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.

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)

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)

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.

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)

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

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.

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?

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.