1 00:00:00,240 --> 00:00:10,600 Speaker 1: Bloomberg Audio Studios, podcasts, radio news. You're listening to the 2 00:00:10,600 --> 00:00:14,560 Speaker 1: Bloomberg Intelligence podcast. Catch us live weekdays at ten am 3 00:00:14,600 --> 00:00:17,880 Speaker 1: Eastern on Apple Coarclay and Android Auto with the Bloomberg 4 00:00:17,920 --> 00:00:21,040 Speaker 1: Business App. Listen on demand wherever you get your podcasts, 5 00:00:21,360 --> 00:00:23,560 Speaker 1: or watch us live on YouTube. 6 00:00:24,480 --> 00:00:25,400 Speaker 2: It is Merger Friday. 7 00:00:25,480 --> 00:00:28,520 Speaker 3: Here Netflix agree to by Warner Brothers Discovery in a 8 00:00:28,760 --> 00:00:33,320 Speaker 3: historic combination, joining the world's dominant paid streaming service with 9 00:00:33,400 --> 00:00:36,800 Speaker 3: one of Hollywood's oldest and most revered studios. To get 10 00:00:36,840 --> 00:00:38,680 Speaker 3: the bottom of this, gets some real analysis with this 11 00:00:39,040 --> 00:00:41,080 Speaker 3: return to Githa rang Annat and she covers all the 12 00:00:41,120 --> 00:00:47,559 Speaker 3: media companies for Bloomberg Intelligence here. You know, it's interesting, getha. 13 00:00:48,080 --> 00:00:52,360 Speaker 3: You could argue that paramount sky Dance and Comcasts arguably 14 00:00:52,479 --> 00:00:57,800 Speaker 3: needed this Warner Brothers Discovery company more than Netflix. Yeah, 15 00:00:57,840 --> 00:00:59,560 Speaker 3: Netflix comes out on top here. What do you think 16 00:00:59,560 --> 00:01:00,840 Speaker 3: the strategy for netfocuses? 17 00:01:02,280 --> 00:01:05,119 Speaker 4: Yeah, thank you so much, Paul, So definitely in Netflix here. 18 00:01:05,200 --> 00:01:07,680 Speaker 4: Kind of really looking at the future. I mean we 19 00:01:07,760 --> 00:01:10,680 Speaker 4: are I think at you know, this cusp of the 20 00:01:10,720 --> 00:01:13,960 Speaker 4: media landscape kind of completely changing with the advent of 21 00:01:14,400 --> 00:01:17,080 Speaker 4: jen Ai, and I think the barriers to entry for 22 00:01:17,200 --> 00:01:19,920 Speaker 4: anybody is going to come down substantially because the costs 23 00:01:19,920 --> 00:01:22,640 Speaker 4: to produce content are going to come down substantially. And 24 00:01:22,640 --> 00:01:24,319 Speaker 4: I think Netflix kind of sees the writing on the 25 00:01:24,319 --> 00:01:26,640 Speaker 4: wall and says that they really need to play the 26 00:01:26,760 --> 00:01:29,880 Speaker 4: long game here and deepen their library with a lot 27 00:01:29,880 --> 00:01:33,240 Speaker 4: of the beloved and you know, global franchises that Warner 28 00:01:33,240 --> 00:01:36,560 Speaker 4: Brothers Discovery has to offer. So I'm just absolutely not 29 00:01:36,760 --> 00:01:40,160 Speaker 4: seen as existential for Netflix at all, but I think 30 00:01:40,200 --> 00:01:44,039 Speaker 4: they see it as existential from a long range perspective. 31 00:01:44,760 --> 00:01:48,360 Speaker 4: But of course the big losers here definitely Paramount and Comcast, 32 00:01:48,400 --> 00:01:49,400 Speaker 4: at least in the short run. 33 00:01:50,200 --> 00:01:53,040 Speaker 5: In talking about Paramount and Comcast here, how are we 34 00:01:53,080 --> 00:01:55,640 Speaker 5: thinking about the added pressures that they may be potentially 35 00:01:55,720 --> 00:01:57,520 Speaker 5: facing if we think about the fact that they are 36 00:01:57,800 --> 00:02:00,720 Speaker 5: lower or subscale I should say, into their streaming in 37 00:02:00,720 --> 00:02:01,760 Speaker 5: comparison to Netflix. 38 00:02:02,600 --> 00:02:05,000 Speaker 4: Yeah, this is pretty much game over. You know, we 39 00:02:05,080 --> 00:02:08,880 Speaker 4: already knew that Netflix had won the streaming wars. Now 40 00:02:08,919 --> 00:02:11,440 Speaker 4: without a shred of doubt, they are going to cement 41 00:02:11,520 --> 00:02:13,920 Speaker 4: their dominance. I mean, you just look at the numbers, 42 00:02:14,200 --> 00:02:17,400 Speaker 4: four hundred and fifty million global streamers. Yes, Paramount Plus 43 00:02:17,440 --> 00:02:20,520 Speaker 4: was already a subscale streamer with only about seventy million subscribers. 44 00:02:20,880 --> 00:02:23,600 Speaker 4: Peacock is even in worse shape with you know, only 45 00:02:23,600 --> 00:02:26,840 Speaker 4: close about forty to forty five million. So this really 46 00:02:26,960 --> 00:02:30,400 Speaker 4: kind of puts, you know, tremendous pressure on them, and 47 00:02:30,560 --> 00:02:32,200 Speaker 4: they really have to come up with some kind of 48 00:02:32,280 --> 00:02:37,560 Speaker 4: strategy to to you know, fortify their businesses. Maybe they 49 00:02:37,560 --> 00:02:39,639 Speaker 4: have to look at a potential combination. I don't know 50 00:02:39,680 --> 00:02:40,600 Speaker 4: what it's going to look like. 51 00:02:41,480 --> 00:02:44,639 Speaker 3: Keith and we talked who spoke earlier this morning to Jenrie. 52 00:02:44,639 --> 00:02:47,240 Speaker 3: She covers all the anti trust stuff for Bloomberg Intelligence. 53 00:02:47,280 --> 00:02:50,760 Speaker 3: Since she suggested that this will face a very difficult 54 00:02:50,840 --> 00:02:52,160 Speaker 3: regulatory review. 55 00:02:52,480 --> 00:02:53,520 Speaker 2: What if that is. 56 00:02:53,440 --> 00:02:57,839 Speaker 3: In fact the case, what do you think Netflix would 57 00:02:57,840 --> 00:02:59,720 Speaker 3: be willing to do to maybe get this deal done with? 58 00:02:59,760 --> 00:03:01,919 Speaker 3: They think about selling some massets here. 59 00:03:03,240 --> 00:03:06,160 Speaker 4: They definitely could, so so far paut there. They're saying 60 00:03:06,200 --> 00:03:08,640 Speaker 4: all the right things. They're saying everything you know that 61 00:03:08,760 --> 00:03:13,400 Speaker 4: should assuage any regulatory regulatory fears that said, I mean, 62 00:03:13,400 --> 00:03:15,560 Speaker 4: you are combining the number one streaming service in the 63 00:03:15,600 --> 00:03:18,320 Speaker 4: world with the number three streaming service. Obviously a lot 64 00:03:18,360 --> 00:03:21,920 Speaker 4: of red flags there. Potentially They are, however, saying that 65 00:03:21,960 --> 00:03:24,200 Speaker 4: this is going to be good for consumers. This you know, 66 00:03:24,240 --> 00:03:26,639 Speaker 4: it's going to provide more consumer choice, that's actually going 67 00:03:26,680 --> 00:03:29,320 Speaker 4: to lower costs for consumers because you know, they're going 68 00:03:29,360 --> 00:03:32,280 Speaker 4: to be able to sell a bundle of HBO Max 69 00:03:32,360 --> 00:03:35,040 Speaker 4: with Netflix, potentially lowering costs by I don't know, thirty 70 00:03:35,080 --> 00:03:37,880 Speaker 4: forty percent. So that's one thing they're saying. The second 71 00:03:37,880 --> 00:03:39,600 Speaker 4: thing where there was obviously a lot of concern, and 72 00:03:39,640 --> 00:03:42,360 Speaker 4: not just from regulators but also from Hollywood content and 73 00:03:42,400 --> 00:03:46,520 Speaker 4: Hollywood moguls, would be that, you know, Netflix has typically 74 00:03:46,600 --> 00:03:50,040 Speaker 4: been very anti theatrical, so they talk always about day 75 00:03:50,040 --> 00:03:53,080 Speaker 4: and date releases, how you know, movies should be released 76 00:03:53,080 --> 00:03:55,680 Speaker 4: directly to streaming, and so obviously there's been a lot 77 00:03:55,680 --> 00:03:59,080 Speaker 4: of backlash from the exhibitors, from the theater, from the 78 00:03:59,360 --> 00:04:03,280 Speaker 4: you know, create community. But Netflix again kind of plicating everybody, 79 00:04:03,360 --> 00:04:06,680 Speaker 4: saying that they are going to continue the Warner theatrical 80 00:04:06,720 --> 00:04:10,440 Speaker 4: strategy by continuing to release those fifteen twenty movies year 81 00:04:10,480 --> 00:04:13,360 Speaker 4: after year in the theaters. And the last thing that 82 00:04:13,400 --> 00:04:15,440 Speaker 4: you know, everybody has been worried about is we have 83 00:04:15,480 --> 00:04:18,680 Speaker 4: to remember that Warner is actually a huge content supplier, 84 00:04:18,960 --> 00:04:20,920 Speaker 4: so they supply all of these big shows or you 85 00:04:20,960 --> 00:04:23,800 Speaker 4: think of Ted Lasso on Apple Tweed that's a Warner show. 86 00:04:24,240 --> 00:04:26,240 Speaker 4: So you know, again, are they going to pull The 87 00:04:26,240 --> 00:04:28,719 Speaker 4: big question is is Netflix going to pull back on that, 88 00:04:28,880 --> 00:04:32,120 Speaker 4: on all that content, And just this morning Ted Sarandos 89 00:04:32,120 --> 00:04:34,200 Speaker 4: said on the call that no, we're not. You know, 90 00:04:34,279 --> 00:04:36,599 Speaker 4: Warner Studio is going to continue to do whatever it 91 00:04:36,640 --> 00:04:40,000 Speaker 4: has been doing. But again, you know, not really sure 92 00:04:40,480 --> 00:04:43,080 Speaker 4: how that's going to work for Netflix if they you know, 93 00:04:43,120 --> 00:04:45,000 Speaker 4: just continue to do that. But so far they're saying 94 00:04:45,000 --> 00:04:47,799 Speaker 4: all the right things from you know, a regulatory standpoint. 95 00:04:47,760 --> 00:04:51,600 Speaker 5: So from a consumer experience standpoint here if it's Netflix 96 00:04:51,600 --> 00:04:54,120 Speaker 5: and they've got Warner Brothers Discovery here, we're thinking about 97 00:04:54,240 --> 00:04:56,880 Speaker 5: HBO Max and things of that sort. Essentially, are you 98 00:04:56,960 --> 00:04:59,280 Speaker 5: going to maybe see some sort of merger of experience 99 00:04:59,279 --> 00:05:01,520 Speaker 5: when you go on to net you're also accessing HBO 100 00:05:01,600 --> 00:05:03,800 Speaker 5: or will it be more of a bundle mindset here? 101 00:05:04,839 --> 00:05:07,080 Speaker 4: Yeah, So that is what has been really difficult to 102 00:05:07,120 --> 00:05:09,159 Speaker 4: parse out Nora. So they were asked this question again 103 00:05:09,200 --> 00:05:12,360 Speaker 4: repeatedly this in this morning's call. Is HBO Max kind 104 00:05:12,360 --> 00:05:14,320 Speaker 4: of going to be like one of the tiles that 105 00:05:14,360 --> 00:05:16,120 Speaker 4: you would see on a Disney Plus? Right, you go 106 00:05:16,160 --> 00:05:18,080 Speaker 4: and you see Pixar and Marvel, and is HBO going 107 00:05:18,080 --> 00:05:20,760 Speaker 4: to be something similar to that or are they just 108 00:05:20,800 --> 00:05:23,960 Speaker 4: going to continue to run the two services completely independently. 109 00:05:24,960 --> 00:05:27,040 Speaker 4: If you kind of run the math, it just doesn't 110 00:05:27,080 --> 00:05:30,960 Speaker 4: make sense for them to have two separate streaming platforms 111 00:05:31,000 --> 00:05:33,680 Speaker 4: because you have all of the overhead expenses and the 112 00:05:33,720 --> 00:05:35,640 Speaker 4: corporates and all of that to a company at that 113 00:05:36,000 --> 00:05:37,479 Speaker 4: so that doesn't really make sense. I think at some 114 00:05:37,480 --> 00:05:40,440 Speaker 4: point they basically fold in HBO max all of that 115 00:05:40,560 --> 00:05:44,600 Speaker 4: content onto Netflix, although they haven't necessarily clarified that, but 116 00:05:44,640 --> 00:05:47,120 Speaker 4: I think that in you know, basically helps them from 117 00:05:47,120 --> 00:05:49,359 Speaker 4: a cost perspective, helps them from a content perspective, and 118 00:05:49,360 --> 00:05:51,240 Speaker 4: then really helps them with engagement, which is really what 119 00:05:51,279 --> 00:05:54,200 Speaker 4: they're looking for. Deepen engagement on the Netflix platform. How 120 00:05:54,240 --> 00:05:56,600 Speaker 4: do you do that by increasing the amount of content? 121 00:05:57,240 --> 00:05:59,640 Speaker 4: So I think eventually that is the game plan, But 122 00:06:00,320 --> 00:06:02,720 Speaker 4: no specifics from the Netflix management team just yet. 123 00:06:03,760 --> 00:06:06,839 Speaker 2: Stay with us more from Bloomberg Intelligence coming up after this. 124 00:06:10,440 --> 00:06:14,159 Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live 125 00:06:14,240 --> 00:06:17,320 Speaker 1: weekdays at ten am Eastern on Apple, Cocklay and Android 126 00:06:17,320 --> 00:06:20,640 Speaker 1: Auto with the Bloomberg Business app. Listen on demand wherever 127 00:06:20,720 --> 00:06:24,240 Speaker 1: you get your podcasts or watch us live on YouTube. 128 00:06:24,960 --> 00:06:28,560 Speaker 3: A big deal of the day, Netflix acquiring Warner Brothers Discovery. 129 00:06:29,200 --> 00:06:31,720 Speaker 3: What's the regulatory framework? Are the regulators going to take 130 00:06:31,720 --> 00:06:33,560 Speaker 3: a look at this deal? This is a monster deal 131 00:06:33,600 --> 00:06:35,400 Speaker 3: in terms of dollars, you know, eighty billion dollars of 132 00:06:35,480 --> 00:06:38,360 Speaker 3: enterprise value. Let's check in with Jennifer Rea, Bloomberg Intelligence 133 00:06:38,480 --> 00:06:40,000 Speaker 3: senior litigation analysts. 134 00:06:40,360 --> 00:06:43,839 Speaker 2: So, Jen, this is a big deal. How the regulator's 135 00:06:43,839 --> 00:06:44,520 Speaker 2: going to view this? 136 00:06:47,279 --> 00:06:49,600 Speaker 6: It really is, Paul, and I think, and we've seen 137 00:06:49,640 --> 00:06:52,240 Speaker 6: a lot of opposition to it coming out already. I 138 00:06:52,240 --> 00:06:55,480 Speaker 6: think it's going to get really significant scrutiny, not just 139 00:06:55,520 --> 00:06:58,120 Speaker 6: in the United States by the Department of Justice, but 140 00:06:58,360 --> 00:07:01,480 Speaker 6: likely also in Europe and by the UK and possibly 141 00:07:01,520 --> 00:07:04,320 Speaker 6: some other jurisdictions as well. But you know, they're going 142 00:07:04,360 --> 00:07:07,000 Speaker 6: to look at these overlaps, which in this case are 143 00:07:07,040 --> 00:07:10,400 Speaker 6: both horizontal. That's in streaming. They both provide stream both 144 00:07:10,400 --> 00:07:13,840 Speaker 6: companies provide streaming services, but they're also vertical. You have 145 00:07:13,920 --> 00:07:16,880 Speaker 6: a big streaming service buying a big movie and TV 146 00:07:17,000 --> 00:07:21,760 Speaker 6: producer and a big content a library of content, and 147 00:07:21,800 --> 00:07:25,960 Speaker 6: that creates vertical issues. And when a company is really 148 00:07:26,000 --> 00:07:29,240 Speaker 6: strong in both levels of a supply chain. When they 149 00:07:29,320 --> 00:07:31,920 Speaker 6: vertically integrate this way, that can raise concerns too, So 150 00:07:31,960 --> 00:07:33,960 Speaker 6: the Department of Justice is going to have to dig 151 00:07:34,000 --> 00:07:37,440 Speaker 6: into both of those issues. And last, Paul, I'll say 152 00:07:37,480 --> 00:07:39,640 Speaker 6: this because we haven't seen very much about it, but 153 00:07:39,680 --> 00:07:43,440 Speaker 6: there's also what we call a monopsony concern here. Monopsony 154 00:07:43,520 --> 00:07:45,800 Speaker 6: is when there are a merger results and too few 155 00:07:45,840 --> 00:07:48,600 Speaker 6: buyers of a service or product. So in this case, 156 00:07:48,600 --> 00:07:51,800 Speaker 6: you've got two huge creators of scripted content that are 157 00:07:51,800 --> 00:07:54,640 Speaker 6: coming together and that could have a negative impact on 158 00:07:54,720 --> 00:07:58,600 Speaker 6: the artists, the production people, the writers that go into 159 00:07:58,760 --> 00:08:01,440 Speaker 6: making all the TV and movie content that the companies make. 160 00:08:02,560 --> 00:08:05,520 Speaker 5: Jennifer walk us through what exactly happens to the deal 161 00:08:05,720 --> 00:08:09,040 Speaker 5: if the DOJ or regulators more broadly decide to push 162 00:08:09,120 --> 00:08:09,640 Speaker 5: back on this. 163 00:08:10,720 --> 00:08:12,640 Speaker 6: Sure, So there are a couple different things that can happen. 164 00:08:12,680 --> 00:08:15,800 Speaker 6: I'll start by saying this. In depth investigation usually starts 165 00:08:15,800 --> 00:08:18,640 Speaker 6: by issuing what are called second requests for information. Those 166 00:08:18,680 --> 00:08:20,720 Speaker 6: are like really big subpoenas where they're going to get 167 00:08:20,760 --> 00:08:22,960 Speaker 6: a lot of business documents, a lot of data and 168 00:08:23,000 --> 00:08:26,240 Speaker 6: information from the companies. Now, once the DOJ has looked 169 00:08:26,240 --> 00:08:29,320 Speaker 6: at all that material. They have to decide either they 170 00:08:29,360 --> 00:08:31,840 Speaker 6: clear it out right, they clear it with the negotiated 171 00:08:31,880 --> 00:08:34,080 Speaker 6: settlement with the companies, or they soon to try to 172 00:08:34,080 --> 00:08:38,559 Speaker 6: block it in trial. A negotiated settlement could mean agreeing 173 00:08:38,559 --> 00:08:42,160 Speaker 6: to divest a product such as HBO max and or 174 00:08:42,240 --> 00:08:45,200 Speaker 6: agreeing to behavioral remedies such as making promises about the 175 00:08:45,200 --> 00:08:47,720 Speaker 6: way the post merger firm will behave in the marketplace. 176 00:08:48,040 --> 00:08:52,000 Speaker 6: But if something like that can't be agreed upon, then 177 00:08:52,520 --> 00:08:54,439 Speaker 6: the only thing the DJ has left to do is 178 00:08:54,480 --> 00:08:57,080 Speaker 6: go to trial and seek a permanent injunction from a 179 00:08:57,160 --> 00:09:00,240 Speaker 6: judge that blocks the companies from closing the deal. They 180 00:09:00,280 --> 00:09:02,160 Speaker 6: did that when AT and T he tried to buy 181 00:09:02,280 --> 00:09:06,960 Speaker 6: Time Warner several many years ago. But I'll contrast that 182 00:09:07,000 --> 00:09:10,600 Speaker 6: to when Comcasts bought NBCU. They also had some concerns there, 183 00:09:10,600 --> 00:09:13,320 Speaker 6: but they entered a settlement agreement with respect to that deal. 184 00:09:14,440 --> 00:09:17,480 Speaker 3: Jen Politics, I think politics is going to come into 185 00:09:17,480 --> 00:09:20,520 Speaker 3: this deal, maybe more so than some others here generally, 186 00:09:20,559 --> 00:09:22,679 Speaker 3: I guess, on the one hand, we have an administration 187 00:09:22,720 --> 00:09:27,520 Speaker 3: that presumably is more open to consolidation across industries, taking 188 00:09:27,559 --> 00:09:30,920 Speaker 3: a lighter touch. But then there's also a president who 189 00:09:31,480 --> 00:09:33,000 Speaker 3: makes it personal oftentimes. 190 00:09:33,160 --> 00:09:35,320 Speaker 2: Do we have any idea how that might shake out? 191 00:09:36,320 --> 00:09:38,360 Speaker 6: You know, Paul, You're exactly right, And it makes it 192 00:09:38,440 --> 00:09:41,720 Speaker 6: so hard nowadays to actually really do a true anti 193 00:09:41,720 --> 00:09:44,440 Speaker 6: trust analysis of a deal because we have seen the 194 00:09:44,480 --> 00:09:47,280 Speaker 6: Department of Justice and the Federal Trade Commission, I could say, 195 00:09:48,920 --> 00:09:52,360 Speaker 6: aligning with the Trump administration in anti trust outcomes for 196 00:09:52,480 --> 00:09:56,200 Speaker 6: deals and pushing the policy priorities of the administration and 197 00:09:56,320 --> 00:09:59,640 Speaker 6: listening to what the President has to say. So where 198 00:09:59,679 --> 00:10:02,800 Speaker 6: the pre and the administration is against a deal, it 199 00:10:02,920 --> 00:10:05,280 Speaker 6: is a higher risk, i would say, of that deal 200 00:10:05,600 --> 00:10:07,920 Speaker 6: having to defend itself in court and the Department of 201 00:10:08,080 --> 00:10:10,480 Speaker 6: Justice seeking a block. But on the other hand, Paul, 202 00:10:10,559 --> 00:10:12,840 Speaker 6: we don't really know what's going on behind the scenes. 203 00:10:13,200 --> 00:10:15,480 Speaker 6: You know, we've seen some of these companies to mergers 204 00:10:15,559 --> 00:10:20,120 Speaker 6: hire some Trump aligned lobbyists, powerful people in Washington that 205 00:10:20,160 --> 00:10:22,080 Speaker 6: have helped them to push through the deal that was 206 00:10:22,080 --> 00:10:25,160 Speaker 6: the allegation with respect to the settlement the DJ entered 207 00:10:25,160 --> 00:10:28,559 Speaker 6: when Hewlett Packard bought Juniper. We don't know what other 208 00:10:28,640 --> 00:10:31,400 Speaker 6: kinds of concessions or agreements are being made. You know, 209 00:10:31,760 --> 00:10:34,160 Speaker 6: this is all sort of the back room channels and 210 00:10:34,200 --> 00:10:37,960 Speaker 6: without knowing that It's hard to understand where the administration 211 00:10:38,040 --> 00:10:40,120 Speaker 6: may come out months from now in the end on 212 00:10:40,200 --> 00:10:42,480 Speaker 6: the deal, but at least for right now, we know 213 00:10:42,559 --> 00:10:45,080 Speaker 6: that the administration doesn't look happy about this buyer. They 214 00:10:45,080 --> 00:10:46,240 Speaker 6: would have preferred Paramount. 215 00:10:46,720 --> 00:10:49,840 Speaker 2: Stay with us. More from Bloomberg Intelligence coming up after this. 216 00:10:53,760 --> 00:10:57,440 Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live 217 00:10:57,520 --> 00:11:00,880 Speaker 1: weekdays at ten am Eastern on Applecarqel, and Android Auto 218 00:11:01,040 --> 00:11:04,080 Speaker 1: with the Bloomberg Business app. Listen on demand wherever you 219 00:11:04,120 --> 00:11:07,120 Speaker 1: get your podcasts, or watch us live on YouTube. 220 00:11:07,880 --> 00:11:10,560 Speaker 5: We did get some earnings out of Hewlett Packard Enterprise, 221 00:11:10,640 --> 00:11:14,400 Speaker 5: that's taker HPE. We did see that this essentially disappointed 222 00:11:14,440 --> 00:11:16,679 Speaker 5: what investors were looking for here. We did see the 223 00:11:16,720 --> 00:11:19,360 Speaker 5: company gave an outlook for sales in the current quarter 224 00:11:19,440 --> 00:11:22,800 Speaker 5: that fell short of the high expectations, particularly for its 225 00:11:22,840 --> 00:11:25,439 Speaker 5: AI server business. And we've got the best person to 226 00:11:25,480 --> 00:11:27,599 Speaker 5: help us break this down. We're looking at going to 227 00:11:27,640 --> 00:11:30,760 Speaker 5: be chatting with Bloomberg Intelligence senior tech analyst Wu Jinho. 228 00:11:31,240 --> 00:11:33,680 Speaker 5: He's coming to us out of Princeton, New Jersey. Tell 229 00:11:33,760 --> 00:11:35,559 Speaker 5: us a little bit about what you took away from 230 00:11:35,559 --> 00:11:36,280 Speaker 5: this earnings report. 231 00:11:37,400 --> 00:11:41,000 Speaker 7: Oh yeah, thanks for having me so I actually like it. 232 00:11:42,080 --> 00:11:44,040 Speaker 7: I know there was a high focus on the revenue 233 00:11:44,120 --> 00:11:49,200 Speaker 7: numbers for the upcoming quarter, but EPs they actually erased 234 00:11:49,200 --> 00:11:52,440 Speaker 7: the EPs guidance from two twenty on the lower end 235 00:11:52,480 --> 00:11:54,439 Speaker 7: to two twenty five and two forty on the high 236 00:11:54,559 --> 00:11:58,200 Speaker 7: end to two forty five. So essentially, the strategy that 237 00:11:58,240 --> 00:12:02,079 Speaker 7: Antonio straight laid out with the Juniper acquisition is working 238 00:12:02,160 --> 00:12:05,559 Speaker 7: out as planned. It is cushioning some of these higher 239 00:12:05,559 --> 00:12:10,439 Speaker 7: commodity costs and the higher AI mix. So you despite 240 00:12:10,440 --> 00:12:14,560 Speaker 7: the disappointing one Q sales outlook, the overall years should 241 00:12:14,559 --> 00:12:14,920 Speaker 7: be fine. 242 00:12:15,880 --> 00:12:19,240 Speaker 3: So the company's talking about, you know, substantial interest in 243 00:12:19,280 --> 00:12:22,559 Speaker 3: its AI servers, and they call out governments, and that's 244 00:12:22,640 --> 00:12:24,440 Speaker 3: kind of new for me at least. I guess I'm 245 00:12:24,520 --> 00:12:26,920 Speaker 3: kind of used to talking about the hyper scalers, whether 246 00:12:26,920 --> 00:12:30,559 Speaker 3: it's Microsoft or Amazon. I've just spent maybe other categories 247 00:12:30,600 --> 00:12:34,360 Speaker 3: of people that may be making some AI investments and servers. 248 00:12:35,120 --> 00:12:39,600 Speaker 7: Yeah, hey, Paul, So let's think about the sovereigns. Let's 249 00:12:39,640 --> 00:12:44,120 Speaker 7: think about the Saudi's, the US, the US federal government, 250 00:12:44,960 --> 00:12:49,560 Speaker 7: they are going to start ramping up their own AI 251 00:12:49,720 --> 00:12:52,920 Speaker 7: initiatives as well, right, the Department of Energy, Department of defense. 252 00:12:53,400 --> 00:12:57,840 Speaker 7: They're customers of HPEES Supercompute, and they're going to convert 253 00:12:57,880 --> 00:13:01,600 Speaker 7: from supercomputing to AI s servers as some of these 254 00:13:01,600 --> 00:13:06,120 Speaker 7: configurations start rolling out. They already you know, h HPE 255 00:13:06,240 --> 00:13:09,400 Speaker 7: already has some agreements with the saudist. But you know, 256 00:13:09,760 --> 00:13:13,320 Speaker 7: and that's one of the issues with with HPE's outlook. 257 00:13:13,440 --> 00:13:15,920 Speaker 7: It's more on the timing of when these deals are 258 00:13:15,960 --> 00:13:20,439 Speaker 7: flowing through. It's being pushed out more towards the second 259 00:13:20,440 --> 00:13:24,080 Speaker 7: half of the year versus the first half. But they 260 00:13:24,120 --> 00:13:27,120 Speaker 7: are going to play a much more meaningful role in 261 00:13:27,360 --> 00:13:29,920 Speaker 7: the future, not only for HPE, for Dells and super 262 00:13:29,960 --> 00:13:30,640 Speaker 7: Micro as well. 263 00:13:31,440 --> 00:13:33,720 Speaker 5: So how are they doing in terms of comparison to 264 00:13:33,720 --> 00:13:34,880 Speaker 5: competitors in this market. 265 00:13:36,120 --> 00:13:41,960 Speaker 7: Well, I mean, you know, HPE has made the strategic 266 00:13:42,000 --> 00:13:45,880 Speaker 7: content on not going after these lower margin AI server deals. 267 00:13:46,880 --> 00:13:50,280 Speaker 7: If we look at, you know, some of the competitors 268 00:13:50,800 --> 00:13:53,920 Speaker 7: the way I have Dell modeled out, they're going to 269 00:13:54,000 --> 00:13:56,600 Speaker 7: do roughly about forty billion dollars in AI server revenue. 270 00:13:56,679 --> 00:14:00,800 Speaker 7: Super Micro around the seminal level similar level for next 271 00:14:00,880 --> 00:14:02,920 Speaker 7: year is probably going to do roughly about five billion 272 00:14:02,960 --> 00:14:08,240 Speaker 7: dollars in AI server AI server revenues. In physical twenty six. Now, 273 00:14:08,520 --> 00:14:11,280 Speaker 7: look that five billion dollars is not that the sneeze at, 274 00:14:12,000 --> 00:14:15,000 Speaker 7: but you know, relatively speaking, it's gonna be much smaller 275 00:14:15,040 --> 00:14:15,920 Speaker 7: in scope and scale. 276 00:14:16,320 --> 00:14:18,760 Speaker 3: Why are they smaller? Why are they lagging? And is 277 00:14:18,800 --> 00:14:20,880 Speaker 3: there a plan for them to kind of narrow that gap? 278 00:14:21,960 --> 00:14:25,000 Speaker 7: Yeah, you know, I found that to be disappointing in 279 00:14:25,320 --> 00:14:28,480 Speaker 7: terms of lagging. I do think they have the assets 280 00:14:28,600 --> 00:14:31,160 Speaker 7: to do so. But at the end of the day, 281 00:14:32,280 --> 00:14:35,920 Speaker 7: you know, the management team at HPE is very focused 282 00:14:35,920 --> 00:14:39,640 Speaker 7: on shareholder and shareholder value. These AI server deals are 283 00:14:39,800 --> 00:14:42,960 Speaker 7: very low in margin and highly competitive, so they're not 284 00:14:43,040 --> 00:14:45,920 Speaker 7: chasing after these lower margin deals. And one of the 285 00:14:45,920 --> 00:14:49,360 Speaker 7: streetategic reasons on why they're going after HP is going 286 00:14:49,440 --> 00:14:51,680 Speaker 7: after these sovereign deals is because they think it's going 287 00:14:51,760 --> 00:14:55,080 Speaker 7: to be higher in margin and and hopefully that does 288 00:14:55,160 --> 00:14:57,400 Speaker 7: pan out for them, which is one of the reasons 289 00:14:57,400 --> 00:15:00,720 Speaker 7: why that you know, we're talking about one fifth the 290 00:15:00,800 --> 00:15:02,280 Speaker 7: size of the deal flow for them. 291 00:15:03,160 --> 00:15:05,440 Speaker 5: So out of outside of HPE, what else are you 292 00:15:05,440 --> 00:15:07,480 Speaker 5: really keeping an eye on right now in this tech space? 293 00:15:09,520 --> 00:15:14,040 Speaker 7: Well, well, the AI play is going to be pretty important, 294 00:15:14,080 --> 00:15:17,480 Speaker 7: but I will tell you, uh, the d ram story 295 00:15:17,520 --> 00:15:21,480 Speaker 7: is actually going to start materializing in as a potential 296 00:15:21,520 --> 00:15:24,680 Speaker 7: headwind for all of the hardware space. One thing that 297 00:15:24,720 --> 00:15:29,160 Speaker 7: we didn't discuss on HPE is the three hundred percent 298 00:15:29,280 --> 00:15:31,320 Speaker 7: rise and d RAM prices is going to affect their 299 00:15:31,360 --> 00:15:33,200 Speaker 7: server sales. They think they're going to pass that through 300 00:15:33,240 --> 00:15:36,440 Speaker 7: to customers. I have I'm a little bit skeptical, but 301 00:15:36,520 --> 00:15:38,920 Speaker 7: I think it's you know, the rise in commodity costs 302 00:15:38,920 --> 00:15:41,120 Speaker 7: and d RAM is going to be the new tariff 303 00:15:41,160 --> 00:15:43,720 Speaker 7: story in twenty twenty six. That's going to affect a 304 00:15:43,720 --> 00:15:45,120 Speaker 7: lot of these hardware vendors. 305 00:15:45,240 --> 00:15:47,120 Speaker 2: Why are DRAMs up so much? 306 00:15:48,280 --> 00:15:53,480 Speaker 7: AI AI AI, you know these hyperscale the hyperscale cloud 307 00:15:53,480 --> 00:15:55,920 Speaker 7: guys are sucking up so much of this memory, and 308 00:15:56,040 --> 00:15:59,840 Speaker 7: the DRAM vendors aren't raising the capacity. So when demand 309 00:15:59,880 --> 00:16:04,440 Speaker 7: is tilting over one way, uh and some of the 310 00:16:04,560 --> 00:16:07,760 Speaker 7: standard DRAMs they're not producing as many DRAMs and the 311 00:16:07,800 --> 00:16:11,000 Speaker 7: capacity is not growing, you know, there's no nowhere else 312 00:16:11,040 --> 00:16:12,280 Speaker 7: to go for the price to go higher. 313 00:16:12,600 --> 00:16:14,680 Speaker 5: I mean, when we think about AI, and we're talking 314 00:16:14,680 --> 00:16:17,880 Speaker 5: about HPE right now in particular, our expectation is just 315 00:16:17,880 --> 00:16:20,120 Speaker 5: too high. Are people putting so much pressure in these 316 00:16:20,120 --> 00:16:22,720 Speaker 5: companies and we're seeing these you know, these estimates and 317 00:16:22,760 --> 00:16:26,320 Speaker 5: we're not really seeing them delivering or what's your read 318 00:16:26,400 --> 00:16:26,600 Speaker 5: on that? 319 00:16:27,360 --> 00:16:30,680 Speaker 7: Well, So let let's let's let's talk about HPE in particular. 320 00:16:30,760 --> 00:16:30,960 Speaker 3: Right. 321 00:16:32,080 --> 00:16:36,320 Speaker 7: You know, the way I wrote my earnings outlook commentary 322 00:16:36,760 --> 00:16:38,960 Speaker 7: was it depends on the lens that you look at, right, 323 00:16:39,800 --> 00:16:43,040 Speaker 7: from an earning from a sales lens, the AI sales 324 00:16:43,040 --> 00:16:45,520 Speaker 7: did disappoint, right, But if we think about it from 325 00:16:45,520 --> 00:16:48,160 Speaker 7: an earnings and a cash flow lens, the networking business 326 00:16:48,160 --> 00:16:51,600 Speaker 7: actually did as well as it should have, and it's 327 00:16:51,640 --> 00:16:53,560 Speaker 7: doing the work that it's supposed to be doing in 328 00:16:53,600 --> 00:16:56,880 Speaker 7: terms of cushioning some of the lower margining business. And 329 00:16:57,240 --> 00:17:00,520 Speaker 7: quite frankly, I still think that there's potential for Ernie's 330 00:17:00,560 --> 00:17:05,240 Speaker 7: upside if networking execution strengthens going into the rest of 331 00:17:05,280 --> 00:17:05,600 Speaker 7: the year. 332 00:17:06,280 --> 00:17:09,439 Speaker 2: Stay with us more from Bloomberg Intelligence coming up after this. 333 00:17:13,320 --> 00:17:17,040 Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live 334 00:17:17,119 --> 00:17:20,159 Speaker 1: weekdays at ten am Eastern on Apple, Cocklay and Android 335 00:17:20,200 --> 00:17:23,520 Speaker 1: Auto with the Bloomberg Business app. Listen on demand wherever 336 00:17:23,560 --> 00:17:26,680 Speaker 1: you get your podcasts, or watch us live on YouTube. 337 00:17:27,280 --> 00:17:30,040 Speaker 5: Let's switch gears and dig a bit into the industrial space. 338 00:17:30,080 --> 00:17:32,720 Speaker 5: I mean, just last month we had a sphears of 339 00:17:32,720 --> 00:17:34,720 Speaker 5: a government shutdown continuing, and we saw it was the 340 00:17:34,720 --> 00:17:37,959 Speaker 5: longest government shutdown in US history. But this did drag 341 00:17:38,040 --> 00:17:40,280 Speaker 5: on a lot of the major airlines. And we have 342 00:17:40,320 --> 00:17:42,399 Speaker 5: a wonderful person to discuss us here with us today, 343 00:17:42,520 --> 00:17:45,879 Speaker 5: George Ferguson. Of course, he's Bloomberg Intelligence senior Aerospace, Defense 344 00:17:45,960 --> 00:17:48,400 Speaker 5: and airlines analysts, and we want to chat a bit 345 00:17:48,440 --> 00:17:51,040 Speaker 5: about what's going on in terms of Southwest earnings and 346 00:17:51,080 --> 00:17:55,560 Speaker 5: how government shutdown actually weighed potentially on this company here. George, 347 00:17:55,680 --> 00:17:57,879 Speaker 5: what is your takeaway here from what we're hearing from Southwest? 348 00:17:59,000 --> 00:18:00,919 Speaker 8: Yeah, I mean it was a little bit more than 349 00:18:00,960 --> 00:18:03,920 Speaker 8: we expected. I think the impact was about two hundred 350 00:18:03,960 --> 00:18:07,840 Speaker 8: million dollars on the quarter. It was in line with 351 00:18:07,840 --> 00:18:12,159 Speaker 8: what Delta Airlines had reported. We probably thought, you know, 352 00:18:12,240 --> 00:18:14,919 Speaker 8: perhaps Southwest a little bit less impacted as they're not 353 00:18:15,800 --> 00:18:18,760 Speaker 8: as heavily into the sort of the high volume airports, 354 00:18:20,080 --> 00:18:21,520 Speaker 8: you know. And actually I think it was a bit 355 00:18:21,560 --> 00:18:24,879 Speaker 8: surprised as well that they talked about the booking curve. 356 00:18:24,920 --> 00:18:28,400 Speaker 8: We think most people, you know, typically book well before 357 00:18:28,440 --> 00:18:31,520 Speaker 8: the holiday season, so we wouldn't have expected their booking 358 00:18:31,520 --> 00:18:34,240 Speaker 8: curve to be as impacted, But I mean again, I 359 00:18:34,280 --> 00:18:37,080 Speaker 8: think it's you know, largely in line with what we expected. 360 00:18:37,440 --> 00:18:39,560 Speaker 8: A couple hundred million dollars hit. I don't think it'd 361 00:18:39,560 --> 00:18:40,639 Speaker 8: be It's not gonna be terrible. 362 00:18:41,200 --> 00:18:43,640 Speaker 3: Stock is up four point six percent today, fifty two 363 00:18:43,720 --> 00:18:47,600 Speaker 3: week high for Southwest Airlines. So, George, what's the I 364 00:18:47,640 --> 00:18:50,280 Speaker 3: know you've either have publisher working on your twenty twenty 365 00:18:50,280 --> 00:18:53,320 Speaker 3: six outlook here, what's kind of the call for the 366 00:18:53,359 --> 00:18:55,880 Speaker 3: airlines in the next six or twelve months? 367 00:18:56,440 --> 00:18:59,040 Speaker 8: Yes, I mean as we look at you know, twenty 368 00:18:59,080 --> 00:19:02,920 Speaker 8: twenty six, we get it like visibility about six months 369 00:19:02,960 --> 00:19:04,879 Speaker 8: where the schedule and you know, we've already started to 370 00:19:04,880 --> 00:19:08,040 Speaker 8: look at schedules for the new year. So in the 371 00:19:08,040 --> 00:19:11,800 Speaker 8: first half of the year, the domestic business appears to 372 00:19:11,840 --> 00:19:15,560 Speaker 8: be growing. The domestic capacity for US airlines is. 373 00:19:15,520 --> 00:19:21,879 Speaker 9: Growing around GDP is two and a half percent, and 374 00:19:21,960 --> 00:19:24,879 Speaker 9: we see less of that growth in the low cost 375 00:19:24,960 --> 00:19:25,760 Speaker 9: airlines space. 376 00:19:25,800 --> 00:19:29,200 Speaker 8: Now, Southwest is in the middle of migrating between I 377 00:19:29,200 --> 00:19:30,919 Speaker 8: don't know if I call them low cost, they call 378 00:19:31,000 --> 00:19:34,359 Speaker 8: them budget. They're in the middle of migrating from budget 379 00:19:33,840 --> 00:19:37,919 Speaker 8: to an airline that's going to offer premium, you know, 380 00:19:38,080 --> 00:19:41,640 Speaker 8: premium seating and some premium services in the new year. 381 00:19:42,119 --> 00:19:45,480 Speaker 8: So look, you know, it looks like there is a 382 00:19:46,080 --> 00:19:49,719 Speaker 8: not a restructuring, but an adjustment underway again in that 383 00:19:49,760 --> 00:19:52,480 Speaker 8: budget low cost world. That's going to be less growth 384 00:19:53,080 --> 00:19:55,160 Speaker 8: than you're seeing in the full service the trend we've 385 00:19:55,160 --> 00:19:58,080 Speaker 8: seen here in twenty twenty five. So we're thinking that 386 00:19:58,600 --> 00:20:02,480 Speaker 8: premium seating, full service seating could be a bit excess 387 00:20:02,640 --> 00:20:08,200 Speaker 8: and could see continued push on the unfairs. We're thinking 388 00:20:08,440 --> 00:20:11,919 Speaker 8: budget ought to get a bit better. We were projecting 389 00:20:12,200 --> 00:20:15,480 Speaker 8: kind of a three percent increase in Southwest yields originally 390 00:20:15,480 --> 00:20:18,080 Speaker 8: before the government shut down. Now we're kind of thinking 391 00:20:18,160 --> 00:20:21,240 Speaker 8: two and a half percent. I mean, that's really not 392 00:20:21,440 --> 00:20:24,440 Speaker 8: bad for four Q So again we think that sort 393 00:20:24,480 --> 00:20:26,840 Speaker 8: of carries into the new year. Another big issue in 394 00:20:26,880 --> 00:20:28,800 Speaker 8: the new year is going to be a lot of 395 00:20:28,840 --> 00:20:32,360 Speaker 8: the US airlines got a bit of a kicker, got 396 00:20:32,359 --> 00:20:36,040 Speaker 8: a tailwind from lower fuel prices. We don't see fuel 397 00:20:36,119 --> 00:20:40,360 Speaker 8: prices going much lower from here, so that tailwind sort 398 00:20:40,400 --> 00:20:43,240 Speaker 8: of peels away in the new year, and that's something 399 00:20:43,240 --> 00:20:45,840 Speaker 8: they're going to have to manage as well, even as 400 00:20:45,880 --> 00:20:47,919 Speaker 8: they try to get sort of yields sorted out. We 401 00:20:47,920 --> 00:20:51,040 Speaker 8: don't see yields improving dramatically right now, but we see 402 00:20:51,080 --> 00:20:54,720 Speaker 8: yields probably firming a bit and maybe not falling. As 403 00:20:54,960 --> 00:20:57,120 Speaker 8: you know, following George, you have. 404 00:20:57,040 --> 00:21:00,960 Speaker 5: A broad view between aerospace, defense, airline, and you know, 405 00:21:01,000 --> 00:21:03,200 Speaker 5: as we're kind of wrapping up earning season, if you 406 00:21:03,240 --> 00:21:06,600 Speaker 5: want to call it that, did you hear about tariffs 407 00:21:06,640 --> 00:21:08,919 Speaker 5: at all during this earning season? Are you expecting to 408 00:21:08,960 --> 00:21:10,400 Speaker 5: hear about this in twenty twenty six? 409 00:21:11,720 --> 00:21:15,199 Speaker 8: The truth is tariffs. Really there was a little bit 410 00:21:15,200 --> 00:21:18,320 Speaker 8: of commentary around tariffs. We heard, I think most of 411 00:21:18,320 --> 00:21:22,000 Speaker 8: it from the engine makers, you know, a couple hundred million, 412 00:21:22,040 --> 00:21:24,480 Speaker 8: five hundred million here and there, which really doesn't matter 413 00:21:25,000 --> 00:21:29,000 Speaker 8: a lot on their business. So largely tariffs look to 414 00:21:29,080 --> 00:21:32,040 Speaker 8: have been you know, sort of I don't know if 415 00:21:32,040 --> 00:21:36,640 Speaker 8: they were sidestep but avoided by the aerospace supply chain. 416 00:21:37,240 --> 00:21:39,879 Speaker 8: One of the things about the aerospace supply chain is 417 00:21:39,920 --> 00:21:44,320 Speaker 8: that it definitely bridges the US and Europe, and it's 418 00:21:44,359 --> 00:21:46,920 Speaker 8: definitely sort of a you know, a NAFTA. NAFTA is 419 00:21:46,960 --> 00:21:50,399 Speaker 8: the old word whatever that North American Free Trade Zone is. 420 00:21:51,200 --> 00:21:55,240 Speaker 8: There's a lot of componentry that moves around that those 421 00:21:55,280 --> 00:21:58,480 Speaker 8: two regions, and so it's going to be I think 422 00:21:58,480 --> 00:22:04,720 Speaker 8: in everyone's best interest to keep tariffs off of aerospace, so, 423 00:22:05,480 --> 00:22:07,359 Speaker 8: you know, I think some of that had to play 424 00:22:07,480 --> 00:22:12,200 Speaker 8: obviously with the European agreements. In North America, we've seen 425 00:22:12,240 --> 00:22:14,600 Speaker 8: some give and take, right as Trump got mad at 426 00:22:15,080 --> 00:22:17,359 Speaker 8: at Canada here and there and decided there's going to 427 00:22:17,400 --> 00:22:20,000 Speaker 8: put some terrorfts on them. But again largely it's been 428 00:22:20,200 --> 00:22:23,640 Speaker 8: side step. The biggest problem was I think Brazil and 429 00:22:23,920 --> 00:22:27,160 Speaker 8: late in the you know, late or recently we've seen 430 00:22:27,200 --> 00:22:29,479 Speaker 8: the Canadian issue, but I think it's going to go. 431 00:22:29,640 --> 00:22:31,280 Speaker 8: I don't think it's going to be big issue. 432 00:22:31,800 --> 00:22:36,480 Speaker 1: This is the Bloomberg Intelligence Podcast, available on Apple, Spotify, 433 00:22:36,680 --> 00:22:40,160 Speaker 1: and anywhere else you get your podcasts. Listen live each 434 00:22:40,160 --> 00:22:43,920 Speaker 1: weekday ten am to noon Eastern on Bloomberg dot com, 435 00:22:44,040 --> 00:22:47,600 Speaker 1: the iHeartRadio app, tune In, and the Bloomberg Business app. 436 00:22:48,000 --> 00:22:50,920 Speaker 1: You can also watch us live every weekday on YouTube 437 00:22:51,320 --> 00:22:53,560 Speaker 1: and always on the Bloomberg terminal