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Slate Money
The Bad Romance Edition
00:46:09
Slate Money talks AT&T’s planned merger with Time Warner, the CETA trade deal, and how tech companies fare in the public stock markets.
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- [00:00]
Kathy O'Neill
The following podcast contains explicit language.
- [00:08]
Felix Salmon
Hello and welcome to the Bad Romance edition of Slate Money, your guide to the business and finance news of the week. And I can tell you that in recent weeks, it has sometimes, especially over the summer, been quite hard to come up with a bunch of recent financial news of the week. And also because there's been this presidential election going on and that's kind of drowned out everything else. But this week has been completely insane and we could have seven shows with what on earth has been going on this week? So we're just going to more or less pick at random. But I just want to give you a taste because I think this is indicative of something and maybe we can talk about what just in the past week in terms of mergers, we. We had GE looks like it's going to buy Baker hughes for about $30 billion. We had BAT, that's British American Tobacco. It wants to buy like the most the bit of Reynolds, which is an American tobacco company that it doesn't already own for $47 billion. There's a telco merger, level three and CenturyLink merging. That's going to create like a $30 billion company. There's a brokerage merger. We had TD Ameritrade agreed trade that was just $4 billion. That's absolutely nothing. There's a massive semiconductor merger where Qualcomm, their semiconductor giant, is buying this company called, I have to admit, NXP Semiconductors, which I had never heard of, but which apparently makes computer chips for cars and is paying $39 billion for this company I'd never heard of. And so, yeah, love is in the air.
- [01:58]
Edmund Lee
Or bad love.
- [01:59]
Felix Salmon
Or bad love. This, by the way, is Mr. Edmund Lee.
- [02:03]
Edmund Lee
Hello.
- [02:03]
Felix Salmon
You run a website called Recode.
- [02:06]
Edmund Lee
I am the managing editor of Recode.
- [02:08]
Felix Salmon
Yes. And Recode is an awesome website. So go check it out. Edmund Leigh is here stepping in for Jordan Weissman, who's on an airplane. Kathy o' Neill is also here.
- [02:18]
Kathy O'Neill
Hello, everyone.
- [02:18]
Felix Salmon
She is an expert in bad romance. We have a little bit of bad romance as well.
- [02:23]
Kathy O'Neill
That's my middle name, baby.
- [02:25]
Felix Salmon
We were expecting, were we not, Ed? The announced merger of Gannett and Tronk. Goodness, that one didn't happen.
- [02:35]
Kathy O'Neill
Nobody even knows what those are. That sounds like made up words.
- [02:38]
Edmund Lee
Well, I mean, that's what the newspaper industry has come to, right? Which is a once storied big newspaper company that a lot of journalists now don't like working for because of all the cuts. This is. I'm talking about Gannett and Tribune, which I guess They've decided to call this bizarre. I don't even want to say it, but anyway, Tribune, LA Times, Chicago Tribune. These are big, major news outlets and some still functioning more or less. And the fact that can't even make this happen is just crazy.
- [03:14]
Felix Salmon
But clearly if you're in any industry other than the completely terminally doomed newspaper industry, now is the time to get it on. There seems to be, I mean, just from what I was ratt off their hundreds of billions of dollars worth of financing available at the push of a button or something.
- [03:33]
Edmund Lee
Well, with basically near zero interest rates, money is cheap. And so you're going to get these deals done before December when the Fed decides, hey, guess what, maybe we should bring that back up.
- [03:45]
Felix Salmon
So we are going to talk about a merger which we haven't even mentioned yet. We are going to talk about the sort of kind of mergery thing that it looks at least like on a trade deal, Canada is going to merge with Europe. I kind of like this. It's called ceta. And we're going to talk because Ed is here and he's at Recode and he knows everything. We're going to talk to him about what happens to tech companies when they go public. There's been a bunch of news around there. We had a little.
- [04:18]
Kathy O'Neill
Or when they die.
- [04:19]
Felix Salmon
We had the death of a minor social network this week as well. It's been a busy week. But Ed, what is the number one biggest, most important merger that everyone has been obsessed with all week?
- [04:31]
Edmund Lee
Oh my goodness. Something involving a little known telephone company or very well known telephone company at&t looking to buy Time Warner. Time Warner Inc. Now, let's be very.
- [04:42]
Felix Salmon
Clear about that because the Senate managed to get this wrong.
- [04:45]
Edmund Lee
Oh, absolutely. And you know what? I don't blame anyone if they're still confused by this because it's not necessarily intuitive or easy. But basically, Time Warner Inc. Is the media company that owns hbo, cnn, Turner Networks, the Warner Brothers movie studio. It does not own. That means it does not include Time.
- [05:03]
Felix Salmon
Warner Cable and it also does not include Time.
- [05:06]
Edmund Lee
Time exactly. Which is the foundation of this media empire from many, many decades ago. So it doesn't include Time.
- [05:15]
Felix Salmon
And there are exactly three public companies with the word time in their name, only one of which owns Time magazine.
- [05:22]
Kathy O'Neill
I'm going to jump in here because I've been kind of stalking Ed this week on Twitter because I'm just like, what? Who cares about all these murders? Like, do they make any sense to the average person whatsoever? And I've decided to like Glom onto this. This issue of names. Yes, Time Warner, because, like, correct me if I'm wrong, but didn't Time Warner and Time Warner Cable just simply split in, like, 2009? And if they're splitting back, then why are they merging now? Like, what, What. What changed?
- [05:52]
Felix Salmon
This is. This is my favorite question, and this is literally the number one question which people should be asking about this merger, is that Jeff Buchus, who's the CEO of Time Warner, famously spun off Time Warner Cable as a separate company because he's like, content and distribution are two entirely different businesses. Let's spin them off, and if you value them separately, they'll be worth more apart than they would be together. So that same dude, and then that same dude is now saying, content and distribution belong together in a beautiful vertical stack. What we want to do is merge Time Warner with AT&T, which is the distribution. Now, I'm going to come out and say that for all that this doesn't make any sense on its face, I kind of think it makes sense. I can come up with a reason for why it makes sense. But, Ed, does it make sense to you?
- [06:39]
Edmund Lee
I think it makes very, very little sense. So there's a whole lot of reasons here. But I think to go back to Felix's earlier point, and your point as well, about why would you want to then merge with a distribution company when you spun off one before? So Bucus actually had an answer for a bunch of reporters when he was asked. His answer was interesting and not entirely believable or one that I can latch onto, which is this is that he said, when we spun off Time Warner Cable, that was a regional distribution player, meaning has a regional footprint. It sells to customers in New York City and Louisiana and other parts around the country. And it was smaller. AT&T is a national distribution company. So my counter to that is that what difference does that make to your content? Right. Whether you. And this is. I'm getting to the heart of why I don't think this deal makes sense. No matter how widely distributed or not widely distributed content is, you still make content. In fact, you want to distribute it as widely as possible. So being part of a distribution company doesn't change or should not change your content calculus.
- [07:44]
Kathy O'Neill
Okay, so here's my next question. And it's directly related to this. Okay, can you give me one example of a really good merger that happened in spaces, like, analogous to this, where you're just like, that makes sense. And it works not just for the. Obviously for the CEOs who always get paid out a lot of money. Right. And maybe for the shareholders who enjoy things like this too. But makes sense as a business. Like it makes it, it makes other people happy. Like one example of a merger where the public is like, holy crap, this is great.
- [08:15]
Edmund Lee
Yeah, I can't think of one. I mean you have to understand that the motivation for lots of mergers, I mean it's very, sometimes it's very balance sheet focused. The word that companies use is synergy. What that really means is how many costs can we cut. Right. Meaning how many staff can we cut? That kind of thing. I'd like to hear the.
- [08:32]
Kathy O'Neill
I have a theory too, but. Okay, Felix first.
- [08:34]
Felix Salmon
Okay, so here's a good example of a merge which I think was really good for both companies. Was Google buying YouTube, like YouTube on its own could not have had nearly the same amount of success that it had as part of Google. Or for that matter, since Ed is in the room, we can say that when Vox Media bought the Curb Network, that was really good for the Curb Network and it's been good for Vox Media as well. So there are horizontal mergers, which makes sense. This is not a horizontal, this is a vertical merge.
- [09:07]
Kathy O'Neill
If you're talking about buying up like basically competitors.
- [09:09]
Felix Salmon
But this was Google competing with YouTube.
- [09:14]
Kathy O'Neill
It's a good question.
- [09:15]
Edmund Lee
Well, Google didn't have. I mean, I think it's a good point. So I think a few things, yes, we're very happy to be part of the Vox family. And I think that that's a fair point. I do think there are definitely sort of mergers in sort of smaller spaces, smaller industries that maybe don't immediately impact consumers. I think that sort of goes to the heart of your question. In this case we're talking about vertical versus horizontal. So what these basically mean is in the case of AT&T, they are buying Time Warner, which is a vertical merger, which is to say AT and T and Time Warner don't compete with each other. So what does that mean for the consumer? The amount of choices you had in wireless carriers and cable companies does not change. In other words, they're not taking, they're.
- [09:56]
Felix Salmon
Not competitor out of. This is not an anti competitive measure.
- [10:00]
Kathy O'Neill
Here's one thing that might change, right? And I know that this, this may or may not change and I want your opinions on it. But I know for a long time the data people of the world have been really excited about the idea of tailored television ads. And I feel like this in some sense presents that opportunity. But at the same time we might.
- [10:20]
Felix Salmon
Not be allowed To. And this is where I want to jump in and say, you know, we're talking about AT&T as a television distribution, as a national television distribution giant, which it is, but only really because it just spent $50 billion buying this company called DirecTV. What at&t really is is a mobile phone company. And while everyone knows that at some point in the future we're all going to be watching a lot of television on our mobile phones, right now no one's watching television on their mobile phones. It's just not something we really do a lot of.
- [10:57]
Edmund Lee
And it's a weird prospect, right? Like, do you really want to do that? Is that really why you want to spend $85 billion so that you can get people to watch stuff on your phones? From the AT&T's perspective, you know, for mobile carriers out there, the mobile market is saturated, which is to say everyone who wants a mobile phone already has one, meaning you're already paying someone for service. In order for AT&T to grow, or Verizon to grow, or T Mobile, they're just fighting for share. The way they're fighting for share is through price wars, right? So it's getting harder for even big, massive companies like AT&T to grow their business. So what are they doing? Oh, let's buy a content company. Because we think that's the future. If we can differentiate our service by having something that the other carriers don't have, then maybe we can charge more.
- [11:39]
Felix Salmon
Maybe we can have stickier customers 100% convinced about this idea. That what this means is that AT&T is going to zero rate HBO and you get free HBO on your AT&T.
- [11:51]
Edmund Lee
I don't think that's going to happen. That's exactly right. That's not going to happen.
- [11:54]
Felix Salmon
I think, I think there is a reason for this. And this is the reason why, as I say, I think it makes sense for a distribution company to buy a content company, even if it doesn't make sense for a content company to own a distribution company. Because, okay, is that if you're a distribution company, you have two choices. One is that you are a dumb pipe and everyone just buys content directly from Netflix or whoever over the top. And you just sit there saying, I'll charge you 40 bucks a month for Internet and that's all you're ever going to get. The second one is that you bundle things together. Historically, this is what cable companies have always done. They've made a huge amount of money by bundling television channels together and then selling them for like $100 a month. The problem with the bundling model is that there's a handful of content companies who have an enormous amount of negotiating power. You have basically the five big networks, abc, NBC, cbs, Fox and Univision, who have to be on that bundle. And then a handful of brand name cable channels. Espn, cnn, hbo. So what? And when you're negotiating as a cable company with, with those channels, they have all of the cards because no one's going to want cable TV from someone who doesn't have espn. So you basically have to pay ESPN whatever they're asking for.
- [13:26]
Edmund Lee
And also take these other channels that maybe you don't want.
- [13:28]
Felix Salmon
And then ESPN is owned by Disney and they're like, you need Disney Family Channel 8 or something. And you're like, no, I don't. But you're gonna wind up paying for it anyway because you need it.
- [13:37]
Kathy O'Neill
Okay, I'm gonna channel my children here. We're all, none of us are that young. So I'm gonna channel the young people of the world. And the young people of the world are so uninterested in any of this stuff. And I want to. Can we talk about that?
- [13:51]
Felix Salmon
Well, actually, let's talk about the latest announcement from DirecTV, the $35 a month.
- [13:57]
Edmund Lee
So DirecTV now, which is their over the top we're streaming TV service, basically you can buy your TV, it goes over the Internet, you can just sort of call it up on your Roku device or your smart TV device or whatever it might be. And that's, I think, the direction all TV is headed in. But to your argument about why this might make sense for a distributor to own a content company, the sort of counter to that, however, is that Time Warner, which owns HBOCN and all these big important essential channels, they can't not sell that stuff to other competitors.
- [14:28]
Felix Salmon
No, no, but I'm not saying this is exactly. What I'm saying is that you have this. It's a natural hedge, basically, that if you own a distribution company and you are getting gouged by Time Warner because they're charging so much for cnn, you're like, hey, I. It's just, I'm paying it from one hand to the other hand.
- [14:47]
Edmund Lee
So you want to diversify your business, fine. I think if that's the argument, I'll buy that.
- [14:52]
Felix Salmon
And there's one other really, really big part of this, which I think people haven't been putting enough weight in, is that AT&T for all that it is a really massive company, is basically entirely an American company. Time Warner is global. And if you're looking for growth, the growth is going to be global. It's not going to be in the US Meaning.
- [15:10]
Edmund Lee
So Time Warner is selling HBO to like Latin America and Europe and Asia and other countries.
- [15:14]
Felix Salmon
Content is. They have Warner Brothers, you know, they. Superman. Superman is a global franchise and makes more money abroad than it does.
- [15:21]
Edmund Lee
Do we think young people are interested now we're talking about like Superman and.
- [15:24]
Kathy O'Neill
Yeah, yeah, I do, I do. But I do think that, like the, I mean, here's my theory about it and I might be totally wrong. You guys know more about this than I do, but I've been at a company that was acquired by another company and I was like, they probably paid too much for this company. And by the way, they have a pattern of buying stuff every couple years. And I feel like that is also a thing where people are like, you know, if you, if you merge or if you acquire, people don't really understand how to evaluate, evaluate you as a company. But if you keep doing it like, it sort of postpones that evaluation. And I'm wondering, like, they're buying DirecTV now. They're buying all this other. I mean, are they sort of just continuing to grow because they don't want to sit still and be evaluated?
- [16:06]
Edmund Lee
Well, they're continuing. That's part of it. But also they're continuing to buy things because they're having a hard time growing, as I was saying earlier about the price wars. And it's a saturated market and they're just fighting for share now in order for them to grow outside the bound. And you're right. AT&T is basically an American company. It's like, that's it. Everyone who wants cell phone service already has one. So how else am I going to grow? When they bought DirecTV, that was. What they're basically buying are TV contracts. Right. The licensing rights that DirecTV already brokered with Time Warner and Fox and all the other content distributor.
- [16:36]
Kathy O'Neill
So it brings up the question, like, are they paying the right amount of.
- [16:40]
Felix Salmon
And the fact is, like, in terms of how much they're paying, they, you know, AT&T is a big boring utility company which I believe has raised its dividend every year for 25 years.
- [16:51]
Edmund Lee
And you can't not pay the dividend. It's called the, it's called, you know, retiree stocks, basically. It's like if you're A to the category. Yeah, you have to, you have, you have to pay that dividend because that's.
- [17:00]
Felix Salmon
What people rely on and they care about that. So what they're not doing is buying Netflix, right? Because Netflix, they would, they would have to spend 55, you know, probably $75 billion if they wanted to buy Netflix. And Netflix basically doesn't make any money. And so then they'd be like, how on earth do we get to keep on buying?
- [17:17]
Edmund Lee
Well, that's the other thing. They'd be taking that much more debt, right? So AT&T is borrowing a lot of money to buy Time Warner, but they.
- [17:23]
Felix Salmon
Already have Time Warner is cash flow positive. So they can, they can afford to do that and still keep on paying.
- [17:28]
Edmund Lee
And if you're, if you want to sort of walk out on the math, some of this, it's like, I think AT&T CEO Randall Stevenson marked it as their debt load after the deal would be something like 2.5 times EBITDA profit. He said, that's an investment grade. He said, we're going to bring it down to 1.8 times EBITDA profit by this time next year. And it'll be fine. Don't worry about it. Everyone's concerned about the debt load that AT&T will take on to buy this and also to do their dividend and everything. So if you're worried about the numbers on that, there's a rationale at least that they've come up with on the balance sheet.
- [18:01]
Felix Salmon
And then, and then, like, you know, if you just do it on a basic, like, multiple of Netflix level, I think it's pretty obvious that you'd rather have Time Warner for $85 billion than Netflix with its market cap of 55 billion. You know, I think I would probably rather have HBO alone than Netflix, let alone everything else.
- [18:22]
Kathy O'Neill
I disagree.
- [18:24]
Edmund Lee
Because remember, you would rather have Netflix because.
- [18:25]
Felix Salmon
Because remember that Netflix has to pay for all of its content. It doesn't really. The amount of content creates better.
- [18:33]
Kathy O'Neill
It's so much better. The young people are so much more into it. Like, and the young people are our future.
- [18:38]
Edmund Lee
So there. Okay, so, you know, there is, there is actually another argument for. In Netflix's favor in terms of the business strategy, which is this, is that the content that's on Netflix and Netflix is increasingly just. It's originals they're owning, meaning they own it outright. They can do whatever they want with it that's exclusive to Netflix. And Netflix, you can argue, is also its own little distribution channel, as opposed to, say, HBO, for example, which has to sell to Verizon FiOS as well as to Comcast as well as to every other distributor. So AT&T who now owns or will own HBO doesn't have an advantage by owning it. Right. Because all their distribution competitors will also have to, you know, have that available to them. Whereas Netflix, however, the content they own is exclusive to Netflix. Not anymore. You know, you're not seeing that on, you know, it's, it's kind of a, it's, it's not the most parallel argument, but like you're. People are paying for Netflix. They're not paying through Verizon or other distributors like Comcast or whatever.
- [19:33]
Felix Salmon
Okay, So, I mean, we've already gone way over time on this segment, but that's okay. I do want to just finish with the stock market crazy here. You know, the value of this deal, you know, the value of AT and T shares is a little bit up and down, but it's in the region of $105 to $107 per Time Warner share. Since the deal has been done, there's been like $12 billion of turnover in Time Warner shares. Lots of people are selling Time Warner shares into the market, and the price they're selling them for is like $87, $88. They're accepting $20 less per time Warner share when they know that if they just hold onto their shares and the deal gets done, they're going to get $20 more. Ed, why would anyone sell their Time Warner shares at such a big discount?
- [20:26]
Edmund Lee
So we're now getting into the risk arbitrage sort of area where a little bit. So basically, typically when an M and A deal is announced, the company that's going to be acquired, their stock shoots up, but not quite to the level that the acquiring company is offering. Right. So if you're offering 107, you're not going to buy it at 107. You're going to trade it around maybe 100, maybe 95 or something. Because there's always a chance. Maybe the deal doesn't entirely go through. The gulf between where Time Warner is currently trading versus what AT&T has offered is a lot, in my opinion. That's telling us the stock market does not think this deal will pass because regulators, regulators, dc, doj, ftc, maybe even the FCC will jump in and review this and say yes or no to allow this to go through. It's leaning towards a no because and not because of. If you look at precedent, there's no reason this deal shouldn't go through because Comcast or NBC, it's a similar type of deal. It's a vertical deal. Right. But there is, I think, Sort of a growing faction in D.C. that wants to create a new doctrine or a new measure or a new standard for antitrust things, which is size. In other words, you're just too big. I don't care. It's vertical versus horizontal. We're not going to let that happen. We think it's bad for consumers. Now, that's frankly kind of an amateur read on the situation because as we said earlier, as a consumer, your choices aren't changing.
- [21:48]
Felix Salmon
Right.
- [21:48]
Edmund Lee
You start to pay ATT a lot of money. It's going to happen regardless. Right. So anyway, I think it's politics now potentially playing into it. I think that that's what the market's reacting to.
- [21:57]
Felix Salmon
So this is the perfect segue to my next segment, which is this wonderful thing called CETA, where Canada and Europe emerging. You thought AT&T and Time Warner was a big deal.
- [22:13]
Edmund Lee
This is far bigger.
- [22:14]
Felix Salmon
This is far bigger.
- [22:15]
Kathy O'Neill
Canada has gotten sick of us and said once and for all we're leaving.
- [22:18]
Edmund Lee
I mean, they've kind of always been a little bit more European anyway.
- [22:20]
Kathy O'Neill
Right? That's true.
- [22:22]
Felix Salmon
There's this thing called ceta, which you think would stand for the Canada Europe Trade Agreement, but in fact it doesn't. It stands for.
- [22:27]
Edmund Lee
Oh, you know what? I thought that's actually a good way to sort of break that. Yeah, that's a better acronym. Right. Than then what is it?
- [22:34]
Felix Salmon
Comprehensive Economic and Trade Agreement, which just.
- [22:37]
Edmund Lee
Sort of sounds like almost a global thing. Right. Like it could be any country around the world. Like it's comprehensive. Right.
- [22:45]
Felix Salmon
But no, it's a purely Canadian European thing. And it's eliminating 98% of tariffs between Canada and Europe. And it is also getting rid of a whole bunch of, like, occupational licensing restrictions, so that if you're an accountant in Romania and you want to move to Vancouver and practice as an accountant, you can just do that. You don't need to pass new exams and that kind of thing. They have been negotiating this for seven years.
- [23:11]
Edmund Lee
Yeah.
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Felix Salmon
And they finally managed to get it together. And Justin Trudeau is going to land in Brussels on Thursday and sign an agreement. Ed, why did he not do that?
- [23:23]
Edmund Lee
Why did he just get it done? Well, no, I think they're done with this deal now. Right.
- [23:28]
Felix Salmon
They are done with it happen. Right. There hasn't been the greatest prime ministerial signing, though, because this is where we all get to talk about for about three or four minutes, we get to talk about Walloons. And how much fun is it to talk about Walloons?
- [23:43]
Kathy O'Neill
So Walloons are what? They're French Speaking Belgians.
- [23:46]
Felix Salmon
Yes.
- [23:48]
Kathy O'Neill
We love Belgians in our house because they eat even more frites than Dutch people. But I guess when you think about standard economic theory and why trade is good, we always assume that tariffs are bad. But I think the truth is they're actually really good for some people.
- [24:06]
Edmund Lee
Right.
- [24:06]
Kathy O'Neill
They're protecting some people in some people's industries.
- [24:09]
Felix Salmon
The poor Wallonian farmers.
- [24:11]
Kathy O'Neill
Yeah. So what's going on there?
- [24:14]
Felix Salmon
I don't think it's the poor Wallonian farmers.
- [24:16]
Kathy O'Neill
Oh, you don't?
- [24:17]
Felix Salmon
No. Okay, but let's give a little bit of that.
- [24:19]
Edmund Lee
Well, the Wallonians in the first place, Right. Like, why are they a factor at all in this? Why were they a factor?
- [24:23]
Felix Salmon
Okay, exactly. Why were the Wallonians a factor? The answer is because one of the reasons this trade deal took seven years to negotiate, which, frankly, is quite not that long by trade deal for such.
- [24:33]
Edmund Lee
A big deal like this.
- [24:34]
Felix Salmon
Yes, by trade deal standards. Trade deals always take years and years to negotiate, which is one reason why you can't negotiate Brexit in two years. But that's a whole other subject. The deal needed to be ratified by all 28 countries, all 27 European countries and Canada. And they all signed off on it. They said, yes, yes, yes, yes, yes, yes, yes. Belgium is, I'm gonna come out and say this, not really a country. It has no reason to exist. It makes no conceptual sen. It's basically a random bit called Flanders, which should really be part of Holland, and a random bit called Wallonia, which should really be part of France, and a city called Brussels. And because Belgium is not really a country, and it has literally gone for years without a government, and it's quite good functioning. It functions, and it can go for years without a government. But one of the effects of this is that all of the power is in the regional governments rather than in the national government, because there is no national government, because it's not really a nation. And so one region of Belgium, Wallonia, just stood up and said, t in the kind of French way as the French did go, T. And, yeah, we do not like this free trade. And they just like that to veto it. And because this one stupid Belgian region wanted to veto it, the whole thing was off. And my. And the Canadian trade minister, who Ed and I know very well, of course, Christian Freeland.
- [26:02]
Edmund Lee
Weekly. Yes, weekly talks. Right.
- [26:04]
Felix Salmon
But she used to be my boss journalist, right. She came out and was pretty much in tears, and she's like, I'm flying back to Canada. I can't even with These Walloons.
- [26:13]
Kathy O'Neill
But wait a sec. I mean they had some real points.
- [26:17]
Felix Salmon
Mostly what their points were were like sort of pan European leftist talking points of we don't like these trade agreements, they're going to allow Canada to import genetically modified food into Belgium and this.
- [26:32]
Edmund Lee
So I mean that was the like sort of ideolog opposition. But in actuality I think a big part of the populace there, I mean it's sort of the equivalent of the Rust belt region in the U.S. right. It's an industrial manufacturing base and the economy there has been terrible for a while and I think they're suffering the effects of which now has become a bad word, globalization. Right. Which is going back to free trade and more free trade is better for everybody. They haven't sort of evolved. And this is a lot of first world economies, including the US were going through this growing pain of transitioning from an industrial base to a services and tech economy base. Right. And I think certain regions are sort of left behind or left farther behind. It's taking longer for them to catch up. And I think that's what they're reacting to as much as, I mean sort of in a sort of very sort of visceral way. Right.
- [27:21]
Kathy O'Neill
I would, I'm just going to like throw in my theory about this right now. Free trade in theory improves countries overall, all the countries that involve it, but it doesn't improve every individual's life. And the point is that like because of what you said about Belgium, it becomes more closer and closer to the individual vote. And there was like a region where just like we haven't seen improvement because of these treaties and we're going to vote against this and we're going to stall this. And that's why, that's why these trade agreements don't go through when like small, small enough groups of people get to vote.
- [27:52]
Felix Salmon
And also just because they're French and the French people are obstructionists and they love to say okay, but I just.
- [27:56]
Kathy O'Neill
Got to jump in though. One of the things they actually push through, it's seems is sort of an appeal system to this sort of ISDS stuff that we talked about a couple weeks ago.
- [28:04]
Felix Salmon
So we had a whole episode on investor state dispute settlements because that's how.
- [28:08]
Edmund Lee
Exciting who gets to sue whom and how.
- [28:10]
Kathy O'Neill
So they have a way to appeal a ruling from the ISDS court, like going to the European Union, something, something that's actually kind of exciting.
- [28:18]
Felix Salmon
And eventually it has to be said the Belgian Prime Minister who does exist, thankfully, because there have been times when there hasn't been one, but there is the Belgian Prime Minister, and he managed to twist the Wallonian arms enough that the Walloons gave up. And so now we are going to have a comprehensive economic and trade agreement.
- [28:37]
Edmund Lee
And do we think that somehow, in a weird way, like Canada is essentially replacing the UK in this? You know, in sort of. That's my read on it, in a sort of backhanded way.
- [28:47]
Kathy O'Neill
I also want to provoke Felix into talking about what this means for Brexit. Poking with a stick.
- [28:52]
Felix Salmon
Well, I mean, so very briefly, what it means is the same thing I've been saying all along, that Brexit is impossible. That in order for Britain to negotiate Brexit, it's going to need to get unanimity from all 27 European countries. And if you thought that was possible before, which pretty much no one did, you're not going to believe that's possible Now. Does anyone believe that Belgium and Greece and Portugal and Romania are all going to say, okay, yeah, that deal sounds good to us, we'll just sign it within two years, like it's inconceivable.
- [29:25]
Kathy O'Neill
Also, TIPP looks like it's threatened, which is the European American treaty that's been long negotiated and Obama has given up on it, I think.
- [29:35]
Felix Salmon
And tpp, which is the Pacific one. That one looks like it's not going to happen either.
- [29:39]
Kathy O'Neill
So much for treaties.
- [29:41]
Felix Salmon
Bad year for trade deals. Trade deals. Oh, and what if it happened to Doha? Remember that? The Doha Free Trade of the World Trade Organization. This has been going on for, I don't know, I want to say, like, 15 years now and has gone absolutely nowhere. Okay, enough trade agreements. Let's talk about stock market companies. The news which we kind of hinted at earlier, which is there's this struggling social network called Twitter, which owns an even more struggling social network called Vine.
- [30:11]
Kathy O'Neill
I talked to the guy who was supposed to be in charge of dealing with abuse on Twitter, but let's.
- [30:17]
Edmund Lee
Oh, my goodness, that has got to be the worst job in the world.
- [30:19]
Felix Salmon
But in any case, Twitter went public with a. With great fanfare. And because it was a tech company, everyone expected it to grow like gangbusters, because that's apparently what tech companies are meant to do. And then it didn't grow like gangbusters. And so everyone on the stock in the stock market who paid vast amounts of money for their Twitter shares are saying, boo, hiss, we hate you. You've got to change what you're doing, even though really what it was, it's just doing what it's been doing. All along. And there's a finite number of people who want to use that service. And one of the casualties of this is vine, which is sad because there are some wonderful vines out there.
- [30:56]
Edmund Lee
In fact, yesterday, basically, it was announced they're killing off Vine. I think vine was the number one trending topic on Twitter. And I think my entire feed was just like, oh, here's the best Vine. No, this is the best vine. And please sit down and watch this Vine.
- [31:10]
Kathy O'Neill
I saw some good vines yesterday.
- [31:11]
Felix Salmon
Oh, my gosh, I saw so many good vines. Interestingly, the place where I saw most of the best vines yesterday was this other, like, hot kind of social network called Slack. Like, the entire fusion Slack was like, just taken over by amazing Vines.
- [31:27]
Kathy O'Neill
I do have a question about this, which I'm going to address to you, Ed.
- [31:30]
Edmund Lee
Sure.
- [31:31]
Kathy O'Neill
I was reading this thing on Vox this morning, written by Matthew Iglesias, about the idea that, like, Amazon will not be consistently profitable anytime soon and it's by choice, and how Bezos is basically like, if we, if we made ourselves consistently profitable, we'd have the wrong kind of investor interested in Amazon. And it just made me like, is that a thing to have to have? Like, you're like, as a company, you're like, I'm going to attract a certain kind of investor. And if it is a thing, how did Twitter go wrong?
- [32:00]
Edmund Lee
Because I feel like Twitter, there's always. Yeah, that's a great question. So in terms of specifically Amazon, that has been Bezos's operating mode, really, since the beginning. There's nothing really new going on.
- [32:10]
Felix Salmon
And he famously wrote this in his initial shareholder letter when they went public in 1997.
- [32:16]
Edmund Lee
Don't buy into my company if you're looking for.
- [32:18]
Kathy O'Neill
I want everyone to write that letter.
- [32:20]
Edmund Lee
Well, so his, his job, in his, his, his mind, his job is to make Amazon as big as he can possibly make it. So in the, in the, in that endeavor, that means spending to either buy things or build things or get into new areas or new regions like India, which is what he's really trying. It's all these things are expensive or spending money on content for Amazon prime, all things expensive. So that's been his operating mode. That's his thesis. If you want to buy into his company, that's what you have to agree to. Some quarters might have profit, some quarters might not have profit. I've never seen a public company like this where when they give forecasts, estimates for what the next quarter might look like, sometimes the profit range they give is actually, we could lose 100 million or make 100 million. Like you will actually give forecasts like that. And you're like, what the hell? You're not investing in Amazon for the profit margin, you're investing Amazon for the growth. Exactly, yeah. In the case of Twitter. And so that's always a long running tension between it for public companies, between the people who run them and the people who invest in them. Right. And so it's as much of, let me the CEO saying to investors, look, this is what we're about. Don't buy on X, Y and Z numbers that you're seeing. Don't believe the traders, don't believe all the sort of the talking heads you're seeing on finance networks talking about why this is good, why this is bad. I'm telling you what you're investing in. Twitter, and this is true of a lot of Silicon Valley companies, has not done a good job of giving its message to Wall Street. Here's what we're about. This is what you have to buy.
- [33:46]
Felix Salmon
I mean, to be Amazon. It's not enough to just not make money. You need, you also need to have.
- [33:53]
Kathy O'Neill
I can do that.
- [33:54]
Felix Salmon
You also need to have a CEO who knows what he's doing. Like Jeff Bezos is genuinely a good CEO. And famously Twitter has just run through CEO after CEO, none of whom seem to be particularly good at being CEOs.
- [34:13]
Kathy O'Neill
I'm going to defend the CEOs of Twitter. Twitter's great idea was Twitter and then they stopped having great ideas. Can we just enjoy what it is?
- [34:23]
Edmund Lee
I think that goes back to point you're making. So Twitter has about the metric everyone looks at with Twitter for investors or anyone who's interested in the business of it monthly active users. How many people are on actively using. It's about 317 million. Now this, this most recent quarter, they reported the quarter prior Something like 313. 312 million, in other words, is really not growing. It's an esoteric service. Meaning it's really just a mere 300.
- [34:48]
Felix Salmon
Million people use it global, globally.
- [34:50]
Edmund Lee
Right. So think about the size of people it is. But compare that to Facebook, which continues to grow. It's amazing.
- [34:57]
Felix Salmon
And there's a whole bunch of social networks which are younger than Twitter and bigger than Twitter, including, we have to talk about this Snapchat, which is going to go public and apparently according to the news this week, is looking to raise, raise $4 billion.
- [35:13]
Edmund Lee
And that's a massive amount for an IPO for a raise. When a company goes IPO, they're just, you know, we're going to sell some shares and make some money, and that'll sit in our treasury and we'll use that for stuff. But that implies about a larger value for the entire company. Raising that much money, though, from the IPO, what does it.
- [35:30]
Felix Salmon
Why do they need $4 billion?
- [35:31]
Kathy O'Neill
What are they going to do with $4 billion?
- [35:33]
Edmund Lee
That's the problem. I don't know that it's. Again, it's really. It's a privately held company. They can do whatever they want right now. They can buy Netflix. But I think, you know, the what the allure of Snapchat, or they've renamed their company Snap Inc. But the service itself is still called Snapchat. The allure is that it's lots of young people. If you're an advertiser, that's your biggest conundrum right now. Where are the young people? What are they doing? How do I reach them? This Snapchat is where I'm supposed to be. Let's go do that shiny new object. They spend a lot of money on there. I think it's working. I don't know. They keep telling me a lot of millennials are looking at my product as a result of this, I'll spend more money. And I think that's the promise. So that's their interest. In terms of Wall street, however, it's a sort of like, we want something that's not Twitter, please.
- [36:20]
Felix Salmon
And there's enough people on Wall street that they have $4 billion between them and they're willing to buy $4 billion of shares even though they know that, like, six months later, a bunch of lockups are going to expire and there's going to be a bunch of other Snapchat shareholders trying to sell. Anyway, we will talk about Snapchat IPO when we get to Snapchat ipo. I just want to talk. I mean, since we're talking about these, like, amazing, charismatic CEO, tech CEOs, like Jeff Bezos, I should mention, just because it was a big surprise to me and I think to most other people, Tesla made a profit this quarter. Tesla is one of those companies which is never meant to make a profit, and it made a profit. Elon Musk. Elon Musk came out with a profit and the stock was like, oh, my God, are you kidding me? You're still three years away from being a real big car company and you've already made it.
- [37:12]
Edmund Lee
They blew away expectations. I have to say, I was surprised, too. Unlike software, unlike tech companies, building a car, building thousands of cars, it's super hard. There are so many moving pieces, quite literally, and you can't always control them. I'm not saying building code or building software isn't hard. That's incredibly hard. And these are hard things to estimate. But there's less friction, there's less.
- [37:36]
Felix Salmon
It scales more easily.
- [37:37]
Edmund Lee
It scales more easily, exactly. You build it once and everyone taps into it. I'm completely surprised. I think Elon Musk, he's clearly got things up his sleeve. I think it's hard to count him out. Like Jeff Bezos, I don't know that he quite rises the level of Jeff Bezos, but certainly very interesting. But going back to Twitter for a second, the other problem, we haven't mentioned his name. Jack Dorsey, who's the CEO of.
- [38:01]
Felix Salmon
Oh yeah, I remember him.
- [38:01]
Edmund Lee
Yeah, exactly. I think part of the issue, frankly, is a big part of the issue is that he has a second job. You know that, right?
- [38:08]
Kathy O'Neill
Yeah, yeah.
- [38:08]
Edmund Lee
He's CEO of another startup called Square, right.
- [38:11]
Felix Salmon
Or Public, just went public.
- [38:14]
Edmund Lee
It's a payments processing and payments, you know, it does payments for small businesses and all kinds of businesses take credit cards, that kind of thing. And I don't know, you can't. I'm sorry, two public companies, you're not. No one's that smart. I'm sorry, it's just not.
- [38:29]
Felix Salmon
Well, Elon Musk was the CEO of two different public companies. Well.
- [38:32]
Edmund Lee
And one of them is doing terribly.
- [38:33]
Felix Salmon
By the way, when it's getting bought by the other one.
- [38:35]
Edmund Lee
Right. So he decided, let's just.
- [38:36]
Felix Salmon
He had this company called SolarCity, which is now being bought by Tesla, and shareholders signed off on it.
- [38:44]
Edmund Lee
But the thing is, between Twitter and this other company, Square, there's absolutely no reason for them to be under one roof anyway. So even that idea doesn't make any sense.
- [38:51]
Felix Salmon
What's become reasonably obvious is that the Twitter board has now more or less arrived in what you might call Jeff Bukus land and saying, well, if you write us a big enough check, we will sell. Like if there's some company, whether it's Google or Facebook or Apple or Reuters or Disney or Salesforce or anyone who wants to spend like $40 billion on Twitter, we will. We are for sale.
- [39:20]
Kathy O'Neill
A lot of people have thought about it and then said no because they.
- [39:24]
Edmund Lee
Looked at the company. You take a second look, you're like, oh, wow, this is not a really well run company. I don't really get this product, the advertising.
- [39:31]
Kathy O'Neill
Is it because. It's not because of the advertising problems or is it because of the.
- [39:34]
Felix Salmon
I Think it's because it's too expensive. I think at the right price, there's a bunch of people who would be interested. But for $40 billion or whatever you need to pay to persuade the board to sell, no one's interested in spending that much.
- [39:47]
Edmund Lee
And it's for a tech company that still relatively young. It's not really growing by leaps and bounds. It's like, what am I really buying? You're sort of leveled off. All right, fine. So there's a smallish network that I can own for a little bit.
- [40:00]
Kathy O'Neill
I feel like I'm the only one who loves Twitter, and I'll wait for the price to get.
- [40:03]
Felix Salmon
You're surrounded by journalists. Like, the one group of people who love Twitter more than anyone else is.
- [40:08]
Kathy O'Neill
Did you see the idea of a bunch of journalists getting together and buying Twitter?
- [40:12]
Edmund Lee
Let's save this, please.
- [40:14]
Kathy O'Neill
I've got 10 bucks in my pocket.
- [40:15]
Edmund Lee
No, I personally love Twitter. I'm on all the time. I think, for Recode also, specifically, a lot of our audience comes. Traffic comes via Twitter. So we are very pro Twitter in that way. Absolutely. Again. But from evaluating it as a business, I think there's lots of things that need to be sorted. If it wants to grow, it has to sort of expand its product in a way that it doesn't come across or it doesn't operate in such an esoteric way. Right. Like, it's really hard. You have to really want Twitter. Once you get it, though, you become addicted. But there's a big barrier to, like, really getting it and really understanding it and finding ways to sort of, like, apply yourself, you know, to the service. So I think that's the big challenge for them.
- [40:54]
Felix Salmon
I don't know, man. Snapchat's even harder. And that's.
- [40:57]
Edmund Lee
Oh, my God. Yeah, that's.
- [40:59]
Felix Salmon
Okay. Enough of these tech companies. We have a numbers round, people. Kathy, you go first.
- [41:05]
Kathy O'Neill
Yeah. So, 798 million. So we have talked not at all about campaign finance. And there's a reason for that, because it's hard to talk about that without talking about presidential candidates. But I do want to mention that the financial sector has spent a lot of money on the presidential campaigns. $800 million. $798 million, which is up 35% since 2008. And in particular, hedge funds.
- [41:31]
Felix Salmon
Well, 2008 was a weird year to be for the.
- [41:33]
Kathy O'Neill
Well, okay. But hedge funds have spent 123 million, which is twice from 2012. So, like, these guys are being serious about the influence that they want to yield. Want to Wield.
- [41:46]
Felix Salmon
My number is 11. There is a brewery in Sweden.
- [41:53]
Kathy O'Neill
Ooh, I'm already thirsty.
- [41:54]
Felix Salmon
St. Eric's and they're super, you know, artisanal and high end. And they make expensive beer. And they decided that they wanted something which you were meant to, you know, snack on while drinking their expensive beer. And so they said, let's make potato chips. And so they started making potato chips. And they said, well, since we're all artisanal and high end, we're going to make artisanal, high end potato chips. They have created a box of potato chips which they sell for $11. Wow. This is an $11 box of potato chips.
- [42:32]
Kathy O'Neill
How many chips are in it?
- [42:33]
Felix Salmon
Do you want to know how many chips are in it?
- [42:34]
Kathy O'Neill
I know the answer.
- [42:36]
Felix Salmon
The number five.
- [42:38]
Edmund Lee
I thought it was gonna be, oh, my God.
- [42:41]
Felix Salmon
Oh, $11 for five potato chips.
- [42:44]
Kathy O'Neill
How big are, how thick are they?
- [42:46]
Edmund Lee
I want the margins on that then. Must be pretty.
- [42:50]
Kathy O'Neill
I want them to be like potatoes, actual potatoes.
- [42:52]
Felix Salmon
But even then, like, would you pay $11 for five potatoes?
- [42:56]
Kathy O'Neill
You know, you know, I was just buying potatoes the other day and I couldn't believe how different the weight per, like the cost per pound of potatoes are. You could go anywhere from a dollar to six dollars a pound. But no, I wouldn't.
- [43:08]
Edmund Lee
Depending on the type of potato. Yeah, yes, exactly. So you. Okay, no, I got, I got a number for you.
- [43:13]
Felix Salmon
What's your number?
- [43:13]
Edmund Lee
And I'll end up giving you two numbers. So I'm going to round it down a little bit. $200. That's how much I pay ATT every month.
- [43:23]
Felix Salmon
Wow.
- [43:24]
Edmund Lee
That's just not for me personally. That's my household. That's me, my wife, my daughter, my 11 year old daughter has her own phone now. And the reason why I bring that up is going back to AT&T for a second. I'll give you another number. After they buy Time Warner, their debt load is going to be about 200 billion. So I will. I'm contributing maybe 1, 1 millionth every month. Right. To what they need to pay off that loan.
- [43:45]
Felix Salmon
1/1 millionth billionth every month.
- [43:47]
Edmund Lee
1,1 billionth every month is exactly right. So I think, don't exaggerate your influence. But I guess the larger point to that is, you know, we talk about these relative to scale in terms of what. Just bring it to a personal level. What I buy in terms of media, my household. ATT is top of the list in terms of how much money I spend versus what I pay. Time on a cable, what I pay Netflix What I pay Hulu, what I play.
- [44:11]
Felix Salmon
Wait, so you pay $200 on AT&T and that doesn't even include television?
- [44:18]
Edmund Lee
Does not. No. That's how expensive. That's what it's sort of shift.
- [44:22]
Kathy O'Neill
I paid way more for my phones for my family.
- [44:24]
Edmund Lee
Right. And I think this is true for most households. And I think sort of, that's the sort of perspective that I think a lot of regulators are considering it. And also in terms of what this merger might mean and just the way the world of media we're talking about, they bought Netflix, whatever Netflix gets, whatever it is, 11 $12 from me every month, which is a great, great value if you think about it, versus the 200 I spent on.
- [44:46]
Felix Salmon
As we spend more and more of our life on our screens, we are will spend $10 on Spotify, $15 on Netflix, $20 on HBO. Like the amount of money we spend for digital subscriptions is just going up and up. And the present value of all that money is trillions of dollars. And that's why people, that's why these merchants are happening.
- [45:06]
Edmund Lee
Right?
- [45:08]
Felix Salmon
Okay, that's it. Thank you for listening to Slate Money this week. It was a good one, mainly because Ed Lee knows what he's talking about.
- [45:16]
Kathy O'Neill
Amazing.
- [45:17]
Felix Salmon
Thank you.
- [45:17]
Edmund Lee
I'm good at pretending.
- [45:20]
Felix Salmon
Come back anytime. Thank you all for listening to Slate Money. It's always as good as this, honest. So subscribe to it by pressing that subscribe button on your phone. Leave us a review on the itunes store. Email us. The email address is slatemoneylate.com and check out all of the other Panoply podcasts@itunes.com Panoply. The producer today was Veer Lynn Williams. The executive producers are Steve Lichti and Andy Bowers. And we will talk to you next week on Slate Money.