WEBVTT - Surveillance: Merger Monday Special on AT&T and Time Warner 0:00:00.040 --> 0:00:02.640 Who you put your trust in matters. Investors have put 0:00:02.680 --> 0:00:07.040 their trust and independent registered investment advisors to the two 0:00:07.040 --> 0:00:10.680 and four trillion dollars. Why learn more at find your 0:00:10.760 --> 0:00:26.400 Independent Advisor dot com. Welcome to the Bloomberg Surveillance Podcast. 0:00:26.840 --> 0:00:30.520 I'm Tom Keene with David Gura. Daily we bring you 0:00:30.600 --> 0:00:35.600 insight from the best in economics, finance, investment, and international relations. 0:00:36.040 --> 0:00:40.600 Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot com, and 0:00:40.680 --> 0:00:49.720 of course on the Bloomberg Justin Craig mof At, Michael 0:00:49.800 --> 0:00:54.040 Nathanson their substantial report on this transaction, and worth shrilled 0:00:54.080 --> 0:00:57.360 to bring you Scott Galloway from New York University and 0:00:57.440 --> 0:01:00.160 Stern School with thoughts in the Scott, You and I 0:01:00.200 --> 0:01:04.080 talked this morning, particularly with Brian Weezer, about cost synergies 0:01:04.160 --> 0:01:07.680 Moffat and Nathanson degree. You can also dismiss the notion 0:01:07.720 --> 0:01:11.240 of cost synergies. But where they go before that is 0:01:11.280 --> 0:01:15.880 this idea of net neutrality that if you vertically integrate, 0:01:16.280 --> 0:01:20.160 you've got to offer everything that everybody outside the company 0:01:20.240 --> 0:01:23.119 as well. Right, Sure, but there might be some ways 0:01:23.160 --> 0:01:26.400 about that. You might have faster download, you might have enhancements. 0:01:26.440 --> 0:01:32.199 You might have previews, special special opportunities to get Game 0:01:32.240 --> 0:01:34.920 of Thrones the night before it comes out if you're 0:01:34.959 --> 0:01:36.840 an a T and T subscriber. I think there's all 0:01:36.920 --> 0:01:40.120 kinds of ways they can play. I mean, HBO now 0:01:40.360 --> 0:01:43.319 is working in the point of Game of Thrones, but 0:01:43.480 --> 0:01:45.959 it's not a big count. There's not a lot of 0:01:46.240 --> 0:01:51.920 mass there is there versus say the huge platform of CNN. Well, 0:01:52.880 --> 0:01:55.280 it depends. I see a lot of people seeing their 0:01:55.320 --> 0:01:59.440 parents HBO go um passwords and watching it on this 0:01:59.640 --> 0:02:02.480 way range. So I think Game of Thrones has probably 0:02:02.560 --> 0:02:05.200 got more mass, and if you look at the impact 0:02:05.200 --> 0:02:07.600 it's having versus kind of people just sort of numb 0:02:07.720 --> 0:02:10.880 and sort of sleepwalking through their day with and on 0:02:11.000 --> 0:02:13.640 in the background. I think Game of Thrones is, you know, 0:02:13.760 --> 0:02:16.920 some of the content they have is not only fantastic content, 0:02:17.000 --> 0:02:19.400 but will continue to have pricing power such that these 0:02:19.400 --> 0:02:23.480 people can exit this awful ecosystem called advertising and well, 0:02:23.600 --> 0:02:26.239 and and that's where we went with Scott earlier David 0:02:26.240 --> 0:02:30.720 gurd this idea of advertising or no ads. Yeah, hearing that, 0:02:31.200 --> 0:02:33.239 you gotta think that's bad news for Verizon, which is 0:02:33.280 --> 0:02:35.560 pursuing a strategy that is fully focused on ads, right. 0:02:36.360 --> 0:02:39.640 I generally believe that the advertising ecosystem. I think in America, 0:02:39.720 --> 0:02:41.560 just like we become numb to mass shootings, we become 0:02:41.600 --> 0:02:45.640 numb to how bad advertising is. The the constant reload 0:02:45.800 --> 0:02:49.800 on website pages with this these banner ads that are irrelevant. 0:02:50.800 --> 0:02:53.200 Look at look at the television ads. If you read 0:02:53.440 --> 0:02:55.920 if you think that TV is out is targeting you, 0:02:56.040 --> 0:02:58.000 that means really in the market for a South Korean car, 0:02:58.080 --> 0:03:00.280 a light beer, and that you're bipolar and have cis 0:03:00.320 --> 0:03:04.080 leg syndrome. There's absolutely no targeting taking place in TV. 0:03:04.639 --> 0:03:07.079 We have seen the end of I think we're at 0:03:07.080 --> 0:03:10.120 peak advertising and people are going to opt out using 0:03:10.160 --> 0:03:12.560 technology to say I'll pay fifty cents to opt out 0:03:12.560 --> 0:03:16.359 of advertising. And when was the ball dropped on that? Gosh, 0:03:16.360 --> 0:03:18.480 that's that's an interesting point. I don't know what the 0:03:19.240 --> 0:03:20.839 folk rum was. But at the end of the day, 0:03:20.880 --> 0:03:23.359 what where you have is now the technology will give 0:03:23.360 --> 0:03:26.800 people the opportunity to opt out and digest the business 0:03:26.800 --> 0:03:28.959 inside of for an entire year for five cents. Do 0:03:28.960 --> 0:03:31.440 you know how much New York Times gets for littering 0:03:31.520 --> 0:03:35.120 your newspaper with ads an entire year? They can monetize 0:03:35.160 --> 0:03:37.160 you to the extent of two dollars and sixty four 0:03:37.200 --> 0:03:39.280 cents a year. So if they make it easy for 0:03:39.320 --> 0:03:41.640 you to pay another two dollars and seventy cents for 0:03:41.720 --> 0:03:43.760 no ads, I think people are gonna start opting out. 0:03:44.400 --> 0:03:45.960 There was a note from John Martin the head of 0:03:46.040 --> 0:03:48.880 Turning to his staff I saw excerpted this morning, saying, 0:03:48.880 --> 0:03:50.880 you know, I can't do anything, of course until the 0:03:50.920 --> 0:03:53.600 deal goes through, but start thinking about what you could 0:03:53.600 --> 0:03:56.760 do with HUD thirty million mobile subscribers, sixty million broadband subscribers, 0:03:56.760 --> 0:03:59.760 and twenty five million video subscriberies. Bearing that in mind, 0:03:59.800 --> 0:04:01.960 what what is the what is available to this company 0:04:02.000 --> 0:04:03.840 if the deal goes through? What what does change in 0:04:03.960 --> 0:04:07.000 terms of how they approach the media space? Well, the 0:04:07.080 --> 0:04:10.640 idea of just having on demand and live TV on 0:04:10.680 --> 0:04:12.800 an app where you just you just it's just your 0:04:12.800 --> 0:04:14.800 finger on it and then boom, it's playing, and we 0:04:14.840 --> 0:04:17.359 don't quite have that yet. This Some of the stuff 0:04:17.440 --> 0:04:20.560 is pretty cumbersome. It does take some time to figure 0:04:20.560 --> 0:04:22.760 it out. I love HBoL, love Game of throunds. I 0:04:22.800 --> 0:04:25.320 have not figured out their pay service on my iPad. 0:04:25.320 --> 0:04:26.520 I don't know if you guys have I just have 0:04:26.640 --> 0:04:29.960 to figured it out. And I think there's more of 0:04:30.040 --> 0:04:32.159 us out there than people would like to admit. So 0:04:32.279 --> 0:04:36.320 the the kind of on demand easy. Not only not 0:04:36.400 --> 0:04:38.120 only on demand over the top, but one of the 0:04:38.120 --> 0:04:40.040 bets A. T and T is making with their direct 0:04:40.400 --> 0:04:43.160 TV now is that they noticed six of the consumption 0:04:43.160 --> 0:04:46.200 of video on their network was live TV. I'm seeing 0:04:46.240 --> 0:04:48.880 the headlines come out of c NBC in conversation with 0:04:48.960 --> 0:04:50.719 a head of of A T and T on this 0:04:50.920 --> 0:04:54.279 right now. It's eerie to me. Scott Galloway how the 0:04:54.279 --> 0:04:57.120 headlines are the same as every other merger in particularly 0:04:57.120 --> 0:04:59.799 Time Warner a O L from another time in place 0:05:00.000 --> 0:05:02.240 and I get the idea of CEOs are supposed to 0:05:02.240 --> 0:05:05.680 talk their book. That's all I see here this morning. 0:05:06.040 --> 0:05:10.480 How do you translate the actions of these CEOs as 0:05:10.480 --> 0:05:14.560 they move forward with this trans this transaction. Well, one 0:05:14.560 --> 0:05:16.480 of these guys is hoping it's a good deal. One 0:05:16.520 --> 0:05:20.839 of them knows it's a great deal. Jeffrey Jucos. Jeffrey Jucos, 0:05:21.400 --> 0:05:22.840 It's like, I don't know if this is the best 0:05:22.880 --> 0:05:25.680 time to sell a condo and Manhattan are the best 0:05:25.680 --> 0:05:27.440 time to sell time owner, but you know it's a 0:05:27.480 --> 0:05:30.960 good time. The cable isn't structural decline, and they are 0:05:30.960 --> 0:05:34.880 taking some outstanding cable assets but nonetheless instructural decline and 0:05:35.120 --> 0:05:37.960 selling them. He may be ringing the bell at the 0:05:38.080 --> 0:05:40.520 high here. I think this is you. This is what 0:05:40.600 --> 0:05:42.920 you want from a CEO on a board, if you're 0:05:42.920 --> 0:05:45.240 a shareholder, you want them to time and sell at 0:05:45.279 --> 0:05:47.520 the top. I led with my first line, Scott Galloway, 0:05:47.600 --> 0:05:50.880 thank you so much in with New York University, and 0:05:50.920 --> 0:05:54.000 just thank you again for your important perspective and will 0:05:54.040 --> 0:06:07.560 get you yo in the Verizon. Trenwick. This is Bloomberg 0:06:07.560 --> 0:06:10.200 Surveillance on Bloomberg. Rerady. I'm David Garrow with Tom Keane 0:06:10.400 --> 0:06:13.960 digging into that billion dollar A T and T Time 0:06:14.000 --> 0:06:16.960 Warner deal this morning. It's our pleasure to welcome Craig 0:06:17.000 --> 0:06:19.600 Moffitt to the program, Craig Mofet of Mofet Nathanson, who 0:06:19.600 --> 0:06:22.080 has just published a note as Tom was mentioning on 0:06:22.200 --> 0:06:25.479 the deal. And Craig, let me start with the two 0:06:25.520 --> 0:06:29.080 seas here the rationale for the deal, content and cost savings. 0:06:29.160 --> 0:06:31.320 Let's take the latter one first. Here when you when 0:06:31.320 --> 0:06:32.680 you look at the deal so much as we know 0:06:32.720 --> 0:06:35.400 of it right now, does the cost savings argument makes sense? 0:06:36.200 --> 0:06:42.320 All night morning, David, What what cost savings? Exactly? I'm 0:06:42.360 --> 0:06:45.920 struggling to see the logic for any cost savings. Give 0:06:45.960 --> 0:06:48.880 me you can shut down and investor relations department and 0:06:48.920 --> 0:06:51.480 the cost of listing one of the docks on the exchange. 0:06:51.520 --> 0:06:54.400 But that's about it. There's there's there's not any any 0:06:54.560 --> 0:06:58.720 particular industrial logic to this being cheaper to run because 0:06:58.760 --> 0:07:01.320 you put them under one umbrella when you when you 0:07:01.360 --> 0:07:04.279 look at at atencies hunger for content here? How how 0:07:04.640 --> 0:07:07.520 complementary is this combination? In other words, is this a 0:07:07.560 --> 0:07:09.400 logical fit in that regard as a teen going to 0:07:09.440 --> 0:07:12.200 get the content of once out of Time Warner. Well, 0:07:12.880 --> 0:07:15.120 here's the way I would think about it. Um. You know, 0:07:15.320 --> 0:07:18.720 there's a lot of things you could do with vertical integration. 0:07:19.080 --> 0:07:22.320 Um you could A lot of people this morning are 0:07:22.320 --> 0:07:25.400 talking about the theory at least of could you keep 0:07:25.560 --> 0:07:29.520 HBO or some of the Time Warner properties proprietary to 0:07:29.600 --> 0:07:32.680 one of the A, T and T distribution platforms. That's 0:07:32.720 --> 0:07:35.400 not going to be allowed that It's not clear that 0:07:35.440 --> 0:07:39.320 would economically make sense anyway, but it will clearly be prohibited, 0:07:39.360 --> 0:07:42.000 so you won't be able to advantage your distribution because 0:07:42.000 --> 0:07:46.120 you own content. At the same time, Net neutrality and 0:07:46.120 --> 0:07:48.960 and rules around so called zero rating or trying to 0:07:49.040 --> 0:07:53.720 exempt time warner content from usage caps and that sort 0:07:53.760 --> 0:07:58.280 of thing will also be prohibited. So it's almost impossible 0:07:58.320 --> 0:08:02.120 to differentiate your distribution because you own content, and it's 0:08:02.120 --> 0:08:05.680 almost impossible to differentiate your content because you own distribution. 0:08:06.160 --> 0:08:09.720 So you end up with two companies that operate side 0:08:09.720 --> 0:08:14.520 by side, and I suppose they're vertically integrated in concept 0:08:14.560 --> 0:08:16.800 because they're both owned by the same entity, But there's 0:08:16.800 --> 0:08:20.040 no real vertical integration in any meaningful business sense here. 0:08:20.080 --> 0:08:25.000 It's it's really diversification rather than strategy. What's the regulatory 0:08:25.080 --> 0:08:27.600 hurdle going to be here this gets kicked down to Washington. 0:08:27.680 --> 0:08:29.520 Is that a given that the FEC takes it up? 0:08:29.560 --> 0:08:32.920 And how high hurdle is that going to be? Well, 0:08:32.960 --> 0:08:34.760 it's a given that the d o J will take 0:08:34.800 --> 0:08:36.880 it up. There's a lot of question right now about 0:08:36.920 --> 0:08:41.280 whether or not the SEC actually has any jurisdiction here. Um, 0:08:41.440 --> 0:08:46.320 the SEC's authority to review deals arises from licenses, and 0:08:46.600 --> 0:08:51.880 there's a single broadcast station in Atlanta that that Time 0:08:51.880 --> 0:08:54.920 owner owns that. I'm guessing they will rapidly try to 0:08:55.360 --> 0:08:58.400 divest if they can avoid STEC reviews. Are a handful 0:08:58.440 --> 0:09:02.760 of satellite uplink licensees, but there's nothing really material in 0:09:02.920 --> 0:09:06.840 Time Warner that that revolves around licenses. So there's still 0:09:06.880 --> 0:09:09.680 some ambiguity about whether the STC will actually get to 0:09:09.679 --> 0:09:12.160 get its claws into the steel at all. Anyway, the 0:09:12.240 --> 0:09:14.120 d J is going to be a tough hurdle. That's 0:09:14.160 --> 0:09:17.800 a rule of law tests. Um, this is a they're 0:09:17.880 --> 0:09:21.320 they're outstaying. There's no parrizonal issues, and that's true, but 0:09:21.400 --> 0:09:24.120 the vertical issues are really profound. And you've seen an 0:09:24.200 --> 0:09:28.240 already a tremendous amount of political blowback uh, not only 0:09:28.480 --> 0:09:34.520 from uh kind of Trump um and uh and but 0:09:34.720 --> 0:09:37.920 but from across both sides of the aisle. And there's 0:09:37.960 --> 0:09:40.600 gonna be a tremendous amount of scrutiny. I don't think 0:09:40.640 --> 0:09:43.800 you can give this deal better than fifty fifty odds 0:09:43.840 --> 0:09:45.560 being approved. I know Tom wants to get in here, 0:09:45.559 --> 0:09:47.600 but let me ask you quickly how useful the comparison 0:09:47.640 --> 0:09:49.640 to the Comcast deal is. When when you're looking at 0:09:49.640 --> 0:09:54.160 this one, well, it's useful in some ways. Um, you know, 0:09:54.240 --> 0:09:56.840 I happen to think that the Comcast deal also was 0:09:57.000 --> 0:10:00.480 largely diversification, and that Comcast really hasn't on all that 0:10:00.600 --> 0:10:05.080 much Tom to differentiate what it does in either content 0:10:05.160 --> 0:10:08.560 or distribution, but virtual owning the other. So in suset 0:10:08.640 --> 0:10:11.440 you can think of them both as diversification deals. The 0:10:11.520 --> 0:10:14.800 difference is Comcast brought NBC at the bottom of the 0:10:14.880 --> 0:10:17.439 cycle and they bought it for less than nine times EBITDA. 0:10:18.040 --> 0:10:19.880 A T and T is buying time or at the 0:10:19.920 --> 0:10:21.800 top of the cycle, and they're buying it a twelve 0:10:21.800 --> 0:10:25.240 times VODA. So if diversification is all about what price 0:10:25.360 --> 0:10:29.240 you paid, Comcast paid a much much more attractive price 0:10:29.280 --> 0:10:32.240 than A T and T. Craig, There's so much to 0:10:32.280 --> 0:10:34.200 talk about. You and I could go for three hours 0:10:34.200 --> 0:10:36.319 this morning. I've got a minute and a half with you. 0:10:36.840 --> 0:10:40.640 I lead my show open this morning with the word desperation. 0:10:41.240 --> 0:10:44.319 You nailed that in your research report of moments ago 0:10:45.040 --> 0:10:48.480 to say that A T and T had to do something. 0:10:49.200 --> 0:10:52.480 All my radar is up on that Moffatt Nathanson headline. 0:10:53.080 --> 0:10:56.600 I mean that never ends pretty, doesn't No, you know, 0:10:56.679 --> 0:10:59.520 it's it's fun. I mean, they've they've gotten bigger and bigger. 0:10:59.600 --> 0:11:01.880 And the problem that you get into in these kinds 0:11:01.880 --> 0:11:06.120 of situations that look, they did direct TV a year 0:11:06.120 --> 0:11:09.400 and a half ago because they had to do something 0:11:09.440 --> 0:11:12.040 that would help them support the dividend um, and so 0:11:12.080 --> 0:11:14.720 they bought a company that generated a lot of cash flow. 0:11:15.120 --> 0:11:18.600 But direct TV is in a precarious position of being 0:11:18.679 --> 0:11:21.240 potentially a declining event and they're already starting to lose 0:11:21.240 --> 0:11:24.920 subscribers and pay TV. You've already got a shrinking wireless 0:11:24.960 --> 0:11:28.200 business and a shrinking wire line business. Now you're buying 0:11:28.320 --> 0:11:31.520 yet another business to try to support the cash flow 0:11:31.559 --> 0:11:33.520 because direct TV doesn't look like you can do it 0:11:33.520 --> 0:11:35.280 for long. But all you get is a bigger and 0:11:35.320 --> 0:11:38.240 bigger and bigger balance sheet along the way. And eventually, 0:11:38.600 --> 0:11:41.600 as you say, it tends to end badly. Do you 0:11:41.960 --> 0:11:44.880 very quickly? Or do you and Michael actually believe the 0:11:44.920 --> 0:11:48.800 advertising business as we know it will continue to be 0:11:48.880 --> 0:11:52.280 the cash flow that will support this transaction, or as 0:11:52.320 --> 0:11:55.400 Scott Galloway just said, the real news is that it 0:11:55.480 --> 0:11:59.480 will be a no ad world the next number of years. Well, 0:11:59.720 --> 0:12:03.360 they're certainly an awful lot of questions about advertising, and 0:12:04.160 --> 0:12:07.520 you know that there's a fundamental theoretical question that you 0:12:07.520 --> 0:12:11.160 and I could talk about forever about does targeting actually 0:12:11.280 --> 0:12:14.520 lead to higher CPM. There's the price of advertising cost 0:12:14.559 --> 0:12:19.560 for thousand people reached. Does does better targeting actually gilds 0:12:19.600 --> 0:12:22.960 higher CPMs? Theory says it should because it's better targeted 0:12:23.040 --> 0:12:26.200 left face or does it lead to lower CPMs, which 0:12:26.240 --> 0:12:30.240 history says happens every time because as targeting gets better, 0:12:30.840 --> 0:12:35.640 the opportunity for arbitrage between advertisers get better, and historically 0:12:35.720 --> 0:12:38.720 that has won out. So there's lots of questions about 0:12:38.760 --> 0:12:41.839 the future of the advertising correct. Thank you so much 0:12:41.880 --> 0:12:45.400 from your busy day, Craig Moffatt with Moffatt Nathanson, we continue. 0:12:45.559 --> 0:12:51.960 This is Bloomer who you put your trust in matters. 0:12:52.080 --> 0:12:56.960 Investors have put their trust in independent registered investment advisors 0:12:57.040 --> 0:13:00.000 to the tune of four trillion dollars. Why they see 0:13:00.080 --> 0:13:03.520 their roles to serve, not sell. That's why Charles Schwab 0:13:03.679 --> 0:13:08.160 is committed to the success over seven thousand independent financial 0:13:08.200 --> 0:13:13.959 advisors who passionately dedicate themselves to helping people achieve their 0:13:14.000 --> 0:13:25.920 financial goals. Learn more at find your Independent Advisor dot com. 0:13:26.000 --> 0:13:29.320 We've of course been looking at the transaction of a 0:13:29.400 --> 0:13:34.120 T and T and Time Warner. They will sign contracts 0:13:34.720 --> 0:13:38.640 many I assume, not only to retain personnel, but actually 0:13:38.679 --> 0:13:42.440 to get this transaction done. They will do it within 0:13:42.480 --> 0:13:46.760 a principle and agency basis. Gentleman has just won the 0:13:46.760 --> 0:13:50.960 Nobel Prize in Economics for thinking about contract theory. We 0:13:51.040 --> 0:13:53.719 spoke with benk Olstrom of M I T a few 0:13:53.800 --> 0:13:56.120 days ago and now joining us a laureate from Harvard 0:13:56.679 --> 0:14:02.080 Oliver Heart Professor Hart. Good morning, good morning, congratulations in 0:14:02.280 --> 0:14:06.680 on thinking of contracts in theory. If you were to 0:14:06.800 --> 0:14:10.680 speak this morning to a T and T executives about 0:14:10.720 --> 0:14:15.880 this strange principal agency relationship, what would a Nobel Prize 0:14:15.920 --> 0:14:21.680 winners council be to the management of a T and T. Well, 0:14:21.720 --> 0:14:26.760 that's besides lower your cable TV bill. Well, that's a 0:14:26.960 --> 0:14:30.360 that's a difficult question because it's a very complicated transaction, 0:14:30.400 --> 0:14:34.200 and I wouldn't presume to give them advice without knowing 0:14:34.240 --> 0:14:36.520 a great deal more about the transaction. And it's two 0:14:36.600 --> 0:14:40.680 very large companies, and there are there are many, many, 0:14:40.720 --> 0:14:44.600 many things going on. I suppose I would probably more 0:14:44.720 --> 0:14:47.560 ask them questions such as why why are you doing it? 0:14:47.760 --> 0:14:51.840 What are the efficiency gains from this deal? You know, 0:14:51.960 --> 0:14:55.760 a lot of people are worried about it because they think, um, 0:14:55.800 --> 0:14:57.920 it's going to lead to higher prices, that it's really 0:14:58.000 --> 0:15:04.480 an attempt to increase the monopoly power of the parties 0:15:04.520 --> 0:15:08.320 as opposed to being efficiency enhancing. So I would like 0:15:08.360 --> 0:15:13.880 to know why why they think it will lead to efficiencies? 0:15:13.880 --> 0:15:18.240 What what exactly they are? Could they be achieved by 0:15:18.240 --> 0:15:20.680 in some other way, by some sort of joint venture 0:15:21.520 --> 0:15:25.680 or you know, contract as opposed to a merger. Um, Yeah, 0:15:25.760 --> 0:15:28.280 that's that's that's what I sorry, would be more questions 0:15:28.280 --> 0:15:33.200 than answers for me. I'm curious for someone who isn't 0:15:33.240 --> 0:15:35.800 that familiar with with contract theory, and it's it's still 0:15:36.040 --> 0:15:39.320 a fairly new field here situated for us, and and 0:15:39.320 --> 0:15:41.960 and walk us through the wider applications of it. I 0:15:41.960 --> 0:15:43.880 know you're teaching the economics department, but you teach with 0:15:43.920 --> 0:15:46.320 the business school, and you teach in the law school 0:15:46.400 --> 0:15:49.920 school as well. Just talk about the wider implications of 0:15:49.920 --> 0:15:54.800 the field itself. Well, Um, you know, contracts are everywhere, 0:15:54.800 --> 0:15:59.600 and I think they're everywhere in economics because almost all 0:15:59.720 --> 0:16:03.560 the as that parties make have some sort of contract 0:16:03.680 --> 0:16:07.560 behind them. The most interesting cases are where it's some 0:16:07.600 --> 0:16:12.240 sort of long term economic relationship that parties are getting 0:16:12.240 --> 0:16:17.400 themselves into. And then, you know, a contract is a 0:16:17.440 --> 0:16:21.120 way to regulate that relationship as it goes through as 0:16:21.160 --> 0:16:24.440 it goes through time, instead of having to talk to 0:16:24.560 --> 0:16:26.720 each other, you know, every day about how we should 0:16:27.360 --> 0:16:30.320 you were you know what price I should pay for something? 0:16:30.360 --> 0:16:34.320 You're you're telling me if if we're talking about a 0:16:34.360 --> 0:16:36.960 long term relationship, you know, it could be an electricity 0:16:37.040 --> 0:16:43.080 company that wants to burn coal, so is contracting with 0:16:43.160 --> 0:16:44.960 a coal mine. You know, we might be talking about 0:16:44.960 --> 0:16:48.840 a thirty to fifty year relationship. So they want to 0:16:48.920 --> 0:16:52.920 set out the terms in advance. And I think the 0:16:52.960 --> 0:16:55.120 way economists think of it is the contract is a 0:16:55.200 --> 0:16:59.120 way to maximize the value of the relationship. So it's 0:16:59.320 --> 0:17:03.000 not just some sort of legal constructed has this is 0:17:03.320 --> 0:17:06.400 very important economic value that the parties have an interest 0:17:06.480 --> 0:17:11.800 in arranging their relationship so as to achieve as much 0:17:12.680 --> 0:17:14.800 as possible from it, and that's the contract is a 0:17:14.880 --> 0:17:19.000 way to do that very quickly. Here and Professor Hart, 0:17:20.240 --> 0:17:22.600 I want to make clear that Sandy Grossman is someone 0:17:22.680 --> 0:17:25.280 that I have immense respect for his work with stiglets, 0:17:25.280 --> 0:17:29.159 and obviously Grossman in Heart three as well. What did 0:17:29.240 --> 0:17:32.359 you and Sanford Grossman do there? What was it that 0:17:32.640 --> 0:17:36.840 you found nuanced about how we make contracts each and 0:17:36.920 --> 0:17:40.320 every day? Yes, actually it was it was my I 0:17:40.359 --> 0:17:43.200 did write a paper with Sandy Grossman eight three, but 0:17:43.320 --> 0:17:46.639 the one I actually got the prize, I understand that 0:17:46.760 --> 0:17:51.000 it was six It was eightiesix paper. The innovation there, 0:17:51.080 --> 0:17:55.800 I think it was that we realized that when when 0:17:55.880 --> 0:17:59.280 parties write contracts, and we're talking again the electricity coal 0:18:00.000 --> 0:18:02.720 example is quite a good one, a long term relationship, 0:18:02.840 --> 0:18:05.960 it's very hard to anticipate all the things that are 0:18:05.960 --> 0:18:08.640 going to happen, you know, of a thirty fifty period. 0:18:08.720 --> 0:18:13.720 It's it's absolutely impossible. So any contract will be incompleted, 0:18:13.800 --> 0:18:17.440 will have a lot of stuff missing. And then what 0:18:17.640 --> 0:18:20.439 we realized was that a key question then is who 0:18:20.520 --> 0:18:25.520 gets to decide on the things that are missing? And um, 0:18:25.840 --> 0:18:29.120 what we what we then went on to argue was well, um, 0:18:29.760 --> 0:18:32.600 that's something that can be decided and advanced. In other words, 0:18:33.080 --> 0:18:35.879 while you can't decide or putting the contract, all the 0:18:35.960 --> 0:18:39.720 things that can happen you can decide who's going to decide, 0:18:40.280 --> 0:18:43.800 and one way you can do that is through allocating 0:18:44.680 --> 0:18:49.960 ownership of that. It's all more generally um uh, deciding 0:18:50.000 --> 0:18:53.159 whether two companies should merge or not. That's going to 0:18:53.400 --> 0:18:55.479 so in the case of just to give you an 0:18:55.520 --> 0:18:59.320 example of a T and T by Time Warner, then 0:18:59.800 --> 0:19:02.800 in the future, when some decision has to be made 0:19:03.320 --> 0:19:05.720 concerning Time Warner, a T and T will be able 0:19:05.760 --> 0:19:11.520 to make that decision. We continue with Professor Hart of Harvard, 0:19:12.359 --> 0:19:16.240 who was an acclaimed teacher and educator and has wandered 0:19:16.280 --> 0:19:21.480 into a Nobel prize and contract theory. Professor I interrupted you, 0:19:21.600 --> 0:19:25.600 as only we do on Bloomberg Surveillance. You were my 0:19:25.720 --> 0:19:29.440 answers are too long. No, no, no, they're they're very professorial. 0:19:29.600 --> 0:19:33.720 And also we want tickets to Harvard Yale football. Professor, 0:19:33.880 --> 0:19:38.679 could you please explain, as you were, long term agreements 0:19:39.000 --> 0:19:42.800 and how it folds into, as an example, a major 0:19:42.960 --> 0:19:47.720 media acquisition between a telephone company of ancient vintage in 0:19:47.920 --> 0:19:52.800 Bugs Bunny in Yosemite, Sam, how does that work? Well, 0:19:53.760 --> 0:19:57.720 are we to amount Time Warner and yeah, Well, as 0:19:57.760 --> 0:20:00.200 I say, I I would have to look at the 0:20:00.240 --> 0:20:03.320 details more. But my My point is that what my 0:20:03.440 --> 0:20:07.800 work has been about is how if you acquire a company, 0:20:08.280 --> 0:20:12.960 you also acquire residual control rights, which means the ability 0:20:13.040 --> 0:20:16.760 to make decisions in the company you've acquired that previously 0:20:17.480 --> 0:20:22.040 somebody else was was doing. And this these this transfer 0:20:22.080 --> 0:20:26.359 of decision rights, this is really what characterizes a merger, 0:20:27.840 --> 0:20:32.080 that the decision rights have changed. Once company A buys 0:20:32.119 --> 0:20:36.159 company the company A now has decision rights over what 0:20:36.320 --> 0:20:40.000 company B is doing that previously company B had. And 0:20:40.160 --> 0:20:44.439 it's all it matters because the initial any contract they 0:20:44.480 --> 0:20:50.080 write doesn't can't specify everything. So these residual decision rights matter. Now, 0:20:50.680 --> 0:20:54.840 that's the theory. And then to say why that transfer 0:20:55.000 --> 0:20:58.920 of decision or control rights is important in a particular context, 0:20:59.080 --> 0:21:01.480 like a t in tee in Time Warner, you have 0:21:01.680 --> 0:21:04.800 to get into the weeds there. You know, if they 0:21:04.840 --> 0:21:07.800 want to hire me as a consultant, I'll start thinking 0:21:07.800 --> 0:21:10.680 about it, but it would take a long time. I'd 0:21:10.720 --> 0:21:14.160 really have to roll up my sleeves. You can't. It's yeah. 0:21:14.800 --> 0:21:17.320 I wanted to ask you about performance based pay. There 0:21:17.359 --> 0:21:19.879 has been such a movement over these last few years 0:21:20.600 --> 0:21:24.480 to tie pay more to executive performance, and I wanted 0:21:24.480 --> 0:21:26.600 to agree to, which that's a no brainer. In other words, 0:21:26.880 --> 0:21:28.440 should that be the case all the time when you're 0:21:28.440 --> 0:21:30.680 going through those calculations, one is it we're there not 0:21:30.800 --> 0:21:34.679 to tie paid performance. Well, you are now actually asking 0:21:34.720 --> 0:21:37.440 me about what my colleague, but what my friend and 0:21:37.680 --> 0:21:40.440 co winner begged Homestrom worked on. Actually it's not really 0:21:40.560 --> 0:21:43.639 my thing, but I'm sure he if you asked him 0:21:43.680 --> 0:21:47.359 that question, he would say that paper performance can be 0:21:47.520 --> 0:21:50.440 good in for the obvious reason that it can get 0:21:50.520 --> 0:21:53.240 people to work hard to achieve some goal, but that 0:21:53.480 --> 0:21:57.600 it can also be bad because sometimes you're trying the 0:21:57.720 --> 0:22:00.399 pay to the to the wrong goal, or maybe just 0:22:00.600 --> 0:22:03.240 one of several goals, and it can have a distortionary 0:22:03.680 --> 0:22:06.800 impact as people. You know, people may then start focusing 0:22:06.880 --> 0:22:09.359 on one thing at the expense of a lot of 0:22:09.440 --> 0:22:11.920 other things, and so you have to be careful that. 0:22:12.160 --> 0:22:14.520 That's why, you know, the devil is in the details. 0:22:14.720 --> 0:22:17.280 But I think he's the guy really to to ask 0:22:17.320 --> 0:22:20.439 about that. Fair enough. I mentioned to somebody this week 0:22:20.480 --> 0:22:21.800 and I was going to be speaking with you, and 0:22:22.320 --> 0:22:24.880 uh she she wanted me to ask you if if 0:22:24.920 --> 0:22:27.600 you're a Bob Dylan fan, as a matter of joking, 0:22:27.680 --> 0:22:29.600 But wonder to what you what you plan to talk 0:22:29.600 --> 0:22:32.280 about in the lecture that you'll be giving in December. 0:22:33.320 --> 0:22:37.000 Oh well, am I Bob Dylan. Actually, I think members 0:22:37.040 --> 0:22:39.520 of my family are probably bigger fans than I am 0:22:39.680 --> 0:22:42.240 the U. I have to say, you know, it would 0:22:42.240 --> 0:22:44.560 be nice if he shows up. I will not be devon. 0:22:46.600 --> 0:22:48.560 I'm still going to go. I'm going to go and 0:22:48.640 --> 0:22:52.840 get my pride um taking guitar. Go practice it, pest seems, 0:22:53.160 --> 0:22:55.840 Go practice it, pest seems up the street from Harvard, 0:22:56.240 --> 0:22:57.680 you know, for a couple of months, and you'll be 0:22:57.800 --> 0:22:59.560 fine when you get the stock home with your guitar 0:22:59.640 --> 0:23:02.399 and him, Professor, we've got one minute left. I'm sorry 0:23:02.440 --> 0:23:06.119 for that. The most honorable thing within your resume and 0:23:06.240 --> 0:23:10.560 your biography is you'r the chairman of hurting Cats for 0:23:10.720 --> 0:23:15.000 Harvard Economics for three years two thousands to two thousand three. 0:23:15.320 --> 0:23:19.119 How did your contract theory work play out? Is you 0:23:19.200 --> 0:23:24.359 had to manage the egos of Harvard Economics. It was 0:23:24.440 --> 0:23:29.959 fantastically helpful. Actually, interestingly enough, because I'm not a natural 0:23:30.760 --> 0:23:34.520 administrator at all, and so um I actually found it 0:23:34.560 --> 0:23:37.320