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Paul Sweeney on Amazon's New Delivery Service · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm Pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Abramowitz. Each day we
• 0:11
  Speaker 1: bring you the most important, noteworthy, and useful interviews for
• 0:15
  Speaker 1: you and your money, whether you're at the grocery store
• 0:17
  Speaker 1: or the trading floor. Find the Bloomberg p m L
• 0:20
  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Well,
• 0:32
  Speaker 1: Amazon wants the jet smarter, actually wants to jet smarter
• 0:35
  Speaker 1: and deliver your package is more quickly. Here to tell
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  Speaker 1: us about Amazon's foray into the world of delivery directly
• 0:42
  Speaker 1: to the customer is our own Paul Sweeney. He is
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  Speaker 1: the director of Research North America for Bloomberg Intelligence. And Paul,
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  Speaker 1: does this mean that you can't get your brown boxes
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  Speaker 1: fast enough that Amazon has to go out and have
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  Speaker 1: its own planes deliver them directly to you? Yeah? It
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  Speaker 1: certainly is, particularly around the holiday time when you know
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  Speaker 1: they really their system really spaces capacity issues. So this
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  Speaker 1: is just another example of um, you know, Amazon trying
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  Speaker 1: to get more control over the logistics of its business,
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  Speaker 1: uh in the delivery of its products, you know, trying
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  Speaker 1: to get more products to consumers faster. So we see
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  Speaker 1: them make significant investments in their distribution centers, their fulfillment centers,
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  Speaker 1: and they're even getting into the transportation business, uh, you know,
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  Speaker 1: potentially with trucks. They've actually leased a lot of planes
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  Speaker 1: to compete with FedEx and ups and even cargo ships.
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  Speaker 1: So Jeff Bezos is putting his money where his mouth is. Well,
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  Speaker 1: can they really create a much more efficient system of
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  Speaker 1: distribution than the FedEx is of the world, considering how
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  Speaker 1: long they've been in the business and how much reach
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  Speaker 1: they have. No, I don't think so. I think FedEx
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  Speaker 1: and and ups will still be the backbone of the
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  Speaker 1: delivery system of Amazon products. But you know, there's certain
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  Speaker 1: times of the year in certain markets where I think
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  Speaker 1: Amazon feels like they need a little bit more flexibility
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  Speaker 1: than what the existing to distribution platform can provide them,
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  Speaker 1: so to the extent that they can fill in some
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  Speaker 1: of the cracks, um, you know, maybe provide a little
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  Speaker 1: bit more flexibility, particularly during times of peak demand. UM,
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  Speaker 1: whether that's in terms of transportation or warehousing or fulfillment UM.
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  Speaker 1: I think Amazon is just trying to see if they
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  Speaker 1: can supplement what's already in the marketplace. Hey, Paul, wonder
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  Speaker 1: if you could tell people How does it work that
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  Speaker 1: if you're a third party seller through Amazon and you
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  Speaker 1: have Amazon store your products at their warehouse? What happens?
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  Speaker 1: Explain how that relationship works and the connection between this
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  Speaker 1: this initiative. Sure, so the fulfillment by Amazon or fba
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  Speaker 1: is has actually become a huge business for Amazon. More
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  Speaker 1: than half the products that they sell on Amazon dot
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  Speaker 1: com or from third party providers where Amazon does all
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  Speaker 1: the warehousing and distribution of those products. Uh. So you
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  Speaker 1: may be going to l ob dot com, but a
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  Speaker 1: lot of the logistics warehousing uh in this distribution of
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  Speaker 1: the product is actually handled by Amazon for a fee
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  Speaker 1: that gives Amazon a greater ability to to deliver more
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  Speaker 1: products um faster Uh two more consumers. And that's kind
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  Speaker 1: of you know, what has been their value proposition? Paul?
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  Speaker 1: How much more is Amazon spending on shipping now than
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  Speaker 1: say a few years ago as it tries to ramp
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  Speaker 1: up its promises of one hour delivery or one day um,
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  Speaker 1: a lot of money. Um. You know, every single four
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  Speaker 1: we see this company, Yeah, every single quarter was either
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  Speaker 1: company put up popline revenue growth, which is what the
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  Speaker 1: investors are looking for north of um. Yet we see
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  Speaker 1: the expenses for this company grow also North So where
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  Speaker 1: are those investments going. Those investments are going, you know,
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  Speaker 1: like we've seen over the last several years, two more
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  Speaker 1: fulfillment centers, more warehouses, more trucks, more people again to
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  Speaker 1: try to get the products closer to the end of market. Um,
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  Speaker 1: and all that takes a lot of money. And Jeff
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  Speaker 1: Bezos has you know, has the benefit in the mark
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  Speaker 1: place where investments have given them a very long leash
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  Speaker 1: to develop that business at the expensive near term profitability.
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  Speaker 1: So uh, you know, I think we should expect to
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  Speaker 1: see Amazon continue to make these kinds of investments, uh
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  Speaker 1: in their business, um, you know, and you know, hopefully
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  Speaker 1: profits will come down the line. Hey, Paul, I don't
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  Speaker 1: want to be too simplistic about this, but would this
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  Speaker 1: be positive for companies like Boeing and GE companies that
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  Speaker 1: make aircraft? I mean, I remember last year, right, didn't Boeing,
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  Speaker 1: Uh they agreed to operate an air cargo not Boeing,
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  Speaker 1: I beg your pardon, the Air Transport Services Group. They
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  Speaker 1: would did an air cargo deal with Amazon twenty Boeing
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  Speaker 1: seven six seven freighter aircraft. This has gonna be good
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  Speaker 1: for airlines pilots and everybody associated with the aerospace industry
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  Speaker 1: or am I wrong? Uh? You you're right? Um. I
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  Speaker 1: think as more and more product um, more and more
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  Speaker 1: retail sales you know, are done online, that really puts
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  Speaker 1: a lot of stress on the distribution system. You're not
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  Speaker 1: just you know, going to the local mall and buying
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  Speaker 1: your product. You're relying upon a global distribution system to
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  Speaker 1: get it to you. And that includes aircraft. And so,
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  Speaker 1: you know, George Ferguson, who covers the airline industry for US,
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  Speaker 1: has been talking about some of the strength in the
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  Speaker 1: aircraft leasing market as some of the you know, a
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  Speaker 1: positive long term play, uh drive drivative play on the
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  Speaker 1: growth of e commerce. Paul Sweeney, thank you so much
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  Speaker 1: for joining us. We always love speaking with you. Paul
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  Speaker 1: Sweeney is director of North American Research for Bloomberg Intelligence. Well,
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  Speaker 1: the world's business jet fleet continued to grow last year.
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  Speaker 1: In two thousand sixteen, it expanded by about two and
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  Speaker 1: a half percent to more than twenty one thousand aircraft.
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  Speaker 1: And here to tell us about the industry and some
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  Speaker 1: of those twenty one jets is Brad Stewart. He's the
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  Speaker 1: chief executive of exo jet. Brad, thanks for being with us.
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  Speaker 1: Let's jump right in and tell us about the you know,
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  Speaker 1: an exo jet and the aircraft market. Before we get
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  Speaker 1: to the demand side, I want you to tell me
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  Speaker 1: about the supply of jets and what you're seeing in
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  Speaker 1: the industry overall. Well, great to be back with you, Pim. Uh,
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  Speaker 1: you know, these are these are different questions that um,
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  Speaker 1: you know, I think are long term trends that you've
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  Speaker 1: seen really since the global financial crisis. Uh. Planes, as
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  Speaker 1: you said, there's a lot of them. Uh, there's you know,
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  Speaker 1: in my opinion, always been too many the O E MS, Bombardier, uh,
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  Speaker 1: text drawn you know, you name it, continue to manufacture
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  Speaker 1: planes and and that produces this this glut that exists.
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  Speaker 1: What you've seen in the last six to twelve months,
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  Speaker 1: that was a little bit of tightening and what they
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  Speaker 1: call new inventory. So planes that are you know, three
• 6:40
  Speaker 1: to five years since make you're seeing a reduction in
• 6:43
  Speaker 1: the amount of airplanes there for sale. Therefore a little
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  Speaker 1: bit of tightening in the in the price points, and overall,
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  Speaker 1: I think you're seeing a drift towards a healthier supply
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  Speaker 1: demand marketplace. But the long term trend of there being
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  Speaker 1: too many airplanes out there for the level of demand,
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  Speaker 1: both for full airplanes and for charter um continues. Let's
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  Speaker 1: talk about the charter market from the demand side. I'm curious,
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  Speaker 1: have you seen an uptick in wealthier individuals looking to
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  Speaker 1: book private flights or or what sort of the trend
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  Speaker 1: there no doubt and say what you will about you know,
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  Speaker 1: the social impact of the wealthy getting wealthier, but um
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  Speaker 1: as um as we've seen over the last couple of years,
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  Speaker 1: demand for private aviation, the hours flow and the cycle's
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  Speaker 1: phone is up two to three times GDP. So we're
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  Speaker 1: seeing you know, five six seven percent, depending on how
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  Speaker 1: you want to plice the marketplace. But there's no doubt
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  Speaker 1: that consumption of and demand for private aviation is continuing
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  Speaker 1: to grow at at a pretty sustained clip. Right. Can
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  Speaker 1: you give us some sense, can you give some numbers
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  Speaker 1: to this as far as the number of flights on
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  Speaker 1: privately privately chartered UH aircraft or just a number of
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  Speaker 1: people who normally do this. It's it's staggering actually when
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  Speaker 1: when you step back, so we think in terms of hours,
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  Speaker 1: we think that sort of accounts for you know, short
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  Speaker 1: flights versus long flights. Last year, private aviation flew about
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  Speaker 1: three million hours within North America. UM, and we're seeing
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  Speaker 1: that that number up, you know, like I said, five
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  Speaker 1: or six percent year on year. So it's a it's
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  Speaker 1: a massive number at a wide swath of you know,
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  Speaker 1: everything from turbo props at the very low end flying
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  Speaker 1: you know, forty five minute to an hour flight up
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  Speaker 1: to you know, your ultralong range G six fifty Global
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  Speaker 1: Express to so you know, seven X type aircraft. UM.
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  Speaker 1: But but a big market flying a lot of hours,
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  Speaker 1: growing quickly. I was going to ask you which in
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  Speaker 1: more demand, but I guess you're telling me that everything
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  Speaker 1: from turbo prop, you've got the small cabin, mid size,
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  Speaker 1: large cabin, they're all in demand. Well, there's a little
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  Speaker 1: bit of an interesting kind of barbell seam that you're seeing. UM.
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  Speaker 1: And I think the jet smarters of the world, our
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  Speaker 1: partner wheels up at the low end, are driving significant
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  Speaker 1: demand for the for the smaller cabin plane. And then
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  Speaker 1: you're seeing the global fortune hundred, the wealthy, the global
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  Speaker 1: elite really drifting towards this ultra long range large cabin.
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  Speaker 1: So there's a little bit of a barbell in the
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  Speaker 1: growth profile. The smaller planes in the in the much
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  Speaker 1: larger private jets are the ones growing, not at the
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  Speaker 1: expense of but you know, there's there's clearly a difference
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  Speaker 1: between the midsize and super midsize. Yeah, there's there's there's
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  Speaker 1: definitely a difference between the Dessault seven X yeah, and
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  Speaker 1: maybe something else. Um, you know, Brad. One of the
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  Speaker 1: questions it always comes up, I would imagine, is air
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  Speaker 1: traffic control and the f a A and the effort
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  Speaker 1: on behalf of the government perhaps to privatize, uh, the
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  Speaker 1: air traffic control system. What have you heard and what
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  Speaker 1: are you hearing? Yeah, there's a bunch of different themes
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  Speaker 1: that go on within that. You know. The first is
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  Speaker 1: that the technology. So I think most people who follow
• 9:44
  Speaker 1: the industry closely know that there's a there's a real
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  Speaker 1: focus on modernizing the technology. So there's this requirement by
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  Speaker 1: that all planes that are for for charter or higher
• 9:54
  Speaker 1: or on a d s B compliance. Um. So there's
• 9:57
  Speaker 1: the right actions are being taken. Um. Not going to
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  Speaker 1: drift into the politics of whether, um, you know ATC
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  Speaker 1: should be privatized or not. In my opinion, they're doing
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  Speaker 1: a good job they're making the right steps. Is it
• 10:08
  Speaker 1: as quick as we'd all like? Um? You know, I
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  Speaker 1: don't think it really ever is um? But but it's okay.
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  Speaker 1: But Brad, there's a larger question here, which is traffic
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  Speaker 1: in general can be really tough, especially at popular airports.
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  Speaker 1: How do you get around that with chartered flights? Well,
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  Speaker 1: I think this is one of the big benefits of
• 10:25
  Speaker 1: flying private. So um, you know, look at the major
• 10:29
  Speaker 1: markets the Try State and southern California. What you see
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  Speaker 1: is most private aviation flights, the vast majority in fact,
• 10:36
  Speaker 1: or actually going into airports that are not either um
• 10:40
  Speaker 1: commercial at all or certainly not dominated by commercials. So
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  Speaker 1: flying private actually works around that quite a bit. Um.
• 10:47
  Speaker 1: You know. Obviously there's a little bit of a hangover
• 10:48
  Speaker 1: effect when there's congestion at l A X or JFK,
• 10:51
  Speaker 1: but by and large private sort of circumvents that that
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  Speaker 1: sort of pinch point, if you will, Thank you so
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  Speaker 1: much for joining us. Brad's Stewart, chief executive officer of
• 11:02
  Speaker 1: XO Jet talking about chartered aircraft and pim Fox, let
• 11:07
  Speaker 1: me just tell you eight thousand five dollars an hour
• 11:10
  Speaker 1: for some of these of flights or a flight hour,
• 11:13
  Speaker 1: so not cheap. But evidently there are lots of people
• 11:15
  Speaker 1: willing to uh, willing to sell that out. But it
• 11:18
  Speaker 1: comes with pillows, blankets, and I think whatever you'd like
• 11:21
  Speaker 1: to eat. Yeah, I don't think that's the peel. I
• 11:23
  Speaker 1: mean yes, but I think that it's the idea of
• 11:25
  Speaker 1: not having to take your shoes off, and take your
• 11:27
  Speaker 1: jacket off, and and have somebody patch you up and
• 11:29
  Speaker 1: down and then still might be three hours late because
• 11:32
  Speaker 1: of a delay him. You know, there was a report
• 11:47
  Speaker 1: put out by JP Morgan that caught my attention. It
• 11:49
  Speaker 1: was by quantitative and derivative strategist Marco Kolonovic, and he
• 11:54
  Speaker 1: was saying that he is expecting a potential quote great
• 11:58
  Speaker 1: liquidity crisis when the central banks start withdrawing cash from
• 12:02
  Speaker 1: the system, shrinking their balance sheets, possibly as soon as
• 12:06
  Speaker 1: early next year or later this year. This will lead
• 12:09
  Speaker 1: off a substantial crisis in markets. And here to weigh
• 12:14
  Speaker 1: in on that as Bruce Biddles, his chief investment strategist
• 12:17
  Speaker 1: at BAIRED and he joins us from the lovely Sarasota, Florida. Bruce,
• 12:21
  Speaker 1: thank you so much for joining us. Do you agree
• 12:24
  Speaker 1: with this assessment that there is the potential for a
• 12:27
  Speaker 1: quote great liquidity crisis. Well, I'm not so sure I
• 12:31
  Speaker 1: would use the term great, but I certainly could see
• 12:33
  Speaker 1: a liquidity problem um eight or nine years ago when
• 12:38
  Speaker 1: the when the central banks began quantitative using, they were
• 12:41
  Speaker 1: adding liquidity to the system. Now the US and Canada
• 12:45
  Speaker 1: both have withdrawn from that, So now there's a slight
• 12:48
  Speaker 1: tightening there. But if you look at what's going on
• 12:50
  Speaker 1: in Europe and Japan and elsewhere quantitative using, he is
• 12:54
  Speaker 1: still robust and adding liquidity and very large amounts to
• 12:59
  Speaker 1: the system. And a lot of that liquidity that has
• 13:01
  Speaker 1: generated overseas find its way into our markets as well.
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  Speaker 1: So at this point I don't see a problem. Now.
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  Speaker 1: With that said, if the European central banks all of
• 13:11
  Speaker 1: a sudden realize that their economies are surging and inflation
• 13:16
  Speaker 1: is beginning to resurface, and they begin to cut back,
• 13:21
  Speaker 1: then I can see certainly where the markets could be
• 13:23
  Speaker 1: in jeopardy because quantitative easing in zero percent indust rates
• 13:27
  Speaker 1: have been a very very strong support for the market
• 13:30
  Speaker 1: throughout most of this pollmarket. Do you believe, Bruce, that
• 13:34
  Speaker 1: if indeed that accommodation is withdrawn, that corporate earnings are
• 13:38
  Speaker 1: going to more clearly drive asset prices. Well, there's there's
• 13:43
  Speaker 1: no question about that. I think that's almost by necessity
• 13:46
  Speaker 1: giving the evaluations we're seeing in this market, I mean
• 13:49
  Speaker 1: evaluations today or as so as we've seen in oh
• 13:53
  Speaker 1: in two thousand, two thousand and seven. I mean, they're
• 13:56
  Speaker 1: really stretched here. So it's going to be um up
• 13:59
  Speaker 1: to corporate earnings to close that gap. Now. I think
• 14:03
  Speaker 1: that why the markets are acting so so so powerful
• 14:07
  Speaker 1: right here in the past month or so is because
• 14:10
  Speaker 1: the economy is stronger than most economists believe. You can
• 14:14
  Speaker 1: look at the I s M numbers today, the non
• 14:17
  Speaker 1: manufacturing numbers the best is two thousand and four or five.
• 14:21
  Speaker 1: The manufacturing I s M number the best two thousand
• 14:25
  Speaker 1: four or five as well, and um and that's before
• 14:30
  Speaker 1: you get the potential for a tax um cut here,
• 14:33
  Speaker 1: which would spur the economy even further. So the markets
• 14:37
  Speaker 1: are really I would say, depending greatly corporation, you're coming
• 14:41
  Speaker 1: through in the next UM year certainly given these evaluations,
• 14:46
  Speaker 1: and I think given the economy and what we're seeing
• 14:48
  Speaker 1: in terms of inflation now we're starting to see some
• 14:51
  Speaker 1: pickup in pricing pressures. So if if these corporations can
• 14:56
  Speaker 1: can indeed raise prices, and we saw that today with Netflix,
• 15:01
  Speaker 1: if they can indeed raise prices and maintain or increase
• 15:05
  Speaker 1: their top line growth, then you're looking at a very
• 15:09
  Speaker 1: very strong bottom line growth potential. Bruce, are you thinking
• 15:13
  Speaker 1: in line with many others out there that in this
• 15:15
  Speaker 1: environment US stocks? Good bet. Yeah. I've been a proponent
• 15:22
  Speaker 1: of the US market now for quite a while. I
• 15:24
  Speaker 1: know the European markets and some others are out performing
• 15:27
  Speaker 1: this year, but that's been the exception for the past
• 15:31
  Speaker 1: five six years. The US markets have out performed everybody,
• 15:34
  Speaker 1: and I think it at the end of the day
• 15:36
  Speaker 1: that's going to continue. So, Bruce, is the best way
• 15:39
  Speaker 1: to get exposure through a broad index fund of US
• 15:43
  Speaker 1: stocks like SP five hundred, tracker nasdac UH and just
• 15:48
  Speaker 1: go through it that way? Or is this more selective time?
• 15:52
  Speaker 1: I think it's a more selective time. If the market
• 15:56
  Speaker 1: is being driven by um stronger economic growth, then you
• 16:01
  Speaker 1: want to be in those sectors that are that will
• 16:03
  Speaker 1: that will benefit the most, and of course they would
• 16:06
  Speaker 1: be the material sector, the industrial sector, and if interest
• 16:10
  Speaker 1: rates are going to go up, and be in the
• 16:11
  Speaker 1: financials as well. And if you look at the last
• 16:14
  Speaker 1: six months, the leading sectors in the market have been
• 16:18
  Speaker 1: those that are closely tied to the economy. Bruce, you know,
• 16:23
  Speaker 1: I know that you are a veteran of the industry.
• 16:25
  Speaker 1: You worked at J C. Bradford, also at Thomas Haven
• 16:29
  Speaker 1: Bots treating options. In your experience, what advice or guidance
• 16:36
  Speaker 1: would you give people to separate the news, however awful
• 16:40
  Speaker 1: or terrible, or catastrophic or upsetting it might be, from
• 16:43
  Speaker 1: what actually drives asset values. Well, UM, money is a
• 16:49
  Speaker 1: lifeblood of Wall Street, and that's what eventually drives the markets.
• 16:52
  Speaker 1: It's a supplied demand situation, the same it would be
• 16:55
  Speaker 1: in business and UM with all little liquidity that the
• 16:59
  Speaker 1: Central Bank have added over the years, UM certainly there's
• 17:02
  Speaker 1: been a lot of demand side build up and also
• 17:07
  Speaker 1: a lot of domain has come from corporate buy backs
• 17:09
  Speaker 1: the last five or six seven years. And if the
• 17:13
  Speaker 1: tech proposal is going to get to go through this
• 17:15
  Speaker 1: year or early next year, and we're going to bring
• 17:18
  Speaker 1: back two or two and a half trillion dollars, some
• 17:21
  Speaker 1: of that money is going to find its way into
• 17:22
  Speaker 1: buy backs again. So with that in mind, I think
• 17:26
  Speaker 1: you maintain your asset allocation where it is despite these
• 17:30
  Speaker 1: high valuations. So Bruce, when you come into the office
• 17:33
  Speaker 1: every day in a period like this, we're seeing such
• 17:36
  Speaker 1: low volatility and such low movements, small movements in markets broadly.
• 17:42
  Speaker 1: What are the first five things you look at? Well,
• 17:46
  Speaker 1: two things I think the most important for the market.
• 17:51
  Speaker 1: One on a particularly short term basis, and that is
• 17:54
  Speaker 1: the markets typically don't get into trouble unless investors become
• 17:58
  Speaker 1: extremely optimate stick and um. In this ball market since
• 18:03
  Speaker 1: two thousand and nine, I mean, optimism has come in
• 18:07
  Speaker 1: from time to time, but it's never been widespread or
• 18:10
  Speaker 1: deep deeply seated. As soon as the market pulls back
• 18:13
  Speaker 1: for a couple of days, all of a sudden, sentiment
• 18:16
  Speaker 1: returns to uh. There's skepticism around right pessimism. What I'm
• 18:21
  Speaker 1: looking for here is if we're going to see a
• 18:23
  Speaker 1: top in the market anytime soon, and a lot of
• 18:26
  Speaker 1: folks are pointing to two thousand and eighteen, is being
• 18:29
  Speaker 1: um potentially problematic. We look for either sentiment to become
• 18:34
  Speaker 1: excessively bullish or to interest rates the rise significantly. And
• 18:40
  Speaker 1: and so those are the two things I'm watching, particularly
• 18:44
  Speaker 1: rates now because for the first time we're starting to
• 18:47
  Speaker 1: see some pricing pressures. The bond market is starting to
• 18:50
  Speaker 1: react to that a little bit. But I think if
• 18:53
  Speaker 1: the ten uere yield got above three percent, I think
• 18:55
  Speaker 1: that would be a big negative for the markets. Above
• 18:59
  Speaker 1: three above three sent yes, No, And you do believe
• 19:02
  Speaker 1: that the markets already priced in this tax reform or
• 19:05
  Speaker 1: tax cut because it continues to go up every day.
• 19:09
  Speaker 1: So I mean it's getting priced in, and probably when
• 19:13
  Speaker 1: it when it's finally passed, it will be fully priced in.
• 19:16
  Speaker 1: And I wouldn't be surprised if the markets reacted negatively.
• 19:19
  Speaker 1: Then all right, I want to thank you very much
• 19:21
  Speaker 1: for joining us. Bruce Biddles is the chief investment strategist
• 19:25
  Speaker 1: for Bear. Right now, I want to turn our attention
• 19:39
  Speaker 1: to Facebook. There have been a lot of pretty scathing
• 19:42
  Speaker 1: comments made about the company by congressmen and others, particularly
• 19:47
  Speaker 1: about its lack of regulating some of the Russia linked
• 19:51
  Speaker 1: advertisements that targeted a wide variety of different people leading
• 19:57
  Speaker 1: up to the October US November you a selection. I
• 20:00
  Speaker 1: want to bring a David Garritty, CEO of g v
• 20:03
  Speaker 1: A Research, to talk about what the implications are for
• 20:06
  Speaker 1: Facebook going forward if they are regulated more tightly. This
• 20:10
  Speaker 1: is going to be really expensive, won't it. Well. Certainly,
• 20:14
  Speaker 1: Facebook as a company has tried to focus on having
• 20:16
  Speaker 1: a very lean model, very much depending upon software algorithms
• 20:21
  Speaker 1: in terms of managing its platform, and what's being called
• 20:24
  Speaker 1: for here is for Facebook really to put in place
• 20:27
  Speaker 1: more of a human element so as to effectively review
• 20:30
  Speaker 1: and curate content that's actually going on to its site.
• 20:34
  Speaker 1: So from that standpoint, the human costs of running this
• 20:37
  Speaker 1: business arguably are going to be going up. Certainly, they
• 20:40
  Speaker 1: don't necessarily process information as fast as Facebook might like,
• 20:44
  Speaker 1: so it might slow things down from the standpoint of
• 20:47
  Speaker 1: a user experience. But relative to the issue of interference
• 20:50
  Speaker 1: in political campaigns, I mean, this is a necessary step. Well, David,
• 20:54
  Speaker 1: you think it's going to be successful, Uh, that remains
• 20:58
  Speaker 1: to be seen. I think that we're in a situation
• 21:00
  Speaker 1: here where, you know, Facebook obviously has grown to be
• 21:02
  Speaker 1: a platform where you've got two billion average monthly users
• 21:06
  Speaker 1: on it um. You know, is this a platform that's
• 21:08
  Speaker 1: potentially grown out of the ability of management to control
• 21:11
  Speaker 1: it um, you know, away from issues of just you know,
• 21:15
  Speaker 1: bringing more people on board to review and control. I mean,
• 21:18
  Speaker 1: that doesn't seem realistic, does it? I mean, come on,
• 21:20
  Speaker 1: you're gonna get human beings to review all the stuff
• 21:22
  Speaker 1: that's on the Internet, because it's not just Facebook, you
• 21:25
  Speaker 1: know that, it's also Google, it's any social media site.
• 21:28
  Speaker 1: Because once they start to aggregate the information, it's incredibly
• 21:31
  Speaker 1: difficult to figure out where it goes, and no one
• 21:34
  Speaker 1: is able to even figure out whether the information is
• 21:36
  Speaker 1: accurate or not. Well, I mean, certainly that's you know,
• 21:39
  Speaker 1: these are all very legitimate points, and the question is,
• 21:41
  Speaker 1: you know, can we develop technology tools to assist these
• 21:44
  Speaker 1: people to essentially move along and have greater accuracy at
• 21:48
  Speaker 1: a faster rate of speed. There are other issues to
• 21:50
  Speaker 1: look at for Facebook away from just the issue of
• 21:53
  Speaker 1: the election interference in the Senate and House Intelligence Committee activities.
• 21:58
  Speaker 1: We've also had movement taking place in Congress with regards
• 22:02
  Speaker 1: to prosecution for sex crimes or providing information to support
• 22:06
  Speaker 1: sex trafficking. There is a movement in Congress to allow
• 22:09
  Speaker 1: a law wherein state attorney generals and district attorneys would
• 22:12
  Speaker 1: have the ability to sue Facebook as well as other
• 22:15
  Speaker 1: Internet companies, other social media companies. Obviously, this is something
• 22:19
  Speaker 1: that raises a significant litigation risk for the company. So
• 22:22
  Speaker 1: we're not only looking here at an issue where we
• 22:25
  Speaker 1: need to put more human elements in place, but some
• 22:27
  Speaker 1: of the litigation risk profile around Facebook maybe materially changing
• 22:31
  Speaker 1: as well. David, Are any of these risks to Facebook's
• 22:36
  Speaker 1: fundamental business model? Are any of them being priced into
• 22:39
  Speaker 1: its stock price? I think we're still in a situation
• 22:43
  Speaker 1: right now, getting into the fourth quarter of the year
• 22:44
  Speaker 1: where you know, you've had a very solid performance out
• 22:46
  Speaker 1: of what people have been calling the fang stocks, of
• 22:49
  Speaker 1: which Facebook clearly is the first. And from that standpoint,
• 22:52
  Speaker 1: maybe if we see a sell off here, it may
• 22:54
  Speaker 1: not happen until the end of the year. But I
• 22:56
  Speaker 1: think right now we're seasonally at a point in time
• 22:58
  Speaker 1: where portfolio managers are very much you know, inclined to
• 23:01
  Speaker 1: continue favoring their winners, and Facebook so far this year
• 23:04
  Speaker 1: has been a winner. So I think if there's any
• 23:05
  Speaker 1: precipitous fall off, we may not necessarily see it immediately,
• 23:09
  Speaker 1: but we need to set ourselves up to think about
• 23:11
  Speaker 1: what's going to happen in the first quarter of well.
• 23:13
  Speaker 1: I mean, because David, I'm thinking about it from from
• 23:15
  Speaker 1: one perspective. Yes, we can't really oversee everything that goes
• 23:19
  Speaker 1: on the Internet. But Facebook could have given a better
• 23:23
  Speaker 1: disclosure about which, uh funding sources were behind different advertisements, right,
• 23:28
  Speaker 1: I mean, that's been sort of the proposal that's put
• 23:30
  Speaker 1: out there. That is expensive, and that would also raise
• 23:34
  Speaker 1: questions about the efficacy of the ads in that given
• 23:38
  Speaker 1: that framework. Meanwhile, litigation risk is is massive and compliance
• 23:42
  Speaker 1: officers required with that. I mean, it seems like those
• 23:44
  Speaker 1: are real imminent risks. They are eminent risks, but they
• 23:47
  Speaker 1: do depend upon how quickly you know, Congress is going
• 23:50
  Speaker 1: to be acting, and as we know, Congress doesn't necessarily
• 23:52
  Speaker 1: move all that quickly. Uh, these things take time. But
• 23:55
  Speaker 1: hence the point. I would also say that look forward
• 23:59
  Speaker 1: more towards the first quarter of you know, these are
• 24:02
  Speaker 1: discussions that are unfolding now how this is implemented into regulation,
• 24:08
  Speaker 1: into possibly new legislation. That'll take time. So we have
• 24:11
  Speaker 1: to keep a very close sign what's taking place on
• 24:14
  Speaker 1: Capitol Hill as far as what the risks are for
• 24:17
  Speaker 1: Facebook stock in the first half of next year. All right, well,
• 24:20
  Speaker 1: let's look at some of the risks, because you know,
• 24:22
  Speaker 1: November first, we're all going to be watching hearings because Google, Twitter, Facebook,
• 24:26
  Speaker 1: they've all said that They're going to be appearing at
• 24:28
  Speaker 1: a public hearing UH in Washington to address these very issues.
• 24:33
  Speaker 1: What would do be the stock valuation of let's say Facebook,
• 24:37
  Speaker 1: if it was in some way a regulated utility or
• 24:40
  Speaker 1: was considered a public utility. I mean, it would be
• 24:42
  Speaker 1: a very profitable utility. Twelve and a half more than
• 24:45
  Speaker 1: twelve and a half billion in annual profits on you know,
• 24:49
  Speaker 1: just north of thirty three billion dollars of sales. That's
• 24:52
  Speaker 1: a pretty good number, no, without a doubt. But the
• 24:55
  Speaker 1: issue you have to look at here is it would
• 24:57
  Speaker 1: be not just a regulated utility in the United States,
• 25:00
  Speaker 1: it also on all the other markets where it's operating.
• 25:02
  Speaker 1: So from that standpoint, you're looking compliance costs which are
• 25:06
  Speaker 1: going to be unfolded across its global operations. And you know, arguably,
• 25:12
  Speaker 1: is it going to serve to slow the growth rate
• 25:15
  Speaker 1: for Google? I mean for Facebook, Um, that may that
• 25:19
  Speaker 1: may actually happen, but I think it's certainly going to
• 25:21
  Speaker 1: cut into what their profit margins are. And I think,
• 25:24
  Speaker 1: you know, if it does service slow the growth, then
• 25:26
  Speaker 1: you see the multiple start to come under pressure. But
• 25:28
  Speaker 1: I think you know, near term earnings expectations for the
• 25:31
  Speaker 1: third quarter, I think you are safe for the fourth
• 25:33
  Speaker 1: quarter probably as well. But it's more in terms as
• 25:36
  Speaker 1: we look forward towards that we have to take into
• 25:39
  Speaker 1: account these changing elements and how do they affect the evaluation. David,
• 25:43
  Speaker 1: have you taken note of a change in tone by
• 25:47
  Speaker 1: Facebook's leadership as some of these issues become front and center. Well,
• 25:52
  Speaker 1: I think in this regard, you know, if we go
• 25:55
  Speaker 1: back and see what Mark Zuckerberg, Facebook CEO had said
• 25:58
  Speaker 1: after the November twenty team election, when he said, that's
• 26:01
  Speaker 1: pretty crazy idea, you know, if Russia was actually meddling
• 26:04
  Speaker 1: to where he is now, I think we're in a
• 26:06
  Speaker 1: situation where management is really behind this. They need to
• 26:09
  Speaker 1: get themselves out in front and basically say not that
• 26:13
  Speaker 1: they're just going to hire a thousand people, you know,
• 26:15
  Speaker 1: to try to review what's going on in the way
• 26:18
  Speaker 1: of ads and such and content. But I think that
• 26:21
  Speaker 1: there needs to be something more strategic being done by Zukerberg.
• 26:25
  Speaker 1: This is going to be a moment where he really
• 26:27
  Speaker 1: needs to mature, arguably as a leader, because clearly he's
• 26:30
  Speaker 1: very much under the scrutiny of Congress, and he's under
• 26:33
  Speaker 1: the scrutiny of other governments. Elsewhere around the world. You
• 26:37
  Speaker 1: mentioned we're talking obviously about Facebook. Is Google? Do you
• 26:40
  Speaker 1: believe in the same area on Twitter both. I mean,
• 26:44
  Speaker 1: all three companies that are being called to testify in
• 26:46
  Speaker 1: public before the sent Intelligence Committee on November one are
• 26:49
  Speaker 1: clearly very very much in the crosshairs. One might argue though,
• 26:53
  Speaker 1: that with respect to Facebook, and to the extent to
• 26:55
  Speaker 1: which you know increasingly high percentage of people are depending
• 27:00
  Speaker 1: on Facebook as their primary news source, that it's Facebook
• 27:03
  Speaker 1: that's really probably most in the cross here's coming out
• 27:06
  Speaker 1: of this in terms of these three companies. I want
• 27:08
  Speaker 1: to thank you very much for spending time with us.
• 27:10
  Speaker 1: David Garty, of course, is the principle of g v
• 27:13
  Speaker 1: A Research, and he spends a lot of time on
• 27:17
  Speaker 1: you analyzing the tech sector. Thanks for listening to the
• 27:22
  Speaker 1: Bloomberg P and L podcast. You can subscribe and listen
• 27:25
  Speaker 1: to interviews at Apple Podcasts, SoundCloud or whatever podcast platform
• 27:29
  Speaker 1: you prefer. I'm pim Fox, I'm on Twitter at pim Fox,
• 27:33
  Speaker 1: I'm on Twitter at Lisa Abramo wits one. Before the podcast,
• 27:37
  Speaker 1: you can always catch us worldwide on Bloomberg Radio.