Slate Money – “Is Capital One’s Discover Deal Doomed?”

Date: February 24, 2024
Host: Felix Salmon, with Emily Peck and Elizabeth Spiers

Main Theme

This episode dives into three big stories in business and finance:

• The proposed Capital One–Discover credit card mega-merger: its strategic motivations, antitrust challenges, and likely outcomes.
• Nvidia’s explosive growth and dominance in the AI chip market, exploring whether the boom is justified or speculative.
• The economics and cultural transformation of the car wash industry, including the rise of subscription models.

Segment 1: Capital One’s Discover Acquisition – Is it Doomed?

[00:43–15:01]

Key Points & Insights

• Deal Overview:
  Capital One has announced an agreement to buy Discover. The merger would create the biggest credit card issuer in the US, with a 19% market share, overtaking JPMorgan Chase’s 16%.
  “If and when these two companies merge, they will be the biggest credit card issuer in the country with a 19% market share.” – Felix Salmon [01:23]

• Motivation & Value:

  • Discover is unique as both a major card issuer and an independent card network (the four are Visa, MasterCard, Amex, and Discover). Most US card transactions go through Visa/MasterCard.
  • Capital One wants Discover to access its network—allowing independence from Visa/MasterCard’s fees and to potentially grow as a rival network.
  • However, most of the deal’s value is in Discover’s card-issuing business, not the network.
    "Most of that $35 billion is just for its card issuing business, not for its network." – Felix [06:17]
  • Capital One says it’ll move its debit cards to Discover’s network but hasn’t said the same for credit cards.

• Interchange (Merchant) Fees:

  • Visa/MasterCard charge small fees for every transaction—huge business as card usage increases.
  • Most of the “merchant fee” is split among various players, notably including banks and kickbacks to consumers via points and cashback.
  • US credit card fees are much higher (and less regulated) than in other countries, fueling loyalty programs but also inefficiencies. “In the United States, debit card fees are regulated… but credit card fees are not. And they only ever seem to go up and up and up…” – Felix [06:48]
  • Merchants can offer cash discounts as regulations have loosened.

• Regulatory and Antitrust Headwinds:

  • This is a classic horizontal merger—two big issuers, big overlap, less competition.
  • New Consumer Financial Protection Bureau (CFPB) research confirms that big issuers (Capital One, Discover, AmEx, JP Morgan) charge higher APRs and annual fees than small banks. "There is interesting research... CFPB... shows that the biggest card issuers... charge much higher interest rates... than smaller card issuers." – Felix [07:22]
  • The merger would further empower Capital One to raise interest rates—bad for consumers.
  • Bipartisan backlash: immediate Congressional opposition, from both Elizabeth Warren and Josh Hawley.
  • The only realistic pro-consumer argument: The merger could strengthen Discover’s network, create real competition to Visa/MasterCard, and lower fees. "What Capital One has been trying to say with a straight face is... we're going to invest in [Discover]... and it's going to be able to compete with Visa and Mastercard... that's good for consumers." – Felix [08:17]
  • Hosts doubt this logic; other banks are unlikely to use the Discover network once it’s owned by Capital One, a competitor.
    “No one is going to be using this Discover network except for Capital One… Of course they’re not going to do that.” – Felix [10:15]

• Deal Likelihood:

  • Antitrust regulators under the Biden administration are seen as likely to block the deal.
  • Notably, there is a $0 breakup fee if blocked—implying even the companies doubt it will pass.
    “They have negotiated a zero breakup fee… the only way you negotiate a zero breakup fee is if you know that this thing is [likely not] going through.” – Felix [14:04]

Notable Quotes

• “There’s a bipartisan congressional consensus this is crazy and it has to be banned.” – Felix [08:07]
• “I have yet to find a human being who will present this argument to me with a straight face and actually believe it.” – Felix on the “boosting competition” argument [10:15]
• “If Capital One has a 10% chance of this deal going through, it's probably worth giving it a shot… but I'm just going to come out and say that there's no way this deal is going to happen.” – Felix [13:17]

Segment 2: Nvidia—the King of the AI Chip Boom

[15:01–24:36]

Key Points & Insights

• Nvidia’s Meteoric Rise:

  • Recently became a $2 trillion company.
  • Stock price doubled in ~8 months; market cap lionized by the business press.
  • The hype is backed by actual earnings: Nvidia’s profits have grown as fast as its valuation; PE ratio remains steady. “Its profits have gone up a lot because it is the only game in town when it comes to making the kind of AI chips that everyone wants.” – Felix [15:54]

• Dominance in AI Hardware:

  • Nvidia pioneered GPUs, originally for gaming and graphics; this architecture is now the backbone of AI/LLM hardware.
  • Chips like the H100 ($30,000 each) are “the 2020 toilet paper of tech”—so in demand that even Facebook/Meta is stockpiling them. “These H100 chips are like the only thing that anyone wants right now… everyone is just hoarding them…” – Felix [16:30]
  • Massive moat in hardware, custom APIs, and proprietary programming languages, now becoming industry standard. “They have so much research and IP already under their belt…” – Elizabeth [18:07] “Moving away from [Nvidia’s] architecture... would be so hard... so Nvidia kind of has a monopoly on this right now…” – Felix [18:51]

• Expanding AI Market:

  • Not just big tech anymore; now every major company (from JP Morgan to General Motors) wants in-house AI powered by Nvidia chips. “It's not just tech anymore… if you're a big company, you want to be on top of this AI thing.” – Felix [22:31]
  • Labor, not chips, is now the scarce/expensive resource for building AI.

• Bubble or Just Boom?

  • Some skepticism on whether this is the start of an unsustainable tech bubble.
  • Counterargument: AI is here to stay, foundational, and embedded in everything; Nvidia is not yet facing true competitors. “AI is not a bubble… AI chips, it's going to be in everything. Everything tech is going to be AI.” – Emily (paraphrasing Don Byer) [21:24]

• Market Impact:

  • Nvidia single-handedly boosting overall stock market indices to all-time highs, even in high interest rate environment.
  • Tech giants now dominate index weighting at extreme levels.

Notable Quotes

• “People love to talk about market caps that they are missing the real story, which is Nvidia is just printing money right now at an astonishing rate.” – Felix [15:54]
• “This is just the beginning of something. Jensen Huang called this… the AI tipping point.” – Emily [21:24]

Segment 3: The New Economics (and Culture) of Car Washes

[24:36–33:57]

Key Points & Insights

• Changing Consumer Habits:

  • Americans have all but stopped washing their own cars; the norm is now drive-through or automated washes. “The first big move is that no one is washing their own car anymore.” – Felix [25:56]
  • The rise of “unlimited” car wash subscriptions incentivizes far more frequent visits, changing demand and business economics. “If you buy an unlimited subscription to this car wash, you’ll wash your car much, much more frequently…” – Felix [27:00]

• Industry Expansion:

  • Car wash demand up sharply; chains and private equity ramping up investments.
  • Zoning backlash: some cities/towns are restricting new car washes due to issues of traffic, pollution, and land use.

• Spatial Competition:

  • The Hotelling’s Law effect explains why competing businesses (gas stations, pharmacies, and now car washes) cluster at the same intersections. “The intuition that these things would be spread out… is actually… it doesn’t work that way… all the competitors [wind] up being right next to each other.” – Felix [28:48]

• Ecological & Social Implications:

  • Automation and subscriptions improved business stability (less dependent on weather), but possibly increase overall water usage if people over-wash cars. “Anytime you have a pricing model that allows for unlimited anything, I think it switches consumer behavior into doing something more often than you would rationally do it.” – Elizabeth [31:41]
  • While automated washes use less water per wash than washing at home, net water use could rise.

• Personal and Cultural Observations:

  • The car wash is no longer a community social event (e.g., lyrics from “Car Wash” by Rose Royce), but some car washes are gamifying or “partying up” the consumer experience (with mascots, disco lights). “There are some car washes that have things like disco lights and they try to make it an entertaining experience…” – Elizabeth [33:21]
  • For some subscribers, the car wash’s value proposition is as much about entertaining kids or dogs as about cleanliness.

Memorable Moments

• Emily: “At my car wash, they have a guy dressed in… a monkey costume who stands at the front… it is, it’s like heartbreaking a little bit to me.” [33:04]
• Felix: “There’s definitely a subset… who are not washing their car… for cleanliness… but to entertain their dog.” [33:57]

Numbers Round

[34:26–End]

• Elizabeth: 46% of Americans finished zero books last year; an additional 5% only read one. Top 1% of readers finish 50+ books a year. [34:29]
• Felix: $40—new American Airlines checked bag fee, up from $35. Complains fees never go down. [36:33]
• Emily: 546—number of English words meaning “drunk”; “drunk” has more synonyms than any other concept. [37:34]
  • “Words like sozzled, cabbage, canned, fuddled, hammered, honkers, owley eyed...”

Takeaways

• The Capital One–Discover merger faces overwhelming antitrust hurdles and is unlikely to close, even as it highlights the power and inefficiencies of the US credit card system.
• Nvidia’s outsized role in the AI revolution is backed by real profits and a dominant position that may last for years, fueling a market rally.
• A prosaic business like car washes can be radically reshaped by subscriptions, private equity, and consumer psychology—with ripple effects for urban planning and the environment.