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Speaker 2: Man Deep sing joints this year because we want to
Speaker 2: get some more details on this Broadcom deal, because again
Speaker 2: moving the stock big time, help you propel the Nasdaq
Speaker 2: to a nice move today. Man Deep sing is a
Speaker 2: senior techalyst for Bloomberg Intelligence. He's been telling us about
Speaker 2: AI for like a couple of years now. And folks,
Speaker 2: if you don't really know what AI is, and you
Speaker 2: have access to the Bloomberg terminal, just go type in
Speaker 2: BI go that'll get you to Bloomberg Intelligence homepage the
Speaker 2: search bar. Just type in AI and it'll bring up
Speaker 2: send you to the Definitive report, really large report on AI.
Speaker 2: What is it, how to play it, and what's the
Speaker 2: future of AI. It is the definitive Research Report Lomall
Speaker 2: Street on AI, and Man Deep Singh is the blame
Speaker 2: for that. Mandy, talk to us about this Broadcom deal.
Speaker 2: Here lay it out for us. What does it mean
Speaker 2: for broadcommon for just kind of an open AI as well.
Speaker 3: Yeah, I mean loc Open AI is going after heaving
Speaker 3: as much compute capacity as they can, and they did
Speaker 3: first ten gigawatts with Nvidia, six gigawatts with AMD, and
Speaker 3: now ten gigawats with Broadcom. And the difference here is
Speaker 3: with Broadcom they get to use their own chips, and
Speaker 3: Vidia and AMD are what we call merchant silicon. They exactly,
Speaker 3: I mean, that's basically generalized chips where you can deploy
Speaker 3: the workload you want, whether it's from open AI or
Speaker 3: Microsoft or any other vendor. In the case of custom silicon,
Speaker 3: which is what Broadcom does, a company like open AI
Speaker 3: or Google. Google makes up almost you know, fifty plus
Speaker 3: of Broadcom's AI revenue. So Google has their chip called TPUs.
Speaker 3: They use it for everything run on Google's platform, whether
Speaker 3: it's YouTube, whether it's AI, whether it's cloud. Everything inside
Speaker 3: Google's run on their TPU. So opening eyes strategy here
Speaker 3: is to use an approach which is similar to Google
Speaker 3: GPUs because it saves you a lot of money. I mean,
Speaker 3: imagine an Nvidia AI chip costs you thirty grand. A
Speaker 3: custom silicon that Broadcom is making for Google costs you
Speaker 3: six grand. That's the cost differential we are talking about.
Speaker 3: And it's not because Nvidia has to spend thirty grand
Speaker 3: to make that chip. They have a seventy five percent
Speaker 3: gross margin on the chip that they're selling to the customers.
Speaker 3: So Nvidia's cost is also low, but they mark up
Speaker 3: the price of their silicon. Same thing with AMD. In
Speaker 3: the case of Google, they are going directly to Broadcom
Speaker 3: to make that chip a far lower price and it's
Speaker 3: for their own use, which is why they don't have
Speaker 3: to pay the markup to Invidio or AMD. And that's
Speaker 3: why having your custom silicon strategy is so good because
Speaker 3: it really saves you. So one gigaw with Nvidia silicon
Speaker 3: would cost you about forty to fifty billion. One gigawart
Speaker 3: with a Broadcom open AI silicon would cost you twenty
Speaker 3: five to thirty billion. So if you're talking about, you know,
Speaker 3: thirty to forty percent cost differential, and it's huge. I
Speaker 3: mean in the context of what these guys are trying
Speaker 3: to do, you know, scaled the infrastructure.
Speaker 4: In addition to that distinction, there's also no investment or
Speaker 4: stock component to this open Ai Broadcom deal, which makes
Speaker 4: it different from the deals that it struck with Nvidia
Speaker 4: and AMD. So I guess my question is how would
Speaker 4: open Ai finance the purchase or the chips in general?
Speaker 3: That's a great question because right now they have to
Speaker 3: do a lot of financing. It's one thing that's a
Speaker 3: common thread in the Invidia transaction where even though in
Speaker 3: Vidia is putting ten billion dollars in open Ai, they
Speaker 3: still have to find the remainder of the money. So
Speaker 3: if you imagine, you know, forty to fifty billion dollars
Speaker 3: per gigawatt ten gigawatts costume around five hundred billion, Nvidia
Speaker 3: is already investing up two hundred billions, so they still
Speaker 3: have to figure out the remainder of four hundred billion.
Speaker 3: In the case of AMD, I mean, yes, they are
Speaker 3: getting some stock, but you still have to figure out
Speaker 3: the financing for that, you know, three hundred billion or so.
Speaker 3: Here it's the same thing. You need the money and
Speaker 3: Opening eyes bed is if we keep ramping up our revenue,
Speaker 3: that is obviously a big source of the funding. We'll
Speaker 3: do a lot of private deals because we already have
Speaker 3: the buy in from these big player whether it's Nvidia
Speaker 3: or Microsoft and other sovereign providers, and I think it's
Speaker 3: a lot of scale game right now, because once we
Speaker 3: keep hitting our milestones, we'll keep raising more money. And
Speaker 3: that's the hope.
Speaker 2: When it comes to one name I hadn't heard during
Speaker 2: all this dance between all these tech companies is Apple. Yeah,
Speaker 2: what's going on there? Glaring absence exactly.
Speaker 3: I think that's the right way to frame it. And look,
Speaker 3: at some point, I think they are going to go
Speaker 3: the Broadcom route. Out of the three partnerships that Openei
Speaker 3: has had, a company like Apple will never go for
Speaker 3: merchant silicon. I mean, look at what they have done
Speaker 3: in their own devices. It's all custom silicon. And that's
Speaker 3: where if I had to pick a strategy for Apple,
Speaker 3: it will likely be custom silicon using Broadcom or Marvel
Speaker 3: or one of these asay providers. But the hard thing
Speaker 3: for them is because they have missed out all the
Speaker 3: action in the past three years, it's so hard to
Speaker 3: catch up. Even if you throw money and you know
Speaker 3: your CAPEX dollars, the time is off the essence, and
Speaker 3: the longer they delay this, I feel either is Broadcom
Speaker 3: or a partnership with Google. Now that antitrust is behind,
Speaker 3: so they may very adopt Google's LM across their the
Speaker 3: huge That will be huge. But I think you know,
Speaker 3: with the regulatory overhand going away, that could be a
Speaker 3: very likely strategy.
Speaker 4: Apple has a ton of cash. It can't buy its
Speaker 4: way to a solution here.
Speaker 3: Who do you buy? I mean these are all scale
Speaker 3: players and Broadcom. Maybe you could say Marvel is a
Speaker 3: smaller player. But you need the best and chips. That's
Speaker 3: why everyone is buying Nvidia because they have the highest
Speaker 3: performance per what. So you can't really get a second
Speaker 3: or a third player because then you compromise on the
Speaker 3: performance per what when the biggest constraint out out there
Speaker 3: is power, So you know you need the leading player
Speaker 3: when it comes to the chip side of the equation.
Speaker 2: Stay with us. More from Bloomberg Intelligence coming up after this.
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Speaker 1: weekdays at ten am Eastern on Apple Corplay and Android
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Speaker 2: Let's get back to what's happening in the markets. One
Speaker 2: of the concerns, and Scarlett mentioned a couple of times
Speaker 2: here today is credit markets. Do we have some concerns
Speaker 2: out there. First Brands, for example, their challenges there have
Speaker 2: really spooked some parts of the credit market. We want
Speaker 2: to get the latest on what's going on there. Were
Speaker 2: checking with Steve Man Bloomberg Intelligence Global Autos and Industrials
Speaker 2: research analysts. Steve from your perspective, just tell us for
Speaker 2: the people out there that don't know who First Brands is,
Speaker 2: who are they and what happened? Yeah.
Speaker 5: First Brand is a big, huge aftermarket parts supplier. They
Speaker 5: you know, some of the brands are really well known
Speaker 5: in the markets. Parts include like break pads, engine oil filters,
Speaker 5: windshow wipers. So a lot of these are just very
Speaker 5: fast where parts that everyday consumers by.
Speaker 4: Yes, okay, so it's something that's quantifiable, it's knowable to consumers.
Speaker 4: And it kind of shocked everyone when it ran into
Speaker 4: financial problems. And I know that everyone's still trying to
Speaker 4: uncover how much of this is perhaps corporate malfeasance or
Speaker 4: there might be some fraud going on. But it happened
Speaker 4: at the same time that another company named Tree Color
Speaker 4: was also falling apart, and both of these are tied
Speaker 4: to the auto sector. They're not making cars and selling
Speaker 4: cars directly, but you know they are tied to the
Speaker 4: business of selling cars or the business of taking care
Speaker 4: of car consumers afterwards. What does that say about the
Speaker 4: car industry?
Speaker 2: Steve, Yeah, I.
Speaker 5: Think those two insidances really freaked out the market. Based
Speaker 5: on our research, I think those are really contained situation
Speaker 5: to those companies and don't feel there's a broader end pack.
Speaker 5: But you never know. You know, the markets based on
Speaker 5: investors sentiment. But we did some research on the impact
Speaker 5: on the after after market, the parts market. You know,
Speaker 5: companies like O'Reilly, AutoZone and Advanced Autoparts are unlikely to
Speaker 5: see impact on their supply chain. Like I said earlier,
Speaker 5: these are high commodity parts. Uh, there's a lot of
Speaker 5: producer that actually produce wipers and brake pads, not just
Speaker 5: first brands. So it's not going to impact the consumer.
Speaker 5: It's not going to impact companies like O'Reilly AutoZone.
Speaker 3: It actually may be.
Speaker 5: Beneficial to the aftermarket retailers and in terms of higher prices.
Speaker 2: How important are these after market retailers. I mean, it
Speaker 2: seems I keep hearing reading your research that people are
Speaker 2: holding onto their cars longer and longer and longer, and
Speaker 2: therefore this after parts it's a pretty good business, and
Speaker 2: it's a.
Speaker 5: Very good business. It's a relatively high margin business, great
Speaker 5: for cash flow. So in this instance with First Brand,
Speaker 5: you know, companies like O'Reilly AutoZone doesn't really on a
Speaker 5: financial perspective, doesn't really deal with First Brands. You know,
Speaker 5: they buy parts from First Brands. Uh, these these they
Speaker 5: but they pay the financial institutions. And this financial institution
Speaker 5: actually pays First Brand through these what we call supplier
Speaker 5: agreements finance agreements. So there, you know, these auto parts
Speaker 5: retailers are actually shielded from what's happening with First Brands.
Speaker 4: The news, of course today is that First Brands is
Speaker 4: founder and CEO Patrick James, someone that a lot of
Speaker 4: people don't know and haven't heard of. He is resigning
Speaker 4: because of course the company is facing an investigation over
Speaker 4: its finances, and he will be replaced by Charles Moore
Speaker 4: as an interim CEO. This is very inside baseball, Steve,
Speaker 4: But what I wanted to get to is this idea
Speaker 4: that a lot of people are not overly concerned that
Speaker 4: this spells broader problems. At what point might you get
Speaker 4: a little bit more concerned.
Speaker 5: I think if there's a contagion in fact, which I
Speaker 5: think is a low real probability. The other issue is
Speaker 5: a supply chain. Is it gonna if first brand does
Speaker 5: stop operations and stop producing parts, Does it impact the
Speaker 5: supply chain of like o'rally and AutoZone. I think temporary
Speaker 5: it does. But what really could happen is that o'rally
Speaker 5: and AutoZone will probably raise prices and it actually will
Speaker 5: help juice up their margins.
Speaker 2: Stay with us more from Bloomberg Intelligence coming up after this.
Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
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Speaker 2: M and A media likely to be some type of
Speaker 2: media activity M and A activity in the media spaces.
Speaker 2: Some of these companies need to consolidate even more to
Speaker 2: get even more scale to compete against the Netflix of
Speaker 2: the world, not to mention the Amazons and the Apples and
Speaker 2: so on and so forth. So one of the deals
Speaker 2: that's out there potentially is sky Dance, Powermount maybe doing
Speaker 2: a deal with Warner Brothers Discovery. Let's see where we
Speaker 2: are right now. There's been a lot of rumors and
Speaker 2: a lot of news reporting about a potential hookup in
Speaker 2: between these two companies. KEITHA, wrong and nothing. She looks
Speaker 2: at this stuff. She's the US media analyst for Bloomberg
Speaker 2: Intelligence located in our Princeton, New Jersey office. Githa. I mean,
Speaker 2: the scuttle butt is, you know, Paramount is interested in
Speaker 2: buying Warner Brothers Discovery, but I don't. We haven't seen
Speaker 2: Warner Brothers really open to a deal, at least not
Speaker 2: at the prices that have been bandied about. What's the latest?
Speaker 3: Yeah, the latest, Paul is?
Speaker 6: I mean, as you just said, there have been rumors
Speaker 6: now ongoing about this, these possible sale dogs for over
Speaker 6: a month. Over the weekend, you know, Lucas Shaw and
Speaker 6: Bloomberg News basically broke the story that Warner Brothers did
Speaker 6: receive an offer for twenty dollars a share, but David Zaslav,
Speaker 6: the CEO of Warner has basically rejected that offer as
Speaker 6: being too low. Now we know from some prior reporting
Speaker 6: that he had been looking for something like about forty
Speaker 6: dollars a share. So obviously that's a huge, huge gap
Speaker 6: right there.
Speaker 2: And I'm just looking at the size of these companies.
Speaker 2: I mean, Warner Brothers has a Warner Brothers Discovery has
Speaker 2: an enterprise value of more than twice that of Paramount.
Speaker 2: How's that math going to work?
Speaker 6: Yeah, So this is what we've been kind of, you know,
Speaker 6: scratching our heads about. So initially, when we had, you know,
Speaker 6: the news come in, one of the big pieces that
Speaker 6: was mentioned was that this was going to be a
Speaker 6: majority cash deal and a lot of the funding was
Speaker 6: going to come from the Ellison family. Now, things seem
Speaker 6: to have changed a little bit last week because we
Speaker 6: heard that private equity players were getting involved. So Apollo
Speaker 6: was one of the names that was mentioned. It looks
Speaker 6: like Paramount had approached Blackstone, but maybe they were not
Speaker 6: really that interested. Legendary was also thrown into the mix.
Speaker 6: So we're not completely sure just yet whether you know,
Speaker 6: Paramount is going to proceed with a higher offer with
Speaker 6: some of these external sources of financing, or whether really
Speaker 6: the Ellison family is kind of going to you know,
Speaker 6: step in and you know, basically fund majority of the acquisition.
Speaker 2: Well, it's not like you can't afford it. I just
Speaker 2: typed in Rich, go Rich. That's the list of the
Speaker 2: top most wealthy people in the world. According to Bloomberg,
Speaker 2: mister Ellison is number two, with a networth of three
Speaker 2: hundred and fifty billion dollars. So there's certainly some capital
Speaker 2: there to be deployed either. What's the sense of timing here?
Speaker 2: I know, Warner Brothers Discovery, they're actually pursuing kind of
Speaker 2: a parallel path, which is there separating their businesses a
Speaker 2: little bit. Tell us about that.
Speaker 6: Yeah, So, you know, I really think here the odds
Speaker 6: are in Warner Brothers Discoveries favor. And I say that because,
Speaker 6: as you just pointed out, they are on this path
Speaker 6: to separating the two companies. They're separating out the TV networks,
Speaker 6: which really doesn't have a great growth outlook, from their
Speaker 6: streaming and studio assets, which by the way, is just
Speaker 6: doing extremely well. The studio has had an absolutely fantastic
Speaker 6: run this year. They're making up almost thirty percent of
Speaker 6: the box office. They've had hit after hit, so they
Speaker 6: really are on a winning streak. And this is what
Speaker 6: I think gives David Zaslav a lot of confidence that
Speaker 6: he can get top dollar for at least the streaming
Speaker 6: and studio part of the business. The real problem, Paul,
Speaker 6: and you know this very well, is what the outlook
Speaker 6: is going to be for the TV networks. And that's
Speaker 6: where I think it's a little bit of a double
Speaker 6: ed sword, because the paramount offer right now is for
Speaker 6: the entire company, which means he gets to offload, you know,
Speaker 6: the TV networks doesn't really have to worry or think
Speaker 6: about it. The thing is, if he waits and you know,
Speaker 6: pursues the split, of course streaming and studios is going
Speaker 6: to do really well. But then again we're we're stuck
Speaker 6: with the you know, the TV network business without you know,
Speaker 6: much of really a future, a proper future, good outlook
Speaker 6: for it. So so that's really where the dilemma is
Speaker 6: for the Warner Brothers Discovery management team.
Speaker 2: Well, what's interesting here, I think, particularly if you're a
Speaker 2: banker or a lawyer trying to put a deal together,
Speaker 2: is we have a willing seller here. Mister Zazov has
Speaker 2: stated he's willing to sell and stated that it probably
Speaker 2: makes sense for this industry to consolidate. Even more so,
Speaker 2: it sounds like it's just going to come down the price.
Speaker 6: It is going to come down absolutely to price. I mean,
Speaker 6: he's already kind of said on multiple occasions that you know,
Speaker 6: there are people who are interested, especially in the streaming
Speaker 6: and studio part of the business. He is going to
Speaker 6: push hard, very hard for you know, on the on
Speaker 6: the price front. We know he's a really tough negotiator,
Speaker 6: but I'm not really sure how much amount is going
Speaker 6: to be willing to pay up for this.
Speaker 2: So broadly speaking, for these networks, the good to zero
Speaker 2: with code cutting, cord cutting, they.
Speaker 6: Won't go to zero, Paul, but they're definitely I mean,
Speaker 6: the floor has been going lower and lower, so you
Speaker 6: very well know that. You know, at its peak, PayTV
Speaker 6: households were somewhere at about one hundred and four million
Speaker 6: in the country. Today they're at about sixty five million.
Speaker 6: The idea, or at least the thinking on the street,
Speaker 6: is that this is probably going to go to somewhere
Speaker 6: like about forty million, maybe in the next three to
Speaker 6: four years, but who knows. I mean, the rate of
Speaker 6: decline has been pretty dramatic. I mean, even when Warner
Speaker 6: Brothers and Discovery came together a few years ago, remember
Speaker 6: they had projected fourteen billion dollars in ebitdah. That number.
Speaker 6: We never got anywhere close to that number. This year,
Speaker 6: we're looking at something like about eight and a half
Speaker 6: billion or nine billion in ibadah. So there's it's just
Speaker 6: such a big gap, and that's just because of the
Speaker 6: dramatic decline in the TV network business.
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