WEBVTT - Boeing Lays out Challenges Ahead

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<v Speaker 2>FBA's ticker is down about 1% today, down about 8%

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<v Speaker 2>year to date. And just recently, Chief Executive Officer Kelly

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<v Speaker 2>Ortberg laid out a set of challenges that surprised investors

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<v Speaker 2>who had grown comfortable with a more steady performance at

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<v Speaker 2>the U.S.

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<v Speaker 4>Planemaker.

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<v Speaker 2>Let's bring in Sid Phillip. He's the chief correspondent for

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<v Speaker 2>global aviation over at Bloomberg News Journeys here in our studio. Sid,

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<v Speaker 2>I was one of those observers who were saying, I

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<v Speaker 2>think they got this thing turned around. They're cranking out

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<v Speaker 2>the 737 MAX. The worst is behind them. The stock's

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<v Speaker 2>behaving better. A little bit of a kink, you know,

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<v Speaker 2>bump in the road here, it seems like.

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<v Speaker 5>It does.

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<v Speaker 6>And it sort of shows that the turnaround is far

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<v Speaker 6>from complete. And it's basically a much more challenging turnaround

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<v Speaker 6>than the market expects because there are big challenges at

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<v Speaker 6>Boeing and including ramping up production. I mean, Airbus has

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<v Speaker 6>struggled with ramping up production of its rival A320 jets.

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<v Speaker 6>I mean, they've been talking, having to push the deadline

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<v Speaker 6>on when they would get to rate 75 multiple times.

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<v Speaker 6>And so for Boeing, ramping up to 47 a month

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<v Speaker 6>has been something of a challenge. And so for investors

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<v Speaker 6>who were expecting them to sort of go from 47

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<v Speaker 6>to 52 to 63, that's been something that's been a

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<v Speaker 6>bit of a jolt for them.

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<v Speaker 7>So how did we get here? I mean, isn't this

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<v Speaker 7>something where the CEO kind of manages expectations during earnings calls?

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<v Speaker 7>I mean, there was an air show not so long

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<v Speaker 7>ago where, again, he and Boeing executives can kind of

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<v Speaker 7>give investors a sense of what is coming, that people

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<v Speaker 7>are surprised now with this more subdued outlook?

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<v Speaker 6>They are surprised by this now. And that's because the

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<v Speaker 6>company had previously sort of talked about how they were

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<v Speaker 6>going to get to 47 and then they were going

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<v Speaker 6>to get to 52. And they sort of didn't really

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<v Speaker 6>talk about the challenges there. And so Kelly Ottberg talked

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<v Speaker 6>about how wings were a pacing item and how they

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<v Speaker 6>were struggling to produce enough wings for the aircraft.

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<v Speaker 2>Wings, that's important.

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<v Speaker 6>That is, and you can't really build a plane without

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<v Speaker 6>those wings. And so for Boeing, this is a challenge

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<v Speaker 6>in terms of just getting planes.

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<v Speaker 4>Out the door.

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<v Speaker 6>And that also has an effect on their financials because

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<v Speaker 6>the 737 is a massive cash cow for the company.

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<v Speaker 6>And the company had talked about how they expect to

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<v Speaker 6>generate between one and three billion in free cash flow

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<v Speaker 6>this year.

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<v Speaker 4>And now the.

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<v Speaker 6>CFO yesterday talked about how it is likely to be

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<v Speaker 6>around the midpoint and largely because of fewer deliveries.

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<v Speaker 2>So what's the deal with just the logistics within the

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<v Speaker 2>global aviation business? Because Boeing calls it out as an issue,

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<v Speaker 2>as does Airbus as well. They really haven't fixed that

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<v Speaker 2>since really the pandemic.

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<v Speaker 5>Yeah.

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<v Speaker 6>Since COVID, the aviation supply chain has been challenged. And

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<v Speaker 6>so we were talking to Airbus a couple of months ago,

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<v Speaker 6>and they were talking about how there's hundreds of thousands

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<v Speaker 6>of parts on an aircraft. And if you have one

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<v Speaker 6>part missing, you can't deliver those aircraft. And so for

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<v Speaker 6>those companies, it's been a massive challenge just managing the

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<v Speaker 6>logistics because During the pandemic, the industry sort of went

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<v Speaker 6>to almost standstill and production sort of paused. And that

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<v Speaker 6>really led to suppliers being sort of struggling to ramp

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<v Speaker 6>up again when demand came back. And so for the

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<v Speaker 6>plane makers, they have a sort of whack-a-mole where you

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<v Speaker 6>have one issue being sorted out and another issue dropping up.

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<v Speaker 6>And that's really been the challenge post-pandemic. And it continues

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<v Speaker 6>to be a challenge for suppliers even today.

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<v Speaker 7>The other thing that's kind of dogging the stock and

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<v Speaker 7>giving people reason to worry is that the president of

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<v Speaker 7>the U.S. and China, presidents, I should say, will be

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<v Speaker 7>meeting in Washington in about a week and a half

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<v Speaker 7>for this summit. And I guess the expectations that Boeing

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<v Speaker 7>is going to come out with some kind of announcement,

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<v Speaker 7>it's starting to dissipate.

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<v Speaker 6>That is because the CEO did talk about how that

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<v Speaker 6>he sort of managed expectations there, saying, The announcement that

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<v Speaker 6>when President Trump went to China in May, he talked

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<v Speaker 6>about how Boeing had secured a deal for 200 big aircraft. Now,

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<v Speaker 6>that's really going to take some time to materialize in

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<v Speaker 6>terms of actually placing an order. And Kelly Ortberg said

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<v Speaker 6>that while the market had been reopened for aircraft in China,

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<v Speaker 6>it's still not going to materialize into this one massive

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<v Speaker 6>mega order. It's going to be negotiated with the airlines

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<v Speaker 6>and they're going to sort of place piecemeal orders. And

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<v Speaker 6>so I think that was, again, something of a setback

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<v Speaker 6>because the market was expecting this big 200-plane order and

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<v Speaker 6>possibly more because previously it had been telegraphed that the

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<v Speaker 6>Chinese airlines would buy as many as 500 planes. And

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<v Speaker 6>so that's really been something of a setback in terms

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<v Speaker 6>of investor sentiment.

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<v Speaker 4>30 seconds left.

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<v Speaker 2>What is the timetable for the 777?

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<v Speaker 6>The 777X certification will slip into next year, is what

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<v Speaker 6>Kelly Ortberg said yesterday. And that plane has been seven

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<v Speaker 6>years late. And they're still saying that it'll be delivered

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<v Speaker 6>next year, but the airline customers have been skeptical about

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<v Speaker 6>when those planes will actually get there.

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<v Speaker 7>Stay with us.

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<v Speaker 1>More from Bloomberg Intelligence coming up after this. You're listening

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<v Speaker 2>President Trump and others have pushed back saying, no, you

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<v Speaker 2>can't let this slow down. Otherwise, China will win here.

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<v Speaker 2>So our next guest has some thoughts here. John Donish,

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<v Speaker 2>he is a founder and CEO of Resilient Health joining

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<v Speaker 2>us from Zoom. So, Donish, thanks so much for joining

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<v Speaker 2>us here. What's your take on kind of the rollout

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<v Speaker 2>of AI? Does it need some guardrails? Do we need

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<v Speaker 2>to slow down at all?

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<v Speaker 4>Look, I have a very contrarian view on this. So

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<v Speaker 4>I know.

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<v Speaker 3>That a lot of people in the industry, especially the

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<v Speaker 3>ones at the big labs, are trying to tell you

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<v Speaker 3>that we need to start pacing. What they mean by

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<v Speaker 3>that is not slow down the training, but slow down

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<v Speaker 3>the release.

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<v Speaker 4>Because if we keep the releases.

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<v Speaker 3>The way they are, suddenly things are going to get

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<v Speaker 3>really scary for everybody. Look, I'm originally from healthcare, right?

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<v Speaker 3>So I know what regulatory capture looks like. And this

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<v Speaker 3>looks and smells like regulatory capture. The big AI labs

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<v Speaker 3>are worried about a very specific thing. And it's not

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<v Speaker 3>recursive self-improvement, which is what they're talking about. They're worried

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<v Speaker 3>about the rise.

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<v Speaker 4>Of open source.

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<v Speaker 3>If you look at what's happening, people can go to

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<v Speaker 3>open routers data, which is this one platform that many

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<v Speaker 3>people can use, and you can use many different models.

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<v Speaker 3>Tokens for the big labs are dropping faster than anyone expected.

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<v Speaker 3>And open source is rising faster than anyone expected. That

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<v Speaker 3>explains why NVIDIA acquired Hugging Face for a record deal.

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<v Speaker 3>And I think that this is what they're really worried about.

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<v Speaker 3>They are trying to slow down the pace of open

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<v Speaker 3>source and adoption of open source, not really thinking about safety.

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<v Speaker 3>And I have to say one more thing, which is

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<v Speaker 3>if you were listening to Dario, who obviously I respect,

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<v Speaker 3>but if you were listening to Dario, we would have

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<v Speaker 3>guardrails at GPT-2.

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<v Speaker 7>So if that's the case, are we just at a

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<v Speaker 7>moment where people are deliberately misunderstanding what these AI lab

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<v Speaker 7>founders are saying and kind of jumping on the moment,

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<v Speaker 7>capitalizing on the moment.

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<v Speaker 4>To say, let's.

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<v Speaker 7>Take a much closer look at this and slow things

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<v Speaker 7>down dramatically, if not halt progress completely?

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<v Speaker 3>You see, there is a lot of, so I'm an

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<v Speaker 3>AI researcher, as you all know from background. And so

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<v Speaker 3>there is a lot of vested corporate interest in making

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<v Speaker 3>sure that these labs continue to thrive. And what they're

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<v Speaker 3>learning right now is that when you keep adding more

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<v Speaker 3>and more training data from the entire internet, yes, it's

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<v Speaker 3>getting better. The scaling laws are continuing to prove out,

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<v Speaker 3>but they're not proving out.

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<v Speaker 4>The way that they thought they would.

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<v Speaker 3>And more verticalized, hyper-specific models are doing better.

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<v Speaker 4>You know, small language models.

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<v Speaker 3>But also hyper specific, you know, specific harnesses, which is

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<v Speaker 3>sort of learned on local data, learned on sector specific

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<v Speaker 3>data are starting to outperform them. And so I think

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<v Speaker 3>what's really happening is you've got all of these different

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<v Speaker 3>forces that are making these giant AI labs worried.

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<v Speaker 4>And I believe that's what's driving this. And I'm not alone.

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<v Speaker 3>There's a lot of people saying this out loud just

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<v Speaker 3>to kind of set the stage. You hear letters RSI

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<v Speaker 3>a lot. And RSI means recursive self-improvement. We've had that

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<v Speaker 3>for 20 plus years, but it doesn't work that well.

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<v Speaker 3>There's still a lot of technical challenges. And unless the

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<v Speaker 3>big AI labs are going to suddenly start showing the data,

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<v Speaker 3>I mean, we just saw a deep RSI from Google

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<v Speaker 3>and they, in their own paper this last week, said

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<v Speaker 3>that there's still significant challenges to generalizability. So these challenges

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<v Speaker 3>Ideas sound great, and they allow you to believe that

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<v Speaker 3>AGI and.

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<v Speaker 4>ASI is going to take over.

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<v Speaker 3>But the truth is that these labs are starting to

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<v Speaker 3>see real pressure from the open source models.

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<v Speaker 2>Give us a sense, Danish. The relative competitive landscape, the U.S.

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<v Speaker 2>versus China, if that's even the right way to think

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<v Speaker 2>about it.

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<v Speaker 4>It is the right way to do it. Yeah.

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<v Speaker 3>I mean, China has gone all in on open source.

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<v Speaker 3>The quality of their open source models is tremendous. I

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<v Speaker 3>think we have to be very careful about slowing things

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<v Speaker 3>down because, again... Look, there are many things that I

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<v Speaker 3>think the administration is doing right and many things that

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<v Speaker 3>they're doing wrong. They are right about this. And I

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<v Speaker 3>think Jensen Huang at NVIDIA is right about this. This

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<v Speaker 3>is not the moment for pacing. This is the moment

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<v Speaker 3>for acceleration. We really need to be careful about allowing

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<v Speaker 3>the corporate interests of a few large labs driving the

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<v Speaker 3>decision-making for the entire country.

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<v Speaker 7>What do you hope will happen when Xi Jinping and

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<v Speaker 7>President Trump meet in Washington, in New York, in the U.S.

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<v Speaker 7>later on this month? Because AI is supposed to come

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<v Speaker 7>up on the agenda here.

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<v Speaker 4>I think we know China's stance on this.

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<v Speaker 3>I mean, they came out and they said that fear

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<v Speaker 3>mongering and foreign influence is.

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<v Speaker 4>Not going to change their strategy.

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<v Speaker 3>What I would hope is that we can come up

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<v Speaker 3>with international standards on use in defense, use in biology,

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<v Speaker 3>use in gain of function. I mean, these are the

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<v Speaker 3>things as a physician I care deeply about, as an

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<v Speaker 3>AI researcher I care deeply about. I don't think, I mean, again,

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<v Speaker 3>contrarian viewpoint, I don't think these models are actually ready

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<v Speaker 3>to handle consequential things like that because the harnesses, again,

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<v Speaker 3>think of those as guardrails that you're putting on.

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<v Speaker 4>Your own models.

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<v Speaker 3>Are not mature enough to be able to handle such sensitive,

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<v Speaker 3>consequential information.

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<v Speaker 4>I mean, we're seeing this in healthcare right now, right?

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<v Speaker 3>And so I think that's what I'm hoping for is

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<v Speaker 3>actually more guardrails on what AI can touch versus guardrails

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<v Speaker 3>on the actual development of the models themselves.

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<v Speaker 4>Interesting.

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<v Speaker 3>These models need to get way better. We need to

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<v Speaker 3>continue to do this. Imagine the incredible work we can

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<v Speaker 3>do if we can get there.

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<v Speaker 7>Stay with us. More from Bloomberg Intelligence coming.

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<v Speaker 2>Up after this.

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<v Speaker 1>You're listening to the Bloomberg Intelligence Podcast. Catch us live

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<v Speaker 2>The video gaming industry, this is an industry that I'm

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<v Speaker 2>pretty ignorant of, and it just amazes me when I

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<v Speaker 2>look at the numbers for this business. The global video

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<v Speaker 2>game industry generates roughly $ 214 billion in annual revenue, making

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<v Speaker 2>it larger than the film and music industries. It's just

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<v Speaker 2>extraordinary how big this business is. It's a global business,

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<v Speaker 2>and it is just extraordinary. Our next guest, he knows

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<v Speaker 2>what's going on there. Nathan Nadeau joins us here, technology

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<v Speaker 2>research analyst at Bloomberg Intelligence. He's based in London. Hey, Nathan,

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<v Speaker 2>let's talk about Take-Two. What's the story here? Frame out

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<v Speaker 2>the investment story for Take-Two. What's the market really geared towards?

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<v Speaker 5>I think it's just really the one thing. That's Grand

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<v Speaker 5>Theft Auto 6. That game is a juggernaut. It has

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<v Speaker 5>sold half a billion copies of games in that franchise's

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<v Speaker 5>entire lifetime. And the sixth version installment is launching mid-November,

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<v Speaker 5>November 19 to be exact. And for the first time,

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<v Speaker 5>they made a premiere and put it on Netflix. It's

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<v Speaker 5>about 26 minutes long, longer than your five-minute trailer. And

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<v Speaker 5>it was the most viewed film globally for that week

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<v Speaker 5>on Netflix. And the fact that it caused engagement spikes

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<v Speaker 5>on Netflix tells me that there's such hunger because it

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<v Speaker 5>has been such a long wait since GTA V, which

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<v Speaker 5>was launched 13 years ago. And there's a lot of

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<v Speaker 5>expectations that have been baked into Take-Two stock because of

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<v Speaker 5>GTA VI release. And there's a lot of expectations. And

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<v Speaker 5>to quote the CEO, terrifying. How terrifying. Some sales estimates

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<v Speaker 5>are expecting 85 million unit sales within two months of launch.

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<v Speaker 5>I mean, our estimates is a bit more modest, but still,

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<v Speaker 5>you know, on a high end.

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<v Speaker 2>Why is the stock down 18% this year?

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<v Speaker 5>I think a lot of these expectations that were baked

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<v Speaker 5>in were challenged by a few factors. One of them

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<v Speaker 5>being some of these gameplay videos were leaked. Obviously, and,

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<v Speaker 5>you know, going back a couple of months ago, and

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<v Speaker 5>there was such a long wait and, you know, Leaks

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<v Speaker 5>is not new to Rockstar or the publisher of the games,

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<v Speaker 5>but so close to the launch date, it's just where

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<v Speaker 5>the stock and the expectations around the game is a

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<v Speaker 5>bit sensitive to whether or not the game can actually deliver.

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<v Speaker 5>Because the last game alone, the fifth installment sold 230

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<v Speaker 5>million units. And so there's a lot of expectation for

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<v Speaker 5>this version to actually sell as much, if not more.

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<v Speaker 5>Because even though that game sold, you know, 30 million

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<v Speaker 5>in each launch year, and that was 2013, every year

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<v Speaker 5>since then, every year in the 13 years since it

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<v Speaker 5>was released, it adds 300 to 400 million units, sorry,

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<v Speaker 5>300 to 400 million dollars a year to Take-Two's top line.

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<v Speaker 4>So this game has a lot of riding on it.

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<v Speaker 2>So I know the mobile gaming accounts for the largest

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<v Speaker 2>share of just the global gaming market.

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<v Speaker 4>Maybe 50 to 55%.

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<v Speaker 2>What are the growth and profit dynamics of mobile gaming

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<v Speaker 2>versus console gaming?

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<v Speaker 5>The average spend per gamer on console and PC are

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<v Speaker 5>always going to be higher because these are where your

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<v Speaker 5>hardcore gamers reside. They are the ones who invest to

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<v Speaker 5>buy a console or to buy a gaming PC. I

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<v Speaker 5>would like to game on my MacBook Air, but I

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<v Speaker 5>don't think that's possible anytime soon. But mobile is where

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<v Speaker 5>you have volume. It's essentially a volume game. The average

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<v Speaker 5>spend is lower per gamer, sure. But then you're talking

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<v Speaker 5>like 30x more gamers per or downloads on mobile compared

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<v Speaker 5>to PC and console combined just in 2025. But it

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<v Speaker 5>doesn't mean that Take-Two can easily tap that market. A

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<v Speaker 5>lot of PC and console gamers historically have relied on partnerships,

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<v Speaker 5>partnering with an expert maker of mobile games to actually

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<v Speaker 5>launch mobile versions of their franchise. And I think Netflix

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<v Speaker 5>is a good example because Take-Two actually put the GTA

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<v Speaker 5>trilogy on the Netflix app for a brief period of time.

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<v Speaker 5>And I believe you can actually download one of those

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<v Speaker 5>games on mobile. And, you know, it was one of

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<v Speaker 5>the top performing mobile games for Netflix and it came

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<v Speaker 5>from a Take-Two franchise. So essentially, this Netflix Take-Two partnership

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<v Speaker 5>with the premiere could be a telltale sign of what's

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<v Speaker 5>to come for Take-Two.

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<v Speaker 4>All right.

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<v Speaker 2>Globally, there are over 3.2 to 3.6 billion people who

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<v Speaker 2>play video games across mobile, console, and PC platforms.

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<v Speaker 4>Nathan, who are these people? What's the demo here? You're

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<v Speaker 4>really up to date with the figures. I'll tell you why.

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<v Speaker 2>I just said into Google, how big is the video

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<v Speaker 2>game industry? And then the Gemini AI overview is awesome.

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<v Speaker 2>It's got great numbers. That's what's helping me out today.

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<v Speaker 2>Who are these people that play these games?

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<v Speaker 5>Right. More than half of these people are actually in

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<v Speaker 5>emerging markets. So you have the bulk of mobile gamers

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<v Speaker 5>actually reside in China. Your Western markets, whether it's U.S., Germany,

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<v Speaker 5>France or Western Europe, most of these people are going

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<v Speaker 5>to be on PC and console. And naturally, because these are,

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<v Speaker 5>you know, generically speaking, high income countries. So China, you

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<v Speaker 5>got Middle East, you got Brazil, Latin America, generally speaking,

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<v Speaker 5>Southeast Asia. So a lot of these markets where more

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<v Speaker 5>than 90% of players play games on mobile devices. But

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<v Speaker 5>it doesn't mean that these are the highest revenue generating country.

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<v Speaker 5>There is a reason why a lot of these big

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<v Speaker 5>game publishers continue to invest in the U.S.

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<v Speaker 4>Markets.

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<v Speaker 5>Because, like I said, going back to how PC and

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<v Speaker 5>console gamers actually generate more revenue per gamer compared to mobile.

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<v Speaker 5>And Take-Two is one of those examples.

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<v Speaker 1>This is the Bloomberg Intelligence Podcast, available on Apple, Spotify,

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