WEBVTT - At Peak Of Streaming Wars in 2020: LUMA's Kawaja 0:00:02.640 --> 0:00:05.320 Welcome to the Bloomberg Penl Podcast. I'm Paul swing you, 0:00:05.360 --> 0:00:07.680 along with my co host Lisa Brahma wits. Each day 0:00:07.720 --> 0:00:10.240 we bring you the most noteworthy and useful interviews for 0:00:10.280 --> 0:00:12.520 you and your money. Whether at the grocery store or 0:00:12.560 --> 0:00:15.480 the trading floor. Find a Bloomberg Penl podcast on Apple 0:00:15.520 --> 0:00:17.959 podcast or wherever you listen to podcasts, as well as 0:00:17.960 --> 0:00:22.160 at Bloomberg dot com. Disney reports earnings after the close 0:00:22.200 --> 0:00:25.639 and one of the most fascinating aspects of the US 0:00:25.720 --> 0:00:27.800 media business global media businesses. How a lot of these 0:00:27.800 --> 0:00:31.560 traditional media companies are trying to pivot to more technology 0:00:31.640 --> 0:00:35.199 driven streaming companies, trying to get that valuation from Netflix. 0:00:35.200 --> 0:00:37.680 And there's one banker out there who's making it all 0:00:37.840 --> 0:00:42.519 happen for the technology side of the media business, and 0:00:42.520 --> 0:00:45.199 that's Terry Kwaja, founder and CEO of Luma Partners Investment 0:00:45.200 --> 0:00:48.239 banking based here in New York. I used to work 0:00:48.240 --> 0:00:50.120 with Terry back in the day at Solomon Brothers and 0:00:50.400 --> 0:00:52.600 First Boston when he was putting all the traditional media 0:00:52.640 --> 0:00:55.200 companies together back in the day. Now he's kind of 0:00:55.200 --> 0:00:59.320 working with the new wave of technology driven media companies. 0:00:59.320 --> 0:01:01.040 So Terry so much for joining us here in our 0:01:01.040 --> 0:01:04.120 Bloomberg Interactive Brooker Studio. So again, let's start with a 0:01:04.160 --> 0:01:07.959 company like a Disney. These companies are really trying to 0:01:08.040 --> 0:01:11.959 transform themselves from the old model based upon advertising and 0:01:12.240 --> 0:01:16.640 subscription revenue to streaming. Can they do it? Yeah? Great 0:01:16.680 --> 0:01:20.160 to be with you, Paul and Lisa. So here we 0:01:20.240 --> 0:01:22.840 are in the middle of what is one of the 0:01:22.959 --> 0:01:26.280 largest industries. Right there's over a hundred billion dollars of 0:01:26.319 --> 0:01:30.720 advertising and probably another hundred and fifty billion and paid 0:01:30.760 --> 0:01:34.840 dollars that support the sort of TV slash you know, 0:01:35.040 --> 0:01:39.480 video media channel. And all of a sudden, these massive 0:01:39.560 --> 0:01:46.319 companies with enormous market caps you know the names Comcast, Disney, Charter, Uh, etcetera, 0:01:46.600 --> 0:01:51.960 all have a crisis beyond existential crisis as they effectively 0:01:52.000 --> 0:01:55.200 have to swap out their engines while keeping the plane 0:01:55.360 --> 0:01:58.000 in the air. Right, they got to support those market 0:01:58.040 --> 0:02:01.960 caps with a fundamental change not only in the technology 0:02:02.000 --> 0:02:05.680 of the delivery of their media and advertising, but also 0:02:06.160 --> 0:02:10.560 the channel in which consumers have chosen to consume their content. Right, 0:02:10.600 --> 0:02:13.480 So the idea being that they're moving online, and the 0:02:13.560 --> 0:02:16.200 question is with something like what Disney is doing so far, 0:02:16.639 --> 0:02:20.040 they've been rewarded more than other companies for investing even 0:02:20.080 --> 0:02:22.840 though it's not going to make money. How long can 0:02:22.880 --> 0:02:25.400 that continue at a time when there are big questions 0:02:25.480 --> 0:02:28.399 about how much subscribers are willing to pay and how 0:02:28.400 --> 0:02:32.480 many services they're willing to subscribe to. So, look, Lisa, 0:02:32.520 --> 0:02:34.640 I think this is early days. So I think all 0:02:34.760 --> 0:02:40.600 the people looking at the immediate subscriber uh new subscribers 0:02:40.600 --> 0:02:44.760 and the subscriber churn numbers of say Disney's uh Disney 0:02:44.760 --> 0:02:48.280 plus App, I think it's way too early to be 0:02:48.400 --> 0:02:51.359 looking at that. I don't think we're there in terms of, 0:02:51.639 --> 0:02:54.920 you know, the value proposition. There are still content that 0:02:54.960 --> 0:02:57.880 hasn't gone exclusive onto Disney. So there's still is some 0:02:58.200 --> 0:03:01.680 you know, distribution rights on other platforms. We can't fully 0:03:01.760 --> 0:03:04.040 judge it yet. And let's face it, we're still in 0:03:04.080 --> 0:03:08.840 the early days where they're providing subscription a cross promotions. 0:03:09.000 --> 0:03:10.640 It's it's kind of free, right, you know, if you 0:03:10.880 --> 0:03:14.320 buy an iPhone, you get Apple TV if you you know, 0:03:14.360 --> 0:03:18.160 Disney has cross promotions with Verizon. So we're in the 0:03:18.280 --> 0:03:24.800 early fanfare days of um of streaming, the streaming wars. 0:03:24.800 --> 0:03:27.040 In fact, you know, we're at the peak of the 0:03:27.080 --> 0:03:29.760 streaming wars, and we will be at the peak for 0:03:29.800 --> 0:03:31.760 the rest of the year. Think about it. When large 0:03:31.800 --> 0:03:35.600 companies have an existential threat and and a rationale to 0:03:35.640 --> 0:03:38.600 get a consumer product out, they market the but Jesus 0:03:38.640 --> 0:03:42.400 out of it. Just remember last fall when Disney Plus 0:03:42.480 --> 0:03:45.640 was announced and Apple TV was announced. And this year 0:03:45.680 --> 0:03:50.320 we've got um NBC with Peacock, we have um HBO 0:03:50.400 --> 0:03:52.440 A t T with HBO Max, and we've got Quimby. 0:03:52.520 --> 0:03:54.880 So we are going to be in peak streaming wars 0:03:55.080 --> 0:03:58.480 all through and beyond. So, Terry, you spent a lot 0:03:58.520 --> 0:04:01.600 of time with the avert hasing technology companies, companies that 0:04:01.680 --> 0:04:06.040 make the digital advertising marketplace work. They interacted obviously, that's 0:04:06.040 --> 0:04:09.280 really the engines of the big advertising giants like Google, 0:04:09.400 --> 0:04:13.240 like Facebook, like Amazon. Do you expect the technology companies, 0:04:13.240 --> 0:04:16.600 those big technology companies, uh that have all that cash, 0:04:16.680 --> 0:04:19.760 all that free cash flow, to maybe get into the 0:04:19.800 --> 0:04:23.640 media business itself, into the content business in a bigger way. Well, 0:04:24.279 --> 0:04:27.360 I believe they're gonna play a major role. And listen, 0:04:27.640 --> 0:04:32.000 if you set this up as inevitably, it is a dichotomy, 0:04:32.160 --> 0:04:34.600 a war where it is called streaming wars after all, Right, 0:04:34.680 --> 0:04:38.359 it's a war, not even just amongst the streaming choices, 0:04:38.440 --> 0:04:43.560 but between big media and big tech. And and big 0:04:43.560 --> 0:04:46.280 tech has four major advantages. They've got, as you mentioned, 0:04:46.520 --> 0:04:49.360 market cap and cash on the balance sheet up the wazoo. 0:04:49.440 --> 0:04:53.320 They I mean, they can they vastly outscale the big 0:04:53.360 --> 0:04:55.359 media companies, and the big media companies are trying to 0:04:55.400 --> 0:04:57.600 catch up by doing all these you know, traditional mergers 0:04:57.640 --> 0:05:00.080 just to garner enough scale. But even still they you 0:05:00.200 --> 0:05:04.240 not compare to big tech. Second is they've got Ui downpat. 0:05:04.279 --> 0:05:08.120 I mean, your user experience on Apple products or on 0:05:08.240 --> 0:05:12.440 Netflix is just so much different than your average cable company. Um, 0:05:12.480 --> 0:05:14.960 even the more advanced ones like Comcast x one, it 0:05:15.080 --> 0:05:17.720 just it just doesn't compare. They they've got those kind 0:05:17.720 --> 0:05:22.040 of chops. Um. So, there are just so many elements 0:05:22.120 --> 0:05:24.279 why Big tech. And by the way, they have the 0:05:24.320 --> 0:05:28.000 technology at their court. They were born digital. So the 0:05:28.040 --> 0:05:30.960 big media companies, and this is the part where I 0:05:30.960 --> 0:05:32.560 put up my hand and say, thank you very much, 0:05:33.160 --> 0:05:37.360 need technology. There's not technology native to them. They have 0:05:37.440 --> 0:05:41.440 to be able to avail their content across the channels 0:05:41.480 --> 0:05:44.200 that consumers want, which is O, T, T and digital. 0:05:44.240 --> 0:05:47.440 And to do that right there's so much complication. There's 0:05:47.440 --> 0:05:49.640 a loom escape, which is a diagram of all the 0:05:49.640 --> 0:05:52.000 players in the space, you know, because let's think about it, 0:05:52.120 --> 0:05:55.120 right across all these channels of linear addressable O, T, 0:05:55.120 --> 0:05:57.200 T and digital. I'm getting a headache just talking about it. 0:05:57.440 --> 0:06:00.719 You know, there's different parameters and identifying who a person is, 0:06:00.720 --> 0:06:03.920 there's different technologies to deliver the ads. It is just 0:06:04.200 --> 0:06:08.240 a whole bunch of conflation that needs to be sorted out. Terry, 0:06:08.279 --> 0:06:11.640 I'm struck by your expertise being absolutely perfect on a 0:06:11.720 --> 0:06:14.960 daylight today for a variety of reasons. You specialize in 0:06:15.040 --> 0:06:18.920 coming up with valuations of what companies may become and 0:06:18.960 --> 0:06:21.520 as they become the future, and I would love to 0:06:21.560 --> 0:06:25.400 get your perspective on Tesla because right now nobody can 0:06:25.440 --> 0:06:29.719 justify that the valuation based on current fact. How does 0:06:29.800 --> 0:06:33.680 one go about understanding value at a time of transformation? 0:06:33.720 --> 0:06:37.280 And a company that harbor is at least a dream, 0:06:37.320 --> 0:06:41.159 if not a reality. So what what? What you're referring to, Lisa, 0:06:41.440 --> 0:06:48.880 is the complex art of valuing innovation. And I call 0:06:48.960 --> 0:06:53.880 it art because because for most mature companies with demonstrable 0:06:53.960 --> 0:06:56.680 financials and revenue and cash flow that we can all 0:06:56.680 --> 0:07:00.479 analyze and compared to other similar companies. Most of the 0:07:00.560 --> 0:07:02.720 valuation work we do in those kind of companies I 0:07:02.760 --> 0:07:05.840 would refer to put in the category of science, right, 0:07:06.000 --> 0:07:09.720 the science of its math. It's comparables and plus or minus. 0:07:09.720 --> 0:07:13.360 You know, you're kind of gonna get it right or 0:07:13.640 --> 0:07:17.840 right ish when you start talking about the kind of 0:07:17.880 --> 0:07:20.120 companies that actually that I deal with, that you know, 0:07:20.160 --> 0:07:22.600 get sold for like twenty times revenue, And people say 0:07:22.600 --> 0:07:25.240 to me, why did so and so pay twenty times 0:07:25.280 --> 0:07:27.760 revenue for that business? And my answer is because they 0:07:27.800 --> 0:07:30.840 didn't twenty times revenue. That it's not as though they 0:07:30.880 --> 0:07:33.840 did it as a multiplier. To get to the valuation. 0:07:34.480 --> 0:07:37.400 We started with what is this worth to you figure 0:07:37.400 --> 0:07:41.240 out the valuation, and then it's it's division to find 0:07:41.280 --> 0:07:43.680 out what the multiple was. So when you look at 0:07:44.000 --> 0:07:47.160 a company like Tesla, I mean, it's basically the future. 0:07:47.160 --> 0:07:49.320 How do you value the future? I mean, if you 0:07:49.360 --> 0:07:52.360 were to ask people, you know, rational people, you know, 0:07:52.680 --> 0:07:56.239 are we moving towards an e you know, an electronic future? 0:07:56.320 --> 0:07:59.200 The answers yes. So it's just hard to nail down. 0:07:59.240 --> 0:08:01.520 It's not science. Terry Kawaja. We've got to have you 0:08:01.560 --> 0:08:04.560 back and talking energy. I think about talking about this topic. 0:08:04.760 --> 0:08:07.600 I honestly it's it's such a pleasure having you from 0:08:07.640 --> 0:08:10.520 every perspective. Terry Kawaja, founder and chief executive officer of 0:08:10.600 --> 0:08:13.600 Luma Partners Investment Banking in New York, talking about the 0:08:13.600 --> 0:08:28.120 intersection of big tech, big media, and big dreams at 0:08:28.120 --> 0:08:31.040 a time of the everything rally, and perhaps we're still 0:08:31.080 --> 0:08:34.439 in goldilocks territory. Perhaps we're at the very end of it. 0:08:34.760 --> 0:08:37.559 There is a question of whether to buy junk bonds. 0:08:37.559 --> 0:08:39.200 Certainly a lot of people are doing so, with a 0:08:39.240 --> 0:08:43.040 record volume of global junk bond issuance. In January, joining 0:08:43.080 --> 0:08:45.000 us down to discussed the road ahead for risk your 0:08:45.000 --> 0:08:48.800 assets within the fixed income world and beyond. Uh Tad Revel, 0:08:48.920 --> 0:08:51.679 chief investment officer for fixed income at TCW, which has 0:08:51.840 --> 0:08:54.400 a hundred and seventy five billion dollars under management. Tad 0:08:54.679 --> 0:08:56.240 the reason why I wanted to start there. I know 0:08:56.320 --> 0:08:59.679 you've been barished on high yield for a while. Morning 0:08:59.720 --> 0:09:02.800 again some of the risk. I'm wondering what you make 0:09:03.040 --> 0:09:05.880 of the issuance that we've seen of late, including for example, 0:09:05.920 --> 0:09:09.600 a pick Toggle deal that is being marketed today to 0:09:10.120 --> 0:09:15.720 finance a private equity dividend payout. That's probably all the 0:09:15.760 --> 0:09:18.840 commentary that that you need a pick toggle to finance 0:09:19.440 --> 0:09:24.400 a dividend to UH to private equity sponsors and LPs. 0:09:24.440 --> 0:09:30.320 So we haven't seen obviously that level of indiscriminate issuance 0:09:30.360 --> 0:09:32.760 in the junk bond market probably since the end of 0:09:32.760 --> 0:09:35.880 the last cycle. So I mean, first of all, a 0:09:35.920 --> 0:09:39.319 couple of maybe bigger picture statements about the the below 0:09:39.360 --> 0:09:43.800 investment grade marketplace. We we plumbed the low and spreads 0:09:44.080 --> 0:09:46.880 UH seemingly about three or four weeks ago the start 0:09:46.920 --> 0:09:48.320 of the year. We came into the year with a 0:09:48.320 --> 0:09:52.840 lot of euphoria. Spreads are actually about sixty seventy basis 0:09:52.920 --> 0:09:56.480 points wider, so we're we went very quickly from the 0:09:56.480 --> 0:09:59.680 low three hundreds to the high three hundreds. So there 0:09:59.679 --> 0:10:01.600 are there's a lot of cross currents going on in 0:10:01.600 --> 0:10:03.600 the market. There seems to be a lot more risk 0:10:03.679 --> 0:10:06.520 discrimination going in the market, which is to say that 0:10:06.800 --> 0:10:10.520 the double bees have done actually quite a bit better 0:10:10.559 --> 0:10:13.920 than UH than than the triple ceas and UM. The 0:10:14.240 --> 0:10:19.680 market is allowing a lot of semi excessive type of 0:10:19.720 --> 0:10:22.360 transactions to occur, such as the one you alluded to, 0:10:22.880 --> 0:10:25.199 and on the other hand, it's become also rather skeptical 0:10:25.520 --> 0:10:29.199 of some of the more levered business models out there 0:10:29.200 --> 0:10:33.520 as well. So, Ted, I know from past discussions with you, UH, 0:10:33.559 --> 0:10:36.000 you know, you cite the concern that we are at 0:10:36.040 --> 0:10:39.400 the tail end of the economic cycle. What are you 0:10:39.440 --> 0:10:42.040 seeing in terms of credit quality? Uh, maybe in the 0:10:42.120 --> 0:10:44.680 portfolio that in your portfolio, or some of the new 0:10:44.760 --> 0:10:49.480 deals coming to the market. Well, the UH, I guess 0:10:49.480 --> 0:10:52.520 a good starting places to start by thinking about how 0:10:52.640 --> 0:10:56.640 much leverage is embedded now in the in the credit 0:10:56.679 --> 0:11:00.520 markets generally you've seen moving away from I yield for 0:11:00.520 --> 0:11:05.439 a moment there, there's something like twenty of the investment 0:11:05.440 --> 0:11:09.360 grade corporate debt market that's now sporting leverage ratios reported 0:11:09.440 --> 0:11:13.320 leverage ratios of more than four four turns, meaning more 0:11:13.320 --> 0:11:16.439 than four units of debt forever unit of earnings. That's 0:11:16.480 --> 0:11:19.679 significant because, you know, while this is a vast generalization, 0:11:19.800 --> 0:11:21.880 I think it's probably fair to say this that if 0:11:21.880 --> 0:11:24.240 you were walking down the street trip and fell into 0:11:24.360 --> 0:11:28.400 the office of a major rating agency and the first 0:11:28.480 --> 0:11:30.720 questions out of their mouth was we've never met you before, 0:11:30.760 --> 0:11:32.520 but tell us about how much leverage is on your 0:11:32.520 --> 0:11:35.040 balance sheet. If you said to them, oh, I've got 0:11:35.080 --> 0:11:37.200 less than two turns of leverage, less than two units 0:11:37.200 --> 0:11:39.960 of debt forever unit of earnings, they'd probably say to you, 0:11:39.960 --> 0:11:41.960 you're probably investment grade. I don't need to know a 0:11:41.960 --> 0:11:44.079 whole lot more about you, but when you're at about 0:11:44.080 --> 0:11:47.319 four turns of leverage, it's probably more like, well, you'd 0:11:47.360 --> 0:11:50.040 better tell me a really good story about your your 0:11:50.080 --> 0:11:52.840 your business management, and so forth for you not to 0:11:52.880 --> 0:11:56.080 be below investment grade. The point being is that with 0:11:56.160 --> 0:11:59.560 such a large cohort of the investment grade market as 0:11:59.559 --> 0:12:03.280 I alluded to, over four turns of leverage, the risk 0:12:03.520 --> 0:12:06.679 of reprising what we've seen in prior cycles, which is 0:12:06.760 --> 0:12:09.920 that basically somewhere between maybe a quarter to a half 0:12:10.480 --> 0:12:13.720 of the triple B marketplace tends to suffer down grade 0:12:13.760 --> 0:12:17.400 into below investment Great, you're probably already in that territory. 0:12:17.520 --> 0:12:21.000 So what can you say is that as long as 0:12:21.160 --> 0:12:23.720 people are willing to extrapolate and say tomorrow will be 0:12:23.760 --> 0:12:26.600 like yesterday and the cycle will never turn, and the 0:12:26.640 --> 0:12:29.400 FEDS all powerful and all that, um, you probably don't 0:12:29.400 --> 0:12:32.719 have to worry about the rating cycle turning more pernicious. 0:12:32.760 --> 0:12:35.240 But it will at some point because all of the tender, 0:12:35.280 --> 0:12:37.440 so to speak, is already piled up there. So what 0:12:37.440 --> 0:12:41.400 are you doing in terms of buying and selling? Well, um, 0:12:41.679 --> 0:12:44.199 we don't. We try not to respond too much to 0:12:44.320 --> 0:12:46.560 obviously to the day to day noise. Is that the 0:12:46.559 --> 0:12:49.280 way we have always held ourselves out is that you 0:12:49.280 --> 0:12:53.040 should probably think about the asset price cycle as uh, 0:12:53.280 --> 0:12:56.000 you know, roughly speaking, the way we've typically characterized it. 0:12:56.000 --> 0:12:58.800 It has three phases to it. So in the early 0:12:58.840 --> 0:13:01.880 phase you're supposed to be all in in terms of risk, 0:13:02.440 --> 0:13:04.960 at least as as it relates to a fixed income investor, 0:13:05.120 --> 0:13:08.360 because it's a big beta trade. Is that everything trades wide, 0:13:08.559 --> 0:13:11.440 and everything trades wide because everybody got their their fingers 0:13:11.480 --> 0:13:14.320 burnt in the last de leveraging. And so you go 0:13:14.400 --> 0:13:18.160 down the capital structure, you take on a liquid investments, 0:13:18.200 --> 0:13:21.079 you sell convexity risk wherever you find it. It's probably 0:13:21.080 --> 0:13:23.560 gonna work out because even if you did your fundamental 0:13:23.600 --> 0:13:27.000 analysis wrong, probably isn't gonna hurt you when you get 0:13:27.040 --> 0:13:30.640 to the late cycle. The question that we pose to ourselves, 0:13:30.640 --> 0:13:32.760 but we would pose it to anybody is should you 0:13:32.800 --> 0:13:36.839 be underwriting credit risk counterparty risk? The same way in 0:13:36.880 --> 0:13:39.920 the late cycle as you should in the early cycle. Now, 0:13:40.040 --> 0:13:42.120 if you're a momentum investor, you say, well, of course 0:13:42.120 --> 0:13:45.280 you should. If anything, maybe you should pile on more. Well, 0:13:45.760 --> 0:13:49.319 the value perspective says, no, you shouldn't. You're supposed to 0:13:49.320 --> 0:13:51.280 be in the late cycle. You're supposed to go back 0:13:51.320 --> 0:13:56.480 to UH the old Ben Ben Graham dictum about bonds, 0:13:56.480 --> 0:13:59.560 that it's negative selection and you want to avoid the 0:13:59.600 --> 0:14:02.800 more sess of levels of risk taking. So what do 0:14:02.840 --> 0:14:05.840 you do? Okay, you don't put your portfolio in cash, 0:14:05.960 --> 0:14:09.280 but you probably go as follows. You need liquidity in 0:14:09.320 --> 0:14:11.599 the late cycle, so you should have some treasuries and 0:14:11.640 --> 0:14:15.560 agency mortgages, which, by the way, UH agency mortgages have 0:14:15.720 --> 0:14:21.400 actually fairly attractive spread levels. UH. For for just sort 0:14:21.400 --> 0:14:25.480 of ordinary run of the mill yield, there are at 0:14:25.520 --> 0:14:29.720 least a relatively good UH sampling of opportunities in the 0:14:29.760 --> 0:14:33.520 investment grade universe. Just because that market at large is 0:14:33.560 --> 0:14:37.480 significantly levered doesn't mean that opportunities don't come along. Um 0:14:37.640 --> 0:14:40.080 they do. I mean a year year and a half ago, 0:14:40.600 --> 0:14:43.680 the blowout in ge spreads may have five five and 0:14:43.680 --> 0:14:46.040 a half turns of leverage. There were some issues and 0:14:46.080 --> 0:14:48.640 concerns that people had, but at three hundred and fifty 0:14:48.680 --> 0:14:51.960 basis points over treasuries, you're being paid for it. Today. 0:14:52.400 --> 0:14:57.200 Fast forward, the investment grade market is treasuries. You have 0:14:57.240 --> 0:14:58.960 to be really selective about what you do, but you 0:14:58.960 --> 0:15:02.160 should own some. And then you're supposed to go back 0:15:02.200 --> 0:15:04.800 to the to the premise that we said earlier, which 0:15:04.840 --> 0:15:07.160 is what are you not supposed to be owning? Because 0:15:07.400 --> 0:15:09.680 the last thing a fixed income manager I think really 0:15:09.720 --> 0:15:14.680 wants to report back to investment committee's boards shareholders is 0:15:15.160 --> 0:15:18.200 you gave me all this discretion. You trusted me, and 0:15:18.320 --> 0:15:20.040 you know I bought a bunch of bonds and they're 0:15:20.040 --> 0:15:23.600 down forty fifty points and they're not coming back. But sorry, 0:15:23.720 --> 0:15:26.760 you know you should keep me on on board anyway. Um, 0:15:26.800 --> 0:15:29.760 I think it's implicit in the mandate for a fixed 0:15:29.800 --> 0:15:33.360 income manager at least. I mean this luck not trying 0:15:33.400 --> 0:15:35.720 to legislate for the world. But this is our view 0:15:35.720 --> 0:15:38.840 of it, is that that's part of the expectation that 0:15:38.880 --> 0:15:40.800 you'll be prudent in the late cycle and kind of 0:15:40.800 --> 0:15:43.720 greedy in the early cycle. It's just warrant buffett in 0:15:43.800 --> 0:15:46.280 bonds exactly. Hey, Tad, thanks so much. For joining us. 0:15:46.280 --> 0:15:50.360 Tad Rivelle, chief investment officer for fixed income at TCW 0:15:50.560 --> 0:15:53.680 hundred semi five billion dollars under management based in Los Angeles, 0:15:53.720 --> 0:16:08.360 with a consistent conservative view of the fixed income markets. Recently, 0:16:08.480 --> 0:16:11.960 Warren Buffett throw in the towel on his newspaper holding, 0:16:12.080 --> 0:16:15.080 saying he just didn't see this business turning around. There 0:16:15.160 --> 0:16:19.280 is a big existential question facing the entire newspaper industry 0:16:19.520 --> 0:16:22.240 and on the front lines of it, John Founding, founder 0:16:22.280 --> 0:16:25.800 and managing principle at Methusela Advisors. He joins us here 0:16:25.840 --> 0:16:28.640 in our Bloomberg Interactive at Broker Studios, and John, I 0:16:28.640 --> 0:16:30.960 see are on the front lines because you've advised UH 0:16:31.160 --> 0:16:34.480 clear Channel Communications on the eighteen billion dollar buyout Disney 0:16:34.560 --> 0:16:37.520 Company on his two thousand and six sale of ABC Radio. 0:16:37.920 --> 0:16:41.320 I'm trying to understand what the new model will be 0:16:41.720 --> 0:16:45.520 to save an industry that by almost all measures, is dying. 0:16:46.360 --> 0:16:51.640 It's a huge question, Um, thanks for having me. Look, 0:16:51.680 --> 0:16:53.400 the newspaper industry is going to have to remake the 0:16:53.440 --> 0:16:56.080 revenue model. You can't have a revenue model which was 0:16:56.200 --> 0:17:01.080 essentially sent advertising based in subscription based, have the advertising 0:17:01.080 --> 0:17:04.880 side of it go away piece by piece. First digital. First, 0:17:04.920 --> 0:17:08.840 digital killed classifieds, which was the highest profit component of 0:17:08.840 --> 0:17:13.119 the advertising model. Then run of Press came under gigantic pressure. 0:17:13.160 --> 0:17:15.920 So the digital impact in this industry, as it is 0:17:15.960 --> 0:17:19.800 in many industries, far far deeper, and until they replace 0:17:19.920 --> 0:17:22.720 that with a bigger subscription side, meaning the users of 0:17:22.760 --> 0:17:25.520 the content pay for the content, the newspaper industry is 0:17:25.560 --> 0:17:28.360 in deep, deep trouble, all right, So the users. We've 0:17:28.400 --> 0:17:31.040 seen a couple of success stores in New York Times, 0:17:31.440 --> 0:17:33.720 you know, maybe the Wall Street Journal, dot com, FT 0:17:33.920 --> 0:17:38.280 dot com, a couple of national, global brands have created 0:17:38.359 --> 0:17:40.520 that kind of model of subscription model. It's been the 0:17:40.520 --> 0:17:42.640 savior of the New York Times company. But we haven't 0:17:42.680 --> 0:17:45.360 seen many successors or any success stories at the more 0:17:45.480 --> 0:17:48.520 local level. So what is the future? This is a 0:17:48.560 --> 0:17:51.520 public policy question. What is the future of local journalism. 0:17:51.840 --> 0:17:54.480 It's a it's a huge question for the local paper 0:17:54.520 --> 0:17:56.200 that's not the New York Times, the Times as a 0:17:56.320 --> 0:17:59.959 national asset. Now, truth be told, the vast, vast majority 0:18:00.040 --> 0:18:02.240 readers of the New York Times are New York centric 0:18:02.480 --> 0:18:05.560 or sophisticated urban readers. The largest paper in America, I 0:18:05.560 --> 0:18:08.000 believe it or not, as USA Today. USA Today is 0:18:08.080 --> 0:18:11.320 the largest distribution paper. Um. Yeah, because it has a 0:18:11.400 --> 0:18:13.200 deal with all the hotels and they can stick it 0:18:13.240 --> 0:18:15.000 in front of it. That's true. It's it's that free 0:18:15.000 --> 0:18:16.880 paper that's under your your door. But it is still 0:18:16.880 --> 0:18:18.920 read in lots of places and picked up in airports 0:18:18.960 --> 0:18:21.400 and in hotels. And yet it doesn't make it doesn't 0:18:21.400 --> 0:18:23.359 really make money. It was an asset of Ghanette. They 0:18:23.400 --> 0:18:26.760 built it great, um great scope doesn't make money. The 0:18:26.880 --> 0:18:30.760 question becomes, what would happen if these papers, the Denver Post, 0:18:30.840 --> 0:18:34.000 the Saltily Tribune, the Chicago Tribune, the Atlantic Constitution, if 0:18:34.000 --> 0:18:37.160 they go away, And that's the existential question. They could 0:18:37.160 --> 0:18:39.400 go away, with the exception of a few of these 0:18:39.440 --> 0:18:42.720 places that are owned by very wealthy parents. The Cox family, 0:18:42.800 --> 0:18:44.560 extremely wealthy, is not gonna let go of at land At. 0:18:44.600 --> 0:18:47.240 Jeff Bezos has bought the Washington Post to preserve it 0:18:47.280 --> 0:18:49.480 as an asset. But if if, if you don't find 0:18:49.480 --> 0:18:52.920 a billionaire who wants to run each giant local daily 0:18:52.960 --> 0:18:56.720 paper as a mission, you have to change who's making 0:18:56.760 --> 0:18:58.199 money on it. And the right way to change it 0:18:58.280 --> 0:19:00.720 is look at how much money is being made by Google, Acebook, Twitter, 0:19:00.800 --> 0:19:04.760 and the digital giants who have access and use all 0:19:04.800 --> 0:19:06.879 of this content and don't pay a dime for it, 0:19:07.280 --> 0:19:10.439 nothing for it. That to me is criminal. And the 0:19:10.480 --> 0:19:12.520 newspaper industry let the mayor out of the barn, as 0:19:12.560 --> 0:19:15.080 they say, a long time ago, fifteen years ago, when 0:19:15.080 --> 0:19:18.240 they should have asserted their copyright privileges and said, don't 0:19:18.280 --> 0:19:21.280 touch my stuff unless you pay me. And instead, the 0:19:21.280 --> 0:19:24.960 newspaper industry, like everyone else, thought that access to digital 0:19:25.000 --> 0:19:27.800 traffic and volume of digital traffic would be the nirvana. Alright, 0:19:27.800 --> 0:19:29.159 so how do you corral the mayor? How do you 0:19:29.200 --> 0:19:31.159 get it back in the newspaper industry has to do. 0:19:31.440 --> 0:19:33.880 It's like it's like the patient who has a terrible 0:19:34.200 --> 0:19:37.879 cancer and needs chemotherapy. It's an ugly, ugly experience, but 0:19:37.880 --> 0:19:40.399 they're going to have to do it. Six of digital 0:19:40.400 --> 0:19:44.320 traffic on daily papers in America or more is generated 0:19:44.480 --> 0:19:47.119 and coming out of Google, Facebook, Twitter and the digital 0:19:47.160 --> 0:19:52.000 platforms sending traffic to those papers. Therefore, the digital traffic 0:19:52.040 --> 0:19:56.560 manager at the Albany Paper or the Buffalo Paper gets 0:19:56.560 --> 0:19:59.200 a call from his publisher saying, we've told those platforms 0:19:59.240 --> 0:20:01.320 not to not to put our stuff up on their 0:20:01.320 --> 0:20:03.240 side anymore. And that guy at the top of his 0:20:03.240 --> 0:20:04.760 head blows off because he's like, well, how am I 0:20:04.760 --> 0:20:06.760 going to have it be a business? There has to 0:20:06.760 --> 0:20:10.199 be a negotiated solution where instead of using all of 0:20:10.240 --> 0:20:13.359 that content for free, they actually pay something into the industry. 0:20:13.359 --> 0:20:15.040 And there are perfectly good models for this. In the 0:20:15.119 --> 0:20:18.320 music industry, there are there are models where users of 0:20:18.520 --> 0:20:21.919 music content pay reasonable license fees for the use of 0:20:21.960 --> 0:20:25.440 that whether to the songwriter or the artist or the performer. UM. 0:20:25.480 --> 0:20:28.159 In the television industry, we've seen real payments go to 0:20:28.200 --> 0:20:31.160 the television stations from the cable guys who are using 0:20:31.200 --> 0:20:34.080 the signal. People. Forget, fifteen years ago there was no 0:20:34.119 --> 0:20:36.919 such payment. Last year, the cable guys paid twelve billion 0:20:36.960 --> 0:20:39.840 dollars to the television stations for use of their signal. 0:20:40.119 --> 0:20:43.840 Why shouldn't the digital platforms do the same? In one minute, 0:20:43.840 --> 0:20:47.520 what's the fair use collective? Fair use collective as a concept? UM, 0:20:47.520 --> 0:20:50.879 It's an idea UM that we've been supportive of, and 0:20:50.920 --> 0:20:53.720 the News Media Alliance in Washington has been supportive of. 0:20:54.040 --> 0:20:58.400 It is a It is a position that the industry 0:20:58.400 --> 0:21:00.679 comes together and a little bit like the music industry, 0:21:00.680 --> 0:21:03.560 which uses b M I and ascap as the intermediary something, 0:21:03.560 --> 0:21:06.119 whether it's the Faious Collective or something else, acts as 0:21:06.200 --> 0:21:09.840 the representative and negotiating on mass with Google, Facebook, Twitter, 0:21:09.880 --> 0:21:12.560 Apple and people that are using the stuff for free, 0:21:12.960 --> 0:21:15.359 and gets a fair license payment and then distributes that 0:21:15.440 --> 0:21:18.000 license payment out to all the papers in a manner 0:21:18.040 --> 0:21:20.919 that's reasonable and commensurate with what they generate. Obviously, the 0:21:20.920 --> 0:21:23.240 New York Times of the World, the Washington Post, they're 0:21:23.240 --> 0:21:25.160 going to get a significant piece of that because they're 0:21:25.160 --> 0:21:27.520 they're They're what people are reading. But all of these 0:21:27.560 --> 0:21:30.719 papers needed. Imagine a world where the Chicago just Chicago 0:21:30.760 --> 0:21:33.600 Tribune disappears in terms of doing coverage on the state 0:21:33.600 --> 0:21:36.159 House in Illinois, or the Denver Post doesn't exist. We 0:21:36.200 --> 0:21:38.720 are not far from that world, and so the farious 0:21:38.720 --> 0:21:41.560 collective idea is that these license payments have to be 0:21:41.560 --> 0:21:46.160 distributed across the industry to sustain these papers. John, thanks 0:21:46.160 --> 0:21:48.280 for coming in and sharing that commentary with us. Those 0:21:48.280 --> 0:21:49.960 thoughts so with us. It's really fascinating. I think it 0:21:49.960 --> 0:21:51.520