not addressing the problem, let's be clear first, are you saying that she's not addressing the problem that she has diagnosed or she's not addressing the problem that you have diagnosed with private equity?

[C]

In my opinion, her belief is she doesn't think it should exist.

[B]

Wait, but can we go through her proposals before we.

[A]

Yeah, so, so, so I think at core we all kind of agree here that Elizabeth Warren doesn't like private equity. That if her proposals come through, then it would be changed out of it, maybe not eradicated entirely, but it would not look like it looks right now. And so the effect would be that it wouldn't exist anymore in its current state. I think that's probably true. So I feel that's a good way to begin. I feel like in terms of that, she's just right. If she doesn't think that it should exist in its current state and her proposals would stop it from existing in its current state. Current state, then she's kind of fixing the problem that she has diagnosed right.

[C]

Yes, except I don't think that is the problem that as a country we should be focusing on. Okay, wait, so equity should exist? I think the problem.

[A]

Okay, wait. So like, just to slow down here, you're saying that she has diagnosed one problem with private equity that is not the problem with private equity that you see. Her problem doesn't address the problem with private equity that you see. You see other problems, which are bigger problems. But. So you're saying that when she diagnoses a problem, like, she is wrong with the diagnosis.

[C]

Right.

[A]

Okay, Emily.

[B]

Well, now I kind of want to hear what Ann is going to say, but I'll try and point out first the elements of Warren's plan. She wants these PE companies to have more responsibility for the pension plans of the employees. She wants the first two years when they take over another company, they can't pay out dividends until they get things turned around for at least two years. She wants to make workers have more favorable outcomes when these companies go into bankruptcy. She wants to. I thought this was funny. Or interesting. Anyway, she wants to protect gift cards if a company goes into bankruptcy. So I guess sometimes when that's a.

[C]

Serious problem facing the American consumer.

[B]

It is a serious. Yeah, sorry. It's a problem facing American consumers, and why not fix it?

[A]

So. So let's just start with that.

[C]

Sorry for that to be as bitchy as that sounded.

[A]

No, but Anna, like, you know, all of these seem like relatively sensible things and carried interest.

[B]

She wants to get rid of carried interest.

[A]

And she wants to get rid of carried interest, which, you know, it's almost impossible to find anyone who will defend carried interest. So just in terms of these particular proposals that Emily has just run down, is there anything obviously bad about any of these proposals?

[C]

So if you completely change the model of how private equity works, if you're saying that you cannot take on a significant amount of leverage or borrowing.

[A]

No, she's not saying that.

[C]

That is quite literally what Elizabeth Warren.

[A]

I mean, that wasn't one of the proposals that Emily listed, and it's not on the proposals that I read in her medium.

[C]

So she said she wanted to say that the. That the private equity firm would have to hold the debt itself, not the target company.

[A]

Right.

[C]

That is one of her.

[B]

But they can still keep the debt on.

[A]

Yes, so. So explain why that doesn't make any.

[B]

Sense in terms of, like, why doesn't it make sense?

[C]

Because if I'm a company and. Or if I'm a private equity firm, the way I can generate a really high return is because I'm levering up that return, right? So if I'm just holding on to all of that debt myself, and I'm not putting that onto the company and having the company pay out that debt with the cash that they're generating, you can still. Then I'm not going to be able to generate much of a return. You can still point a private equity.

[A]

Cash that the company is generating to pay off the debt to. It's just the only question is, where is the debt?

[C]

If you're looking at how private equity firms work, how they make money for their investors, they are going to need the flexibility to be able to pay out dividends if they want to pay out dividends.

[A]

Anna, let's go back because, you know, I feel like we've jumped forward to a different question here about dividends. Let's stick with the debt because I think this is actually the, the real heart of the issue here. I don't see anything in Warren's proposal saying that you can't have a lot of leverage. Emily doesn't see that. You do see that. So explain where you see that.

[C]

Because the firm itself, because the private equity firm itself isn't. What they're saying is that the private equity firm itself would have to hold all this debt on its own firm's balance sheet, not on the company that it's taking over.

[A]

Yes. Why is that bad?

[C]

Because you wouldn't be able to generate returns.

[A]

Why does it matter where the debt is if company A owns company B? Why does it make such a big difference whether the debt is debt of company B or the debt is debt of company A when it's one is a wholly owned subsidiary of the other.

[C]

So it's not that private equity firms couldn't keep the debt on their own balance sheet. It's that if they had to do that, if the traditional leveraged buyout model wasn't available, they simply wouldn't engage in almost any of these deals because they just wouldn't want to take on the risk. If the aim of the policy is, is to make private equity take on fewer deals, then this would achieve that. I just don't necessarily agree with that goal.

[A]

Okay, so, yeah, I think, I think, I think, I think we've actually come to an agreement here. I think that that's exactly what Elizabeth Warren is saying. She's like, if your whole way of getting your magnificent returns and becoming a gazillionaire like Leon Black is to do financial engineering and shovel debt down onto portfolio companies, instead of actually taking responsibility for the debt that you borrow yourself, then that's not how finance should work. And you're saying, well, that's the only way that Leon Black can become a billionaire. And she's like, well, fine, so Leon Black doesn't become a billionaire.

[C]

Okay, well then explain that to all of the pension funds that have been plowing money into private equity because they need those returns.

[A]

Okay, so the answer no, but, and that, and that is a really good point because the investors in private equity actually do fine. You know, we have seen over the decades that private equity returns have been perfectly good. Certainly the people running private equity companies, like, you know, Leon Black have done very well for themselves or Mitt Romney, you know, and even the people lending money to these leveraged buyouts, you know, the pension funds and other people who like, oh, you want to lever it up with lots of debt, we'll lend you that debt, you know, junk bonds, no problem even they have done. All right, Elizabeth Warren's point is that's like the world of finance. And that the losers from all of that, when the investments don't work out wonderfully, and sometimes they work out wonderfully and everyone does great, but when the investments don't work out wonderfully, the losers are other creditors of the company. And when we say creditors of the company, what we mean is people with gift cards or employees who don't get paid out when they get fired, or pensioners who lose a lot of their pension when the company goes bust and those kind of things. And she's saying that isn't fair because those people aren't involved in high finance. And they're not, you know, financiers who are making risk adjusted return calculations on the liabilities of the company, they're just saying, I've got a gift card, I should be able to spend it or.

[B]

I have a job.

[A]

Exactly.

[C]

No, but number one, a lot of the companies that end up being target companies for private equity firms are companies that are struggling for one reason or another, usually for private equity, are not taking over a company that is doing exceptionally well. So part, that's part of the whole value proposition of private equity. Outside of the fact that this, you are using a lot of leverage to generate these returns. That's clearly a big part of it. But it's also that you are making these companies more productive. And that is something that has been shown that is in fact quite often the case that the companies do end up being more productive.

[B]

So when I was reading Warren's Medium post and you know, when People talk about private equity. You hear about Sears, you hear about Toys R Us, you hear about. I think Bernie's railing about some hospital that was taken over by private equity and shut down. I mean, there's examples abound of firms.

[C]

That we're talking about. Example.

[B]

So what are the good examples?

[C]

You don't hear about the good examples. Okay, I'm asking else, what are the good examples?

[B]

Give me one.

[C]

We talked about pret. A number of years ago. I remember when, like. Because they were owned by private equity and actually did a pretty darn good job with them. So there are plenty of examples.

[A]

The sandwich.

[C]

Yeah, yeah. I'm just saying, like, if all of the deals that private equity engaged in ended up going really poorly and all of the companies went bankrupt, it would be unlikely that this would be a type of investment strategy that would continue. So it is true that there have been periods of time when you've had really, really aggressive private equity deals that took on way too much debt, that clearly there was no logical way the company was going to be able to pay off that debt. And this often happens actually, at the height of business cycles. This is another kind of problem that you sometimes have with private equ Equity is that you tend to have more of these deals when the market's really frothy. That's a problem. It's something we saw pre the crisis. So there are definitely issues with private equity. And to me, the biggest issue with private equity is that I don't think a lot of investors fully understand how truly volatile the returns are. And that's significant because a lot of the investors are pension funds, endowments.

[A]

Let me just stop you there, because again, you're saying the real problem with private equity is nothing to do with what happens to the employees or the creditors or anything like that. It's like the investors, the financiers. The financiers might not make as much money as we thought they would. And I'm like, well, that might be true, it might not be true. We don't know. We haven't gone through the whole cycle. But if the worst thing that happens here is that the people who invest in private equity don't make as much money as they thought they would, you know, they went in with their eyes open.

[C]

Okay, so when all of those pension funds can't meet their liabilities, like, no.

[A]

No, but remember which pension funds we're talking about here, we're not talking about the pension funds of the company, about.

[C]

State pension funds and city pension funds that are investing in These like, they're talking about university endowments that are investing in these.

[A]

This always seems to me to be like the first go to argument when any politician attacks finance or Wall street or anything like that is that everyone says or like the Wall street lobby always replies with a version of this, which is, if you attack Wall street, you're going to attack the returns that you can get by investing in stocks and bonds and private equity and hedge funds. And if you do that, then your 401k will get hurt or your pension plan will get hurt because you're all on this, like, defined contribution, blah, blah, blah. And it's like, I, I understand the argument. I'm not saying it's a worthless argument, but it's the same argument that everyone always applies to every attempt to do anything to Wall Street. And I'm like, there's nothing specific about that argument. It's, it's, it's a very, very generic argument. And I guess what I was looking for here in terms of responses to Elizabeth Warren's proposal, so it's much less, well, you know, the returns on capital for finance will be lower, which, you know, may or may not be true, and much more something like narrow and specific to this particular proposal, the particular.

[C]

Proposals that she has, okay, number one, they're based on the idea that private equity as it currently exists is essentially always a net negative for employees.

[A]

She does not say that. She absolutely does not say that. She does say that it is sometimes a net negative for employees and that the risk of employees being hurt goes up if you wind up going into a leveraged buyout. And that what she thinks is that that kind of financial engineering is not helpful and maybe we shouldn't be doing it. She's not saying it's always bad, but she's saying it's bad often enough and that the incentives in this structure kind of make it worse for employees often enough that we should do something about it.

[C]

So I would say that it is true that we have had some particularly bad examples of private equity deals and leveraged buyouts that have not worked out well, as I've said, because I do think the people behind them were being a bit greedy and they weren't acknowledging how much cash that these companies could actually generate, and they were getting themselves out and just kind of saying, who the hell cares about the companies and the employees? Yes, that is definitely something that's happened. And I do think that that's a problem.

[A]

So what should be done about that?

[C]

I think the market's kind of Taking care of that, like that model is not as prevalent anymore and partly because like you, the deals don't make sense anymore. So you're seeing a lot more of middle market deals and which is actually kind of important because before you had a private equity industry, a lot of middle market kind of industries like had no exit opportunities.

[A]

The headline, you know, the big, you know, Warren Buffett is investing in that kind of deal. You know, he's best friends for the 3G guys.

[C]

Yeah. And we had a, like long discussion a number of months ago about how that 3G model is becoming less and less prevalent because people are seeing that it's not working. My point is not actually that I thoroughly disagree with everything Elizabeth Warren is saying because I do think that there are instances where there are bad deals and where people are not thinking long term and where they are just.

[A]

You just don't think that the government should step in to prevent it. You think the market.

[C]

Because I think the market is a, already actually doing that.

[A]

And I think it's a self regulating.

[C]

No, I'm not saying, as I said, I'm not saying that there should be no government regulations.

[A]

So what kind of regulation would you like to see?

[C]

I think the reporting requirements in terms of volatility and how they're actually marketing a lot of these illiquid assets. There should be stricter oversight of that.

[A]

So let me just ask you if there are private equity deals where the sponsors make money, where the private equity companies make money, where the equity holders, you know, where the company ultimately goes bankrupt, but somehow the people who bought the company still make money, that's obviously bad for the employees who all lose their jobs and it's obviously good for the investors. How can more visibility into the finances and you know, market self regulation prevent that? Because ultimately the people who went in and did this deal, which was bad for the company, wound up extracting enough value from the company before it went bankrupt that they made money.

[C]

Because in private equity, in alternative investments in general, your track record is never as important as how much new capital you're bringing in. And if we can have a more accurate depiction about what's actually happening and the actual volatility, it would affect the amount of capital that these companies are able to bring in, particularly the ones that are actually not doing a particularly good job. I'm not saying that we should have like, oh, like laissez faire, no regulations at all. No, I'm just saying that I don't think we should have such a heavy hand that I think Warren, in not only this proposal, but in many of her proposals, although I may agree with her on actually a lot of her kind of concerns, I think she has this belief that you can have people come in and kind of engineer this financial system to work exactly as they want. I just don't think that actually works in the real world.

[B]

I was just going to ask you if you actually really thought that it would be bad to protect the gift cards and bank, what is the harm?

[C]

No, no, no, look, that's actually like, whatever. Like, I don't really. Like, I'd have to look at the numbers to see, but like, I, you.

[A]

Know, that's probably fine. Emily.

[C]

Yeah.

[A]

We just had earnings report from Netflix, which apparently the stock market didn't like. And so if you, if you're an Anna Shymansky, that's clearly evidence that Netflix is doing badly.

[B]

Yes.

[C]

Now, it's not that the stock market didn't like it. I only point this out because I think there's sometimes this idea of people be like, I don't understand if a company like, you know, they had earnings and they had revenue, like, why, why did the stock price go down? It's like, it's not about liking, it's about numbers. A stock price is factoring in certain expectations of growth. If you change a number, it changes what the value of the stock price should be. So the stock price will go down. It's not because people like it or don't like it. It's because that's how math works.

[B]

So Netflix said signups were about half than what they expected. And they actually lost subscribers, which is the first time they've lost subscribers since they basically launched their streaming business in.

[A]

The US Internationally, they gained like a couple million. So they're not doing less than expected.

[B]

So it just looked like a slowdown for Netflix. And the worrying thing was Netflix kind of blame the slowdown on its sort of lack of really big hit shows in, in Q2. And that's sort of interesting because it's different from how you kind of originally thought of Netflix's streaming service as like a place you go and they have kind of everything you want and you just pick amongst it and it's great. And everyone signs up for it. The way Netflix is kind of saying now is like, oh, no, actually we're more like an hbo. We have certain hits and people go when the hits are in play and that's when we're getting our signups. That's when we're getting our subscribers.

[A]

And this, this is Definitely one of the stories that the Netflix, Netflix bulls have been saying and the Netflix defenders have been saying is this big hit show they have right now, Stranger Things Season 3 came out in Q3 rather than Q2. And if it had only come out a couple of weeks earlier, then there would have been lots of sign ups. But to your point, they agree with this underlying thesis that Netflix is increasingly reliant on a relatively small number of hit shows, many of which it has to produce itself because the hit shows it used to rely on, like Friends in the Office, it's losing, right?

[C]

Yeah. And this is actually really important because Netflix is plowing so much money into content. I mean, that is how they see themselves in the future. They will just be relying on original content. And that takes a lot, a lot of money. And Netflix is losing a lot, a lot of money. At this stage. Netflix only exists because of the public debt market. Otherwise there is no Netflix. And the public debt markets, like those bondholders, the one number they really care about is subscriber growth. And that's why this actually was a big deal.

[A]

And I mean, there are two different types of debt that Netflix has. One is exactly what you're talking about, where it issues bonds in the market. And because it issues the bonds, it has a bunch of cash and it can use that cash to pay for television shows. And obviously there's lag there. Right, because you raise the cash with a bond and you give the money to a production company and then, you know, two years later the production actually appears on, you know, the Queen appears on Netflix and it makes lots of money and it's a big hit. And Netflix is like, look at our subscriber growth. But that came years after you issued the bond. So you need a bunch of like liquidity and cash flow to be able to wait through those two years. And the bond investors need to get paid for that risk. But then there's another part of this, which is that Netflix is entering into deals where it will promise to pay studios and production companies in the future billions and billions of dollars. And that's not a bond, that's just a promise to pay in the future, and that those promises don't actually appear on its balance sheet in any obvious place.

[C]

Yes. Okay. So there are content liabilities, and they have content liabilities that do appear on their balance sheet, and then they have a significant amount of content liabilities that do not have to appear on their balance sheet because the production has, is not reached a certain level yet.

[A]

And more to the point is if your theory, Emily, is true, or the, you know, theory that you brought up, that they're reliant on a steady stream.

[B]

Of hits and that's not as big of a business, then.

[A]

Well, I mean, it may or may not be profitable. It may or may not be a big or profitable business, but the fact is they keep on needing to have hits quarter in and quarter out, year in and year out in perpetuity. And in 10 years or 20 years or 30 years, remember, this is a public company. It's meant to be investing for the super long term. They are still going to need to be churning out those hits, and those hits are going to be expensive. So there's no in that way. It's kind of weirdly not like a tech company where you build something and then it scales. Like, once Slack, say, has built its software, they don't need to build it again every quarter. They just build it once and then they can sell it every quarter.

[B]

An entertainment company.

[A]

Whereas what Netflix used to do is they used to say, well, you know, there's a whole bunch of reruns and remnants and movie rights out there in the world that no one particularly wants very much or doesn't value very much, and we can load them all up onto our service and sell that in perpetuity. And that turned out to be much more profitable than they thought it would be. So much more profitable that now the people who own that intellectual property, like Disney and AT&T, are saying, no, actually, we want to take that back. We're going to set up Disney plus or HBO Max, and we're going to do our own version of this streaming, because it turns out those rights are much more valuable than we thought they were. So that model of Netflix of, like, just monetizing this vast pool of intellectual property that people weren't valuing properly doesn't work anymore because people have realized how valuable it is.

[B]

Right. Well, as that's going away, Netflix is going to replace it with these original hits, but that's a much more volatile business. And it's not clear to me or that it's going to be able to be as profitable or as successful.

[A]

Right. They become a student, right?

[C]

Yeah, Profitable, Yeah. I mean, and like. And they've never been profitable.

[B]

Right.

[C]

But the only way the Netflix story makes sense is if they keep increasing subscriber growth. Because the idea is that you keep plowing money into new content. The new content gives you subscriber growth. And this cycle, Right. If all of a sudden you're saying, well, we're meeting, we've essentially met the addressable market in the United States. We're not potentially going to be able to grow as much overseas as we thought we are. Then that, that model just doesn't work.

[A]

So I think that's the big thing. And everything I've read about Netflix ultimately comes down to this question of how big is the market. And the Netflix model does not work if it's an American company. It only works if it's like this global behemoth in pretty much every single country in the world, with the possible exception of China.

[C]

I've always questioned this idea that Netflix is going to be able to create the type of content that is going to appeal to people everywhere and that they're going to be able to do it in such a way that people are going to choose to pay for it as opposed to content they're already getting, often for free online like that.

[A]

Except that like, you know, already most of Netflix's subscribers are outside the U.S.

[C]

That'S because most of the world is outside of the U.S. you know, they.

[A]

You know, Netflix had a, had a head start in the US Obviously it started here. It does seem to be more popular among Spanish speakers than it is among English speakers in general. You know, Spanish Netflix is very good and it doesn't face the same kind of competition from hbo, Max and Disney that English language Netflix does. And if I was going to come up with like a real bull case for, for Netflix, I think it would be much more based around Spanish language, English language content.

[C]

Yeah, I'm not saying there wouldn't be any global growth. I'm just saying that I don't think it's reasonable to assume the level of growth that is currently being baked into the share price.

[A]

And that's kind of a separate question, which is not so much, you know, how does Netflix make money or what's its model? But it's much more, I feel like a slightly less interesting question, which is what is the right level for the share price and should the share price be higher or lower than it is right now?

[C]

Because in a certain way the debt story is an equity story, which is a debt story. Because the whole idea is that like, like Netflix has a very high share price, thus they don't actually appear as levered on an enterprise value basis as they would if that share price was a lot lower, which enables them to borrow money at a lower rate. That ability to borrow money at a lower rate enables them to get cash to be able to produce content. So yeah, I Mean, I know these.

[A]

So basically, basically what Anna is saying is that Netflix can never be taken over by private equity.

[C]

They don't generate any cash. Nobody, no private equity firm's gonna take them over. Can we. Sorry, one last thing we didn't mention. I actually think it's. Is that what this also showed is that Netflix may not have the pricing power that a lot of Netflix bulls said that they had, because this was one of the issues, is that a lot of the areas where they had either lost subscriber growth or didn't have much growth was where they increased prices. And that actually is significant because otherwise, that's another part of the Netflix.

[A]

Although that said, you know, they raised prices in the United States by 20%, $11 to $13, and the subscribers didn't go down. I mean, it was basically flat. So there aren't that many businesses in the world where you can hike your prices by 20%. And the vast majority of your customers, like, basically 99.7% of your customers say, oh, yeah, that's fine, and just keep on paying the higher price.

[B]

I guess the question will be, when, like, Disney comes out in a few months, are people gonna abandon Netflix and go there? Because it's supposed to be. I think it's gonna be under $10.

[C]

Right. You're seeing these issues where they aren't actually facing a tremendous amount of competition. So what's gonna.

[B]

Right.

[C]

It's also possible that this was just a blip. Like, just to be fair, you know, it is entirely possible that they'll have a fantastic banner third quarter.

[A]

But I think that I was having a little conversation on Twitter about this, which is basically that in a weird way, not managing quarterly expectations and having occasional quarters which look bad and the stock price goes down, and then other quarters which look good and the stock price goes up. It's kind of a good look for them because it looks like they're not in the business in financial engineering, that they're just going to, you know, let the quarterly reports fall where they may, and they're, you know, still focused on the long term. If, if they do come back from this, which, like, historically they always have, then everyone will look back on these quarters and it's not the first time this has happened and say, oh, we probably shouldn't overreact to bad quarters like that, because, you know, they know what they're doing. Anna, we're going to talk about gentrification.

[C]

Yes.

[A]

There's a very interesting new study out where I feel like there's been a Sort of. I've lost track of whether this is a backlash to the backlash to the backlash to the backlash. But, you know, I can kind of see, first of all, gentrification, it's good. It means the neighborhood gets richer and better off and safer and crime goes down. And then there's a backlash to that saying, actually, no, gentrification is bad because it means that the people who live in these neighborhoods get priced out of it and, you know, you lose a whole bunch of character and everything becomes homogenized luxury housing. And now, now we have a backlash to that. Backlash saying, well, actually, maybe gentrification isn't so bad. If you look at the number of people who leave these gentrifying neighborhoods, it's no greater than the number of people who leave ungentrifying neighborhoods. And the people who remain seem to be better off. And it's probably a net positive.

[C]

Yeah, I mean, I kind of had to laugh when I was reading this article you said around, because this is exactly what I said in our discussion on Amazon, which is that a lot of the ideas people have about gentrification are just not actually supported by data. It's. It's a lot of emotion, understandably, because obviously there are individuals who are harmed. But overall, gentrification is not shown to cause significant displacement of people who lived there before. It doesn't show that even if people are displaced that their outcomes are worse off. And the benefits that it brings, especially to the children of people who remain there, vastly outweigh any of the negatives. So this isn't to say that there are no issues, but the idea that gentrification is, you know, this horrible, horrible force. Just. There isn't a lot of data to back that.

[B]

Yeah, it was really interesting study. It's from the, the Philadelphia Fed and University of Chicago. And one of the things I wrote down on my little index card was, was the Amazon Queens thing all a big mistake? Should Amazon have just come to Queens? Because the paper does make a very convincing case that gentrification's basically fine. And they looked at data from like 100 census tracts comparing 2000 to 2010 and economic outcomes for the residents. And though slightly more people leave when the neighborhood, quote, unquote, gentrifies, it's only very slightly, and people are always leaving neighborhoods. So it's like nvd, and then the kids and the people who stay have it a little bit better anyway, and the white people who move in have it a lot better, which I feel a little uncomfortable talking about gentrification because we are three white people talking about gentrification. So that's a little uncomfortable. And paper doesn't really get into, like, all the squishier stuff that Felix and Anna both mentioned about cultural, you know, cultural change and the changing tenor of the neighborhood and all that, you know.

[C]

And that is one issue where, you know, in a lot of studies, when they looked at gentrification, positives and negatives. And one thing that they do show is that in. In more gentrified areas, you tend to get, like, more noise complaints once they become more gentrified. Now, having said that, we don't have a breakdown of, like, who is calling in those complaints.

[B]

We know.

[A]

We know.

[C]

We know. But. But I also feel like. But I. And this is a hard thing to say, but I do feel like neighborhoods change. Yes, they always change. And that's a good thing. I mean, there is no such thing as stasis there. You're declining or you're growing. I mean, like. And so, yes, I think we should try to mitigate harm. Yes, I think we should try to, like, just encourage people to not be jerks in terms of, like, calling the police on their neighbors. But I don't think the goal should be, like, let's mummify neighborhoods. You know? Like, I think sometimes the gentrification discussion, it reminds me a little bit of, you know, when we were talking about rezoning and how you get this nimbyism of people who are like, no, the neighborhood cannot change exactly as it was. And I know this is different because I know there are different power dynamics. I get that. But I also do think there's sometimes this tendency to say, like, well, if anything's changing the neighborhood, that's bad, and it's gentrification. And, you know, sometimes it's just development or it's just change. It's just like, there's no stasis.

[B]

I mean, there needs to be. You need to think of it more holistically, I think, and think about some of the zoning stuff we talked about the other week, as opposed to just simply thinking like, oh, rich white people are moving in, and everything's gonna change for the worse. Like, think about, like, where are they moving in? Are there gonna be new luxury housing? Who gets to live in the housing? How could we make it so more people can stay? Cause there are so many benefits to making people stay. Maybe you need to have, like, a more of a. A bigger, broader policy outlook to sort of amp up the good stuff.

[A]

Going back to the question of Amazon and Queens, though, One of the things which undoubtedly happens with gentrification and is 100% certain to happen with gentrification is complaints about gentrification. You know, if a neighborhood gentrifies, people are going to notice it and they're going to talk about it, and there's going to be a lot of people complaining about it, whether they're justified or not. And Amazon didn't seem to be prepared for that, that if Amazon drops into Long Island City in Queens, people are going to complain about gentrification. That is the most obvious and certain thing that will ever happen in the world. And so Amazon announces this, and then people complained about gentrification, and Amazon then picks up its wall and goes home and says, you know what? If you're going to complain about it, we're just not going to build here at all. And. And how did they not see that coming? You know, that's just insane.

[C]

I do agree with you on that. As much as I still think that New York did not handle that well. I do think you're right that I found.

[B]

Or like, Amazon didn't handle it.

[C]

No, I actually don't. I don't know. Well, like, I can kind of see them being like, okay, well, then we're not coming. I mean, like.

[A]

But why would they want to come in? Like, they could build in, you know, midtown. They could. And in fact, there's. There's reports now that they are doing just that. They're hiring a whole bunch of people in Manhattan and no one minds, because that's what big tech companies do. They could have done that, no problem. But instead they decided to do this huge song and dance about, we're going to come into a un gentrified neighborhood or less gentrified neighborhood. It's not like Long Island City isn't gentrifying. It's just not doing it quite as quickly as it would if Amazon.

[C]

Now, it's going to continue to be gentrified, but with fewer jobs.

[A]

But, you know, if you're going to make a big song and dance about coming in and effectively gentrifying the neighborhood with billions of dollars of investment in engineering jobs and stuff, the first thing you have to expect is complaints about gentrification. And if you then complain about the complaints, that just seems naive.

[C]

I'll give you that.

[A]

Yeah.

[B]

But can we, can we say based on this paper that Amazon could have gone to Queens and it would have been fine, maybe even good?

[C]

Yes.

[B]

Is that true?

[C]

I think, I think there is, actually.

[B]

Can you concede that, Felix?

[A]

It depends on what you mean by fine? I think it comes back to Anna's point. If Amazon had come to Queens and what we're saying is it would have gentrified. And then the next question is, if Queens had gentrified, or to the degree that it gentrified more as a result of Amazon coming, would that have been good or bad? And you can do the, you know, fully fed quantitative analysis of this and say, probably it's good, or you can do the, you know, let's do an opinion poll of the constituents and they'll say it's bad. And so the question then becomes like, how do you judge? You know, do you judge on the way that people think, or do you judge on some kind of objective quantitative analysis?

[B]

You Moneyball it, Felix.

[A]

You Moneyball it. Okay, okay, let's have a numbers round. In fact, I'm going to go first because I have an Amazon related numbers round. And since we were just talking about Amazon, My number is $94.48, which is the amount of money during prime day that a bunch of camera equipment started selling for across Amazon, which was super interesting. And I did this little experiment. I had a bunch of things in my Amazon cart just before prime day, and it was about $220. I'm like, what happens on prime day to like, the price of things in your Amazon cart? And so on prime day, I go into my Amazon cart and the price had gone up to $230. And the fact is that most things on Amazon do not actually drop in price on prime day. It's just a question of like a few very special deals here and there. But it turns out, probably due to some glitch, that a bunch of like insanely expensive camera gear, like 1000, 2000, 5000, there was even one lens which was $13,000, was being sold for $94.48. And it wound up hitting these like, photography forums and people were jumping all over it. And Amazon looks like it's actually shipping all of these. And people who bought $13,000 lenses for 95 bucks are getting them in the mail, which is kind of awesome. Oh, and my favorite bit about this is that there are other stores like Best Buy, which have an official policy of matching any price on Amazon. So some people took this price on Amazon, took it into Best Buy, and Best Buy was like, oh, I guess I have to sell you this for $95.

[B]

Now I kind of want one of these lenses, which I have no use for at all just to get the deal.

[C]

So My number is 230-61912.

[A]

What's that?

[C]

Okay, so as you may know, Alan Turing is now going to be on the 50 pound note, right? Exactly. Which I think is very cool. So if you look at this note, there is this like ribbon near his face that has binary code on it. And if you kind of do the conversion to decimals, what that code actually says in decimals is 230-61912, which is his birthday. Oh, that's so cool. I thought that was cool.

[B]

I can't beat that. Well, I'll see what Felix thinks about this one. $69 million.

[A]

Nice.

[B]

That is the 2018 canned wine sales. So canned wine, $69 million.

[A]

I'm glad that it is that low.

[B]

That is up from 2 million in 2012. That is how popular canned wine has now.

[A]

It's gone from non existent to tiny.

[B]

Yes, it's very popular.

[A]

69 million. Like you can, like in the world.

[B]

Of wine, it's not a big deal.

[A]

Not a big number. But if you said like 6 billion, then I'd be like, okay, that's insane.

[B]

And I didn't write it down. But there's also a big burgeoning industry and canned hard seltzer, which is now a thing.

[A]

That's a big thing.

[B]

It's a very big thing. But they don't break out canned hard seltzer from like other malt beverages. So I didn't want that impure number here. But hard seltzer, big industry cans, huge. It's a huge thing right now.

[A]

So in principle, cans are more environmentally friendly than bottles because you can actually.

[C]

Recycle them as opposed to when you do plastic, which recycling actually creates more environmental structures.

[A]

They're also lighter in terms of the cost of shipping them.

[B]

More Instagram friendly is, I think, part of the thing fueling this trend the most.

[A]

Probably more Instagram friendly. You know, I am generally in favor of new ways of shipping wine, boxing wine, consuming wine. I love screw caps, I love boxed wine, all that stuff. And in principle, I have no objection to wine in cans. In practice, I have a problem with wine in cans. I see, like, I have yet to come across a single canned wine which actually tastes good. And I feel like that's a key element to wine is it should taste good. Also, if a wine comes in a can, you generally drink it straight out of the can. And that is not a great way to drink wine because when you're drinking wine, it's all about the nose and the smell. You put your nose in the glass and that's probably 80% of the pleasure you get from drinking wine comes from smelling it rather than tasting it.

[B]

You can't really put your nose in the can.

[A]

It's really hard. No, exactly. It's hard to. And the cans are not designed. They don't. The whole lid doesn't come off. It's just like that little bit. And so if people were just buying cans of wine and opening them up and pouring them into wine glasses and the wine was good, then I wouldn't have a problem. But none of that is true.

[C]

No.

[A]

No one's pouring them into wine glasses. The wine is not good. So I'm sad that I cannot recommend drinking wine in cans, because I would like to be able to, but I can't.

[B]

What about hard seltzer, which I think is bizarre, but I'm interested in.

[A]

Well, hard seltzer was a big thing in the UK, like, 20 years ago. I'm surprised it's taken so long to come here.

[B]

It's like seltzer is so big here now, so they wanted, you know, they want to capitalize on that. So they do hard seltzer. And. And my problem is, like, I was just at a barbecue and there was hard seltzer and regular seltzer and lots of children, and the hard seltzer looks a lot like the regular seltzer.

[A]

It does.

[B]

And I feel like this is not a good.

[A]

But then my favorite thing is the opposite thing, which is we have to talk about Liquid Death, which just. Liquid Death just raised. Yeah. $15 million or thereabouts. It's canned water and it's called Liquid Death. And if you're walking around in a party with a can of Liquid Death Death, you don't feel stupid in the way that you feel a bit weird if you're walking around in a party with a glass of water.

[C]

I walk around parties with glasses of water all the time.

[B]

Respect.

[A]

Respect. I mean, you need a certain degree of self confidence that Anna has and the rest of us do not. No. Liquid death is a super interesting thing. I mean, it's laughable on one level, but on the other level, everyone who's been to a party with a case of liquid death has kind of been into it. Who knew?

[B]

I think that's good.

[A]

Okay. I think that's it for this week's edition of Slate Money. Thank you for listening. Thank you to Jessamine Molly for producing and especially for managing to turn that whole Elizabeth Warren discussion into something vaguely coherent. Congratulations, Jessamine. You're a superstar. We have a big request for you, which is please send in your questions. We are going to do a a big Q and A episode. So send in your questions to sleep moneyleep.com and we will answer all of your questions. That's coming up pretty soon. And in any case, we will be joining you next week on Slate Money.