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Boeing Lays out Challenges Ahead · Bloomberg Intelligence

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  Speaker 1: Bloomberg Audio Studios.
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  Speaker 2: Podcasts.
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  Speaker 3: Radio. News.
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  Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live
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  Speaker 2: FBA's ticker is down about 1% today, down about 8%
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  Speaker 2: year to date. And just recently, Chief Executive Officer Kelly
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  Speaker 2: Ortberg laid out a set of challenges that surprised investors
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  Speaker 2: who had grown comfortable with a more steady performance at
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  Speaker 2: the U.S.
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  Speaker 4: Planemaker.
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  Speaker 2: Let's bring in Sid Phillip. He's the chief correspondent for
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  Speaker 2: global aviation over at Bloomberg News Journeys here in our studio. Sid,
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  Speaker 2: I was one of those observers who were saying, I
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  Speaker 2: think they got this thing turned around. They're cranking out
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  Speaker 2: the 737 MAX. The worst is behind them. The stock's
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  Speaker 2: behaving better. A little bit of a kink, you know,
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  Speaker 2: bump in the road here, it seems like.
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  Speaker 5: It does.
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  Speaker 6: And it sort of shows that the turnaround is far
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  Speaker 6: from complete. And it's basically a much more challenging turnaround
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  Speaker 6: than the market expects because there are big challenges at
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  Speaker 6: Boeing and including ramping up production. I mean, Airbus has
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  Speaker 6: struggled with ramping up production of its rival A320 jets.
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  Speaker 6: I mean, they've been talking, having to push the deadline
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  Speaker 6: on when they would get to rate 75 multiple times.
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  Speaker 6: And so for Boeing, ramping up to 47 a month
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  Speaker 6: has been something of a challenge. And so for investors
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  Speaker 6: who were expecting them to sort of go from 47
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  Speaker 6: to 52 to 63, that's been something that's been a
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  Speaker 6: bit of a jolt for them.
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  Speaker 7: So how did we get here? I mean, isn't this
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  Speaker 7: something where the CEO kind of manages expectations during earnings calls?
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  Speaker 7: I mean, there was an air show not so long
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  Speaker 7: ago where, again, he and Boeing executives can kind of
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  Speaker 7: give investors a sense of what is coming, that people
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  Speaker 7: are surprised now with this more subdued outlook?
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  Speaker 6: They are surprised by this now. And that's because the
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  Speaker 6: company had previously sort of talked about how they were
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  Speaker 6: going to get to 47 and then they were going
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  Speaker 6: to get to 52. And they sort of didn't really
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  Speaker 6: talk about the challenges there. And so Kelly Ottberg talked
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  Speaker 6: about how wings were a pacing item and how they
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  Speaker 6: were struggling to produce enough wings for the aircraft.
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  Speaker 2: Wings, that's important.
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  Speaker 6: That is, and you can't really build a plane without
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  Speaker 6: those wings. And so for Boeing, this is a challenge
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  Speaker 6: in terms of just getting planes.
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  Speaker 4: Out the door.
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  Speaker 6: And that also has an effect on their financials because
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  Speaker 6: the 737 is a massive cash cow for the company.
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  Speaker 6: And the company had talked about how they expect to
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  Speaker 6: generate between one and three billion in free cash flow
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  Speaker 6: this year.
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  Speaker 4: And now the.
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  Speaker 6: CFO yesterday talked about how it is likely to be
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  Speaker 6: around the midpoint and largely because of fewer deliveries.
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  Speaker 2: So what's the deal with just the logistics within the
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  Speaker 2: global aviation business? Because Boeing calls it out as an issue,
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  Speaker 2: as does Airbus as well. They really haven't fixed that
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  Speaker 2: since really the pandemic.
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  Speaker 5: Yeah.
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  Speaker 6: Since COVID, the aviation supply chain has been challenged. And
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  Speaker 6: so we were talking to Airbus a couple of months ago,
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  Speaker 6: and they were talking about how there's hundreds of thousands
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  Speaker 6: of parts on an aircraft. And if you have one
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  Speaker 6: part missing, you can't deliver those aircraft. And so for
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  Speaker 6: those companies, it's been a massive challenge just managing the
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  Speaker 6: logistics because During the pandemic, the industry sort of went
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  Speaker 6: to almost standstill and production sort of paused. And that
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  Speaker 6: really led to suppliers being sort of struggling to ramp
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  Speaker 6: up again when demand came back. And so for the
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  Speaker 6: plane makers, they have a sort of whack-a-mole where you
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  Speaker 6: have one issue being sorted out and another issue dropping up.
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  Speaker 6: And that's really been the challenge post-pandemic. And it continues
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  Speaker 6: to be a challenge for suppliers even today.
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  Speaker 7: The other thing that's kind of dogging the stock and
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  Speaker 7: giving people reason to worry is that the president of
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  Speaker 7: the U.S. and China, presidents, I should say, will be
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  Speaker 7: meeting in Washington in about a week and a half
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  Speaker 7: for this summit. And I guess the expectations that Boeing
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  Speaker 7: is going to come out with some kind of announcement,
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  Speaker 7: it's starting to dissipate.
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  Speaker 6: That is because the CEO did talk about how that
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  Speaker 6: he sort of managed expectations there, saying, The announcement that
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  Speaker 6: when President Trump went to China in May, he talked
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  Speaker 6: about how Boeing had secured a deal for 200 big aircraft. Now,
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  Speaker 6: that's really going to take some time to materialize in
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  Speaker 6: terms of actually placing an order. And Kelly Ortberg said
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  Speaker 6: that while the market had been reopened for aircraft in China,
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  Speaker 6: it's still not going to materialize into this one massive
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  Speaker 6: mega order. It's going to be negotiated with the airlines
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  Speaker 6: and they're going to sort of place piecemeal orders. And
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  Speaker 6: so I think that was, again, something of a setback
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  Speaker 6: because the market was expecting this big 200-plane order and
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  Speaker 6: possibly more because previously it had been telegraphed that the
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  Speaker 6: Chinese airlines would buy as many as 500 planes. And
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  Speaker 6: so that's really been something of a setback in terms
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  Speaker 6: of investor sentiment.
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  Speaker 4: 30 seconds left.
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  Speaker 2: What is the timetable for the 777?
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  Speaker 6: The 777X certification will slip into next year, is what
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  Speaker 6: Kelly Ortberg said yesterday. And that plane has been seven
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  Speaker 6: years late. And they're still saying that it'll be delivered
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  Speaker 6: next year, but the airline customers have been skeptical about
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  Speaker 6: when those planes will actually get there.
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  Speaker 7: Stay with us.
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  Speaker 1: More from Bloomberg Intelligence coming up after this. You're listening
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  Speaker 1: to the Bloomberg Intelligence Podcast. Catch us live weekdays at
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  Speaker 2: President Trump and others have pushed back saying, no, you
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  Speaker 2: can't let this slow down. Otherwise, China will win here.
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  Speaker 2: So our next guest has some thoughts here. John Donish,
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  Speaker 2: he is a founder and CEO of Resilient Health joining
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  Speaker 2: us from Zoom. So, Donish, thanks so much for joining
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  Speaker 2: us here. What's your take on kind of the rollout
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  Speaker 2: of AI? Does it need some guardrails? Do we need
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  Speaker 2: to slow down at all?
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  Speaker 4: Look, I have a very contrarian view on this. So
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  Speaker 4: I know.
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  Speaker 3: That a lot of people in the industry, especially the
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  Speaker 3: ones at the big labs, are trying to tell you
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  Speaker 3: that we need to start pacing. What they mean by
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  Speaker 3: that is not slow down the training, but slow down
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  Speaker 3: the release.
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  Speaker 4: Because if we keep the releases.
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  Speaker 3: The way they are, suddenly things are going to get
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  Speaker 3: really scary for everybody. Look, I'm originally from healthcare, right?
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  Speaker 3: So I know what regulatory capture looks like. And this
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  Speaker 3: looks and smells like regulatory capture. The big AI labs
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  Speaker 3: are worried about a very specific thing. And it's not
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  Speaker 3: recursive self-improvement, which is what they're talking about. They're worried
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  Speaker 3: about the rise.
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  Speaker 4: Of open source.
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  Speaker 3: If you look at what's happening, people can go to
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  Speaker 3: open routers data, which is this one platform that many
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  Speaker 3: people can use, and you can use many different models.
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  Speaker 3: Tokens for the big labs are dropping faster than anyone expected.
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  Speaker 3: And open source is rising faster than anyone expected. That
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  Speaker 3: explains why NVIDIA acquired Hugging Face for a record deal.
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  Speaker 3: And I think that this is what they're really worried about.
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  Speaker 3: They are trying to slow down the pace of open
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  Speaker 3: source and adoption of open source, not really thinking about safety.
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  Speaker 3: And I have to say one more thing, which is
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  Speaker 3: if you were listening to Dario, who obviously I respect,
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  Speaker 3: but if you were listening to Dario, we would have
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  Speaker 3: guardrails at GPT-2.
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  Speaker 7: So if that's the case, are we just at a
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  Speaker 7: moment where people are deliberately misunderstanding what these AI lab
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  Speaker 7: founders are saying and kind of jumping on the moment,
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  Speaker 7: capitalizing on the moment.
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  Speaker 4: To say, let's.
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  Speaker 7: Take a much closer look at this and slow things
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  Speaker 7: down dramatically, if not halt progress completely?
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  Speaker 3: You see, there is a lot of, so I'm an
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  Speaker 3: AI researcher, as you all know from background. And so
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  Speaker 3: there is a lot of vested corporate interest in making
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  Speaker 3: sure that these labs continue to thrive. And what they're
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  Speaker 3: learning right now is that when you keep adding more
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  Speaker 3: and more training data from the entire internet, yes, it's
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  Speaker 3: getting better. The scaling laws are continuing to prove out,
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  Speaker 3: but they're not proving out.
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  Speaker 4: The way that they thought they would.
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  Speaker 3: And more verticalized, hyper-specific models are doing better.
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  Speaker 4: You know, small language models.
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  Speaker 3: But also hyper specific, you know, specific harnesses, which is
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  Speaker 3: sort of learned on local data, learned on sector specific
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  Speaker 3: data are starting to outperform them. And so I think
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  Speaker 3: what's really happening is you've got all of these different
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  Speaker 3: forces that are making these giant AI labs worried.
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  Speaker 4: And I believe that's what's driving this. And I'm not alone.
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  Speaker 3: There's a lot of people saying this out loud just
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  Speaker 3: to kind of set the stage. You hear letters RSI
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  Speaker 3: a lot. And RSI means recursive self-improvement. We've had that
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  Speaker 3: for 20 plus years, but it doesn't work that well.
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  Speaker 3: There's still a lot of technical challenges. And unless the
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  Speaker 3: big AI labs are going to suddenly start showing the data,
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  Speaker 3: I mean, we just saw a deep RSI from Google
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  Speaker 3: and they, in their own paper this last week, said
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  Speaker 3: that there's still significant challenges to generalizability. So these challenges
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  Speaker 3: Ideas sound great, and they allow you to believe that
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  Speaker 3: AGI and.
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  Speaker 4: ASI is going to take over.
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  Speaker 3: But the truth is that these labs are starting to
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  Speaker 3: see real pressure from the open source models.
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  Speaker 2: Give us a sense, Danish. The relative competitive landscape, the U.S.
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  Speaker 2: versus China, if that's even the right way to think
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  Speaker 2: about it.
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  Speaker 4: It is the right way to do it. Yeah.
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  Speaker 3: I mean, China has gone all in on open source.
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  Speaker 3: The quality of their open source models is tremendous. I
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  Speaker 3: think we have to be very careful about slowing things
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  Speaker 3: down because, again... Look, there are many things that I
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  Speaker 3: think the administration is doing right and many things that
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  Speaker 3: they're doing wrong. They are right about this. And I
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  Speaker 3: think Jensen Huang at NVIDIA is right about this. This
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  Speaker 3: is not the moment for pacing. This is the moment
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  Speaker 3: for acceleration. We really need to be careful about allowing
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  Speaker 3: the corporate interests of a few large labs driving the
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  Speaker 3: decision-making for the entire country.
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  Speaker 7: What do you hope will happen when Xi Jinping and
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  Speaker 7: President Trump meet in Washington, in New York, in the U.S.
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  Speaker 7: later on this month? Because AI is supposed to come
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  Speaker 7: up on the agenda here.
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  Speaker 4: I think we know China's stance on this.
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  Speaker 3: I mean, they came out and they said that fear
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  Speaker 3: mongering and foreign influence is.
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  Speaker 4: Not going to change their strategy.
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  Speaker 3: What I would hope is that we can come up
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  Speaker 3: with international standards on use in defense, use in biology,
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  Speaker 3: use in gain of function. I mean, these are the
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  Speaker 3: things as a physician I care deeply about, as an
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  Speaker 3: AI researcher I care deeply about. I don't think, I mean, again,
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  Speaker 3: contrarian viewpoint, I don't think these models are actually ready
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  Speaker 3: to handle consequential things like that because the harnesses, again,
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  Speaker 3: think of those as guardrails that you're putting on.
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  Speaker 4: Your own models.
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  Speaker 3: Are not mature enough to be able to handle such sensitive,
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  Speaker 3: consequential information.
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  Speaker 4: I mean, we're seeing this in healthcare right now, right?
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  Speaker 3: And so I think that's what I'm hoping for is
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  Speaker 3: actually more guardrails on what AI can touch versus guardrails
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  Speaker 3: on the actual development of the models themselves.
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  Speaker 4: Interesting.
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  Speaker 3: These models need to get way better. We need to
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  Speaker 3: continue to do this. Imagine the incredible work we can
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  Speaker 3: do if we can get there.
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  Speaker 7: Stay with us. More from Bloomberg Intelligence coming.
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  Speaker 2: Up after this.
• 11:27
  Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live
• 11:31
  Speaker 1: weekdays at 10 a.m. Eastern on Apple CarPlay and Android
• 11:34
  Speaker 1: Auto with the Bloomberg Business App. Listen on demand wherever
• 11:37
  Speaker 1: you get your podcasts or watch us live on YouTube.
• 11:42
  Speaker 2: The video gaming industry, this is an industry that I'm
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  Speaker 2: pretty ignorant of, and it just amazes me when I
• 11:47
  Speaker 2: look at the numbers for this business. The global video
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  Speaker 2: game industry generates roughly $ 214 billion in annual revenue, making
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  Speaker 2: it larger than the film and music industries. It's just
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  Speaker 2: extraordinary how big this business is. It's a global business,
• 12:04
  Speaker 2: and it is just extraordinary. Our next guest, he knows
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  Speaker 2: what's going on there. Nathan Nadeau joins us here, technology
• 12:10
  Speaker 2: research analyst at Bloomberg Intelligence. He's based in London. Hey, Nathan,
• 12:13
  Speaker 2: let's talk about Take-Two. What's the story here? Frame out
• 12:17
  Speaker 2: the investment story for Take-Two. What's the market really geared towards?
• 12:22
  Speaker 5: I think it's just really the one thing. That's Grand
• 12:24
  Speaker 5: Theft Auto 6. That game is a juggernaut. It has
• 12:28
  Speaker 5: sold half a billion copies of games in that franchise's
• 12:31
  Speaker 5: entire lifetime. And the sixth version installment is launching mid-November,
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  Speaker 5: November 19 to be exact. And for the first time,
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  Speaker 5: they made a premiere and put it on Netflix. It's
• 12:43
  Speaker 5: about 26 minutes long, longer than your five-minute trailer. And
• 12:47
  Speaker 5: it was the most viewed film globally for that week
• 12:51
  Speaker 5: on Netflix. And the fact that it caused engagement spikes
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  Speaker 5: on Netflix tells me that there's such hunger because it
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  Speaker 5: has been such a long wait since GTA V, which
• 13:04
  Speaker 5: was launched 13 years ago. And there's a lot of
• 13:07
  Speaker 5: expectations that have been baked into Take-Two stock because of
• 13:11
  Speaker 5: GTA VI release. And there's a lot of expectations. And
• 13:14
  Speaker 5: to quote the CEO, terrifying. How terrifying. Some sales estimates
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  Speaker 5: are expecting 85 million unit sales within two months of launch.
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  Speaker 5: I mean, our estimates is a bit more modest, but still,
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  Speaker 5: you know, on a high end.
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  Speaker 2: Why is the stock down 18% this year?
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  Speaker 5: I think a lot of these expectations that were baked
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  Speaker 5: in were challenged by a few factors. One of them
• 13:39
  Speaker 5: being some of these gameplay videos were leaked. Obviously, and,
• 13:45
  Speaker 5: you know, going back a couple of months ago, and
• 13:47
  Speaker 5: there was such a long wait and, you know, Leaks
• 13:51
  Speaker 5: is not new to Rockstar or the publisher of the games,
• 13:55
  Speaker 5: but so close to the launch date, it's just where
• 14:00
  Speaker 5: the stock and the expectations around the game is a
• 14:03
  Speaker 5: bit sensitive to whether or not the game can actually deliver.
• 14:10
  Speaker 5: Because the last game alone, the fifth installment sold 230
• 14:14
  Speaker 5: million units. And so there's a lot of expectation for
• 14:20
  Speaker 5: this version to actually sell as much, if not more.
• 14:23
  Speaker 5: Because even though that game sold, you know, 30 million
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  Speaker 5: in each launch year, and that was 2013, every year
• 14:30
  Speaker 5: since then, every year in the 13 years since it
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  Speaker 5: was released, it adds 300 to 400 million units, sorry,
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  Speaker 5: 300 to 400 million dollars a year to Take-Two's top line.
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  Speaker 4: So this game has a lot of riding on it.
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  Speaker 2: So I know the mobile gaming accounts for the largest
• 14:50
  Speaker 2: share of just the global gaming market.
• 14:52
  Speaker 4: Maybe 50 to 55%.
• 14:53
  Speaker 2: What are the growth and profit dynamics of mobile gaming
• 14:57
  Speaker 2: versus console gaming?
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  Speaker 5: The average spend per gamer on console and PC are
• 15:03
  Speaker 5: always going to be higher because these are where your
• 15:05
  Speaker 5: hardcore gamers reside. They are the ones who invest to
• 15:09
  Speaker 5: buy a console or to buy a gaming PC. I
• 15:12
  Speaker 5: would like to game on my MacBook Air, but I
• 15:14
  Speaker 5: don't think that's possible anytime soon. But mobile is where
• 15:18
  Speaker 5: you have volume. It's essentially a volume game. The average
• 15:21
  Speaker 5: spend is lower per gamer, sure. But then you're talking
• 15:24
  Speaker 5: like 30x more gamers per or downloads on mobile compared
• 15:29
  Speaker 5: to PC and console combined just in 2025. But it
• 15:34
  Speaker 5: doesn't mean that Take-Two can easily tap that market. A
• 15:37
  Speaker 5: lot of PC and console gamers historically have relied on partnerships,
• 15:42
  Speaker 5: partnering with an expert maker of mobile games to actually
• 15:47
  Speaker 5: launch mobile versions of their franchise. And I think Netflix
• 15:53
  Speaker 5: is a good example because Take-Two actually put the GTA
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  Speaker 5: trilogy on the Netflix app for a brief period of time.
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  Speaker 5: And I believe you can actually download one of those
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  Speaker 5: games on mobile. And, you know, it was one of
• 16:05
  Speaker 5: the top performing mobile games for Netflix and it came
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  Speaker 5: from a Take-Two franchise. So essentially, this Netflix Take-Two partnership
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  Speaker 5: with the premiere could be a telltale sign of what's
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  Speaker 5: to come for Take-Two.
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  Speaker 4: All right.
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  Speaker 2: Globally, there are over 3.2 to 3.6 billion people who
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  Speaker 2: play video games across mobile, console, and PC platforms.
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  Speaker 4: Nathan, who are these people? What's the demo here? You're
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  Speaker 4: really up to date with the figures. I'll tell you why.
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  Speaker 2: I just said into Google, how big is the video
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  Speaker 2: game industry? And then the Gemini AI overview is awesome.
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  Speaker 2: It's got great numbers. That's what's helping me out today.
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  Speaker 2: Who are these people that play these games?
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  Speaker 5: Right. More than half of these people are actually in
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  Speaker 5: emerging markets. So you have the bulk of mobile gamers
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  Speaker 5: actually reside in China. Your Western markets, whether it's U.S., Germany,
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  Speaker 5: France or Western Europe, most of these people are going
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  Speaker 5: to be on PC and console. And naturally, because these are,
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  Speaker 5: you know, generically speaking, high income countries. So China, you
• 17:08
  Speaker 5: got Middle East, you got Brazil, Latin America, generally speaking,
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  Speaker 5: Southeast Asia. So a lot of these markets where more
• 17:17
  Speaker 5: than 90% of players play games on mobile devices. But
• 17:26
  Speaker 5: it doesn't mean that these are the highest revenue generating country.
• 17:29
  Speaker 5: There is a reason why a lot of these big
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  Speaker 5: game publishers continue to invest in the U.S.
• 17:33
  Speaker 4: Markets.
• 17:34
  Speaker 5: Because, like I said, going back to how PC and
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  Speaker 5: console gamers actually generate more revenue per gamer compared to mobile.
• 17:43
  Speaker 5: And Take-Two is one of those examples.
• 17:45
  Speaker 1: This is the Bloomberg Intelligence Podcast, available on Apple, Spotify,
• 17:50
  Speaker 1: and anywhere else you get your podcasts. Listen live each weekday,
• 17:54
  Speaker 1: 10 a.m. to noon Eastern on Bloomberg.com, the iHeartRadio app, TuneIn,
• 18:00
  Speaker 1: and the Bloomberg Business app. You can also watch us
• 18:03
  Speaker 1: live every weekday on YouTube and always on the Bloomberg Terminal.