Morning Brew Daily - Another Mega Streaming Merger? & The Big Business of Elf on a Shelf

Episode Date: December 22, 2023

Episode 219: Kyle and Toby discuss the meeting that started the talks for a potential mega merger between Warner Bros. Discovery with Paramount Global. Plus, The guys share their stocks and dogs of the year and break down the economics of your Christmas tree. Finally, what is the business behind Elf on the Shelf and the history of the Poinsettia. Listen to Morning Brew Daily Here: https://link.chtbl.com/MBD Watch Morning Brew Daily Here: https://www.youtube.com/@MorningBrewDailyShow Learn more about your ad choices. Visit megaphone.fm/adchoices

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And I'm Kyle Hagey. Today we're talking about a potential merger that would shake Hollywood TV, sports broadcasting, streaming and news to its very core. And we're also going to break down the economics of Christmas. It's Friday, December 22nd. Let's ride. This is our last show before Christmas. So I just want to take a moment to tell everyone how freaking grateful I am to kick things off.

To everyone listening to this, make my job, Neals, Kyle's job, so much more enjoyable. We see your emails, we see your tweets, we see your responses to our Instagram stories. And it's just so cool that you tune in to support the show every day. It's truly amazing. It's been such a pleasure co-hosting when I get the opportunity in 2023. This will be my last episode of 2020. And I just want to give a kudos to the entire team as well. Like the amount of work you all put in, I kind of fly in and have some fun. You're up every day at 4 a.m. doing the research, setting up the graphics, like the entire team here is incredible. So, kudos to you as well, Toby. Kudos to everyone. Kudos to you, Kyle. This is our second show

of the day. Even though this is going out on Friday, we were recording this on Thursday the day before. Back to back. Also, if you've been enjoying the show, I know a lot of people look for new pods around the new year. So maybe send it to a friend or two, oh, three. My Christmas presence is just a Spotify link to the show to everyone. Exactly. Before we jump into the show, I want to take a minute to tell you all about Yahoo Finance. Christmas is right around the corner, but after December, we enter my favorite time of the year, earnings season. And parsing through earnings report, seeing if companies exceeded or missed expectations, it can be a lot. But that's where our friends at Yahoo Finance come in. They combine breaking news with high quality real-time market data to

give you a platform that helps you do everything from make smart financial decisions to host a daily news podcast. So head to finance.com to learn more or download the Yahoo! Yahoo! mobile app to get it directly on your phone. Wishing you could be there live for the big game, soaking up the atmosphere in the crowd, but too often, life gets busy, or the price hold you back. Priceline is here to help you make it happy. With millions of deals on flights, hotels, and rental cars,

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The two names to be floated as potential candidates for a merger are Warner Bros Discovery and Paramount. Multiple outlets have reported that Warner Bros. CEO David Zaslov, who has never met a deal he doesn't like, met with Paramount Chief Bob Backish this week to discuss the potential. merger. But is this even a good idea? On the surface, combining the owners of Max and Paramount Plus seems like a good plan to try and put a dent in Netflix's streaming dominance. Together, they would have around 158 million subscribers, which would be more than Disney and only trail Netflix's 247 million subs. But the big question marks around this deal are the two companies combined would have an enormous $61 billion debt load, and regulators would no

doubt have a thing or two to say about it as well. But in a world where people are cord cutting left and right and big tech has their eyes set on the streaming entertainment worlds, maybe the two need this deal, warts in all, to remain competitive. Yeah, I love how you said the two might need this deal. And I think the best way to describe this is it's not a match made in heaven. It is a match out of necessity. It's kind of like me and my 10th grade prom day when we both still need a day. It's one week before. But that's neither here nor there. I don't think there's like an incredible amount of synergies, and they would be doing this if they're both businesses were doing well. But as you mentioned, a combine about $60 billion in debt,

they might just need to do this to compete with companies like Netflix, Apple, Amazon, who have way more capital. And it's very interesting. There's this take where there's like essentially two business strategies, the yin and the yang, the bundle and the unbundle. And cable was the ultimate bundle. You paid one price. You got everything. And then companies like Netflix, Disney Plus, Apple came along. And they basically unbundled cable. The idea being, you're just going to get what you want. You're going to pay a much cheaper price. And the really interesting narrative now is like they're merging and basically re-bundling to create a new cable subscription. The jokes just write themselves that the unbundling and then re-bundling has happened.

They're just reinventing cable again. But, I mean, you mentioned synergies. And there are certainly synergies between these two businesses because, I mean, we haven't even mentioned the TV empire that would be created yet. Both of these companies own popular channels like HBO, Showtime, MTV. And the two would also be a news juggernaut if they can. combined because you've got CNN and CBS news operations that would combine to create a very, a news organization that might even rival Morning Brew Daily, some might say. And then combined analysts estimate that the two companies would account for around 35 to 40

percent of viewing time on linear TV network. So even though linear TV is dying and there's all this cord cutting going on, they would still dominate this still sizable industry. So you can see why they are at least considering this deal. I think it makes sense for a lot of these streaming services to start considering merging together. And what is interesting to me, we talked about bundling and unbundling. People, I think, thought the problem with cable was, like, it was too expensive. It was, like, too much choice.

I really think, to me, it was, like, a terrible customer and user experience. Actually, like, canceling a cable bill was impossible. What Netflix is, one of their innovations was, like, having a crisp UI and making it easy to cancel. So we're going to get cable, maybe again, but, like, it will be seamless. It'll be on your phone. You can log in. you can cancel easily. And I think that's going to put the consumer in a better spot.

You did also mention the FTC, and they have a noticeable distaste for mergers. So I'm very curious how they would react to this, although I don't think this causes consumer harm. Yeah, I think that the execs are pretty confident a deal would receive regulatory approval, despite the extremely active antitrust climate that we've been seeing affect numerous deals. Warner Bros. Discovery doesn't own a broadcast network like Paramount does. which would create an easier path towards combination versus, say, if they were combining with someone like an NBC or NBC owner Comcast or something like that.

So I see why they think that this deal can get through, even though on the surface, when you see some of these statistics, it seems like something of the FTC would kind of put their foot down on. The real question is, what is the new streaming service going to be called, Toby? Do you have any ideas for them? I just say they embrace it and say cable plus. They just totally embrace the joke, yeah. I love it.

All right, let's move on to our next segment, which is Stock of the Year, Dog of the Year. And if you've been following the show, then you know we do Stock of the Week, Dog of the Week. And since we're close to wrapping up 2023, we thought, let's go big and then literally let's go home on vacation. So we're going to do Stock of the Year, Dog of the Year. Now, I have to caveat this with this. This is not financial advice. I'm a philosophy major. I just learned that a mutual fund isn't when your friends all Venmo you at the same time.

So do not listen to me for financial advice. All right, Toby. We looked at Santa's Nadia Nislist backstage. I was nicer than you this year, so I'm going to start. My stock of the year is a firm. The California-based Buy Now Pay Later company founded by Max Levchin, one of the co-founders of PayPal, went on an absolute tear in 2023. While it enables customers to buy now and pay later, the stock was a buy now, make a ton of money later because a firm is up close to 420% year to date. They've had an incredible year,

capped off with an expanded Walmart partnership. They announced this week that's going to bring a firm to the 4,500 self-checkout machines across Walmart stores in the U.S. This is in addition to partnerships with Stripe, Amazon, Apple. So they have some big players on their side. I think their biggest win, however, was allowing me to buy my mom's Christmas present

and pay it off over time. So you're welcome, Mom, and you're going to get your gift soon. Toby, what's your take on Affirm this year? My take was that BNPL, buy, now, pay, later, was supposed to be kind of dead in the water after the pandemic boom times. But I think it's just kind of stuck around. A firm was not supposed to do this well in the current market because higher interest rates were supposed to hurt because unlike banks who fund their loans by receiving deposits from customers, buy now, pay later companies need to get their funds from capital markets,

like the stocks or bond markets. And stocks and bonds have been just kind of seesawing every which way. So it's been very difficult for these buy now, pay later companies to have kind of, of that consistent lending pool in order to make these short-term loans. But all that aside, a firm absolutely crushed it. Like, they saw 37% revenue growth last quarter. They got these big Walmart partnerships, which I was, I'm curious to hear your thoughts. Do you think offering a buy-now, pay later short-term loan at a Walmart kiosk is a good idea? I mean, it's quite interesting. Like, I'm going to pay off this $7 gallon of milk for four payments. Yeah, I totally could see it backfiring, though, because you do make some important.

pulls purchases and checkout lines. And the dark side of Buy Now Pay Later is always are these predatory short-term loans. And if you miss the loan payments, they have pretty big penalties attached to them. So I don't know if necessarily putting it in a place like Walmart is going to end up being good for consumers, but it's certainly good for a firm. Right. I think one take for a firm is if you're financially savvy, it really helps because it allows you more cash flow because you're not paying off all at once, but if you are, get behind, it can be a very dangerous trap. So definitely something to watch out for Buy Now, Pay Later. But when it comes to a firm, from a business perspective, they crushed it this year. Yeah, the globe is real. My stock of the year is actually not a stock,

but an index, the regional banking index. It is up a whopping 0% since March of this year. Yes, I said zero. But when you consider the fact that we had a full-blown regional banking crisis in March, suddenly clawing back to even doesn't seem so bad. The S&P 500 Regional Bank Index and the NASDAQ's U.S. Regional Bank Index both had two of their best days of the month last week, and both reached above where they were on March 9th the day before Silicon Valley Bank imploded. Kyle, it feels like a lifetime ago, but the whole global banking system was teetering on the edge just a few short months ago. But swift action from the Fed as well as interest rates, cuts. forecast on the horizon has led to this huge comeback for regional banks,

which is why they are my stock of the year. I love this pick and the fact that you picked an index. That's when you know you really went deep into the numbers. I think this is great just for the country and for the world. I mean, I remember SVB and everyone was like, everyone's going to take out their deposits, give them to J.P. Morgan, and we're going to have one bank. It is great to see these regional banks still kind of bounce back, stay strong.

I think they're great for entrepreneurs. They're great for the regions they exist in, oftentimes giving credit to people that couldn't get credit elsewhere. So this is very good, I believe, for the American economy. It's so interesting because regional banks have kind of lived and died by the Fed this year because you might say the Fed did very well to step in and kind of backstop and make sure that those bank runs didn't happen. But then you also might say that the Fed created the regional banking crisis

because they jacked, they had one of the most aggressive rate hiking cycles in recent memories. So it's definitely like a seesaw effect. And now the Fed is once again forecast. cutting on interest rates on the horizon, which has led the index to rebound. So I was going to say, like, good on the Fed for, like, saving the banks, but also they were the ones who almost created the issue in the first place. So it's certainly one of those things where we're not out of the woods yet, but the horizon's looking much better.

Right. I think the best way to describe it is regional banks are in a toxic relationship with the Fed. Like, there's some pros and cons. Aren't we all? Okay. Let's move on to our dogs of the year. And my pick is AMC. Yes, this is the movie theater company.

You'd sneak into R-rated movies when you were 14. It is my dog of the year. AMC is down 80% year-to-date, standing at about $6 a share. This is down from a March high of about $60, a high for this year. But I think the numbers don't tell the whole story, and this is why I wanted to make this stock, in particular, my dog of the year. AMC really rose to fame as one of the most mainstream, quote-unquote meme stocks, right? Retail investors were aping into this stock, creating wild price swings, and upwards of 90% of outstanding shares currently are owned by retail investors, which is an absurd number.

They reached an all-time high, the stock of $551 per share in 2021. That is adjusted for the reverse stocks, but they did this August. And again, now they sit at $6 a share. And what's interesting is this year, they've been struggling to keep the momentum alive, even though the box office has kind of had this renaissance year. There's been Barbie, Oppenheimer, Super Mario Bros, Taylor Swift in theaters. Like, if Taylor Swift can't save your company, this is bad news. This week, AMC also announced an equity for debt exchange.

Basically, they keep getting in trouble. They need capital. They issue more shares. That dilutes the price of the shares, and it starts a vicious cycle. So it's not looking good for AMC, and by all means, their only hope is they've begun selling their own branded line of chocolate bars. That's not good. Say what you will.

AMC certainly tries stuff. I mean, they're selling the chocolate bars. They also were selling their own branded popcorn this year. They did that deal where they were the sole distributor of Taylor Swift's Aresdura movie, and they got some of the rev share. So they certainly experiment. They certainly leaned into the meme stock, but you can live and die by the meme stock for sure. Right.

I think the moral of the story here is you can't ape forever. Like memes come and go, but business fundamentals really do matter in the long term, and they're going to have to figure out those fundamentals. And maybe it's to your point. They keep experimenting and finally find something that works. Just keep trying, AMC. My dog of the year is Pfizer. I would describe Pfizer's year as missing a train they desperately needed to catch.

And that train is the class of GLP1 weight loss drugs. Novo Nordisk has Ozmpic, Eli Lilly has Monjaro, but Pfizer has nothing. And it's not for lack of trying. Johnson and Johnson, for instance, said, listen, there's already too much competition in the weight loss drug market. We're not even going to try to catch up. And investors looked at that positively. But Pfizer did give it a go, ended up,

pulling the plug on phase three studies for its twice daily oral weight loss drug candidate. And I haven't even mentioned the post-vaccine bonanza hangover it's experiencing either. Both have combined to send the stock down 45% so far this year. Yeah, I mean, I think the story of Pfizer is one. They like kind of help save the world in some ways. And their focus had to be on that. And I think following up with the COVID vaccine going back to back is always tough. And this GLP1 might end up be a bigger story than GPT4 next year.

it is really taking over the world to not be on that train is scary from a business perspective, and Pfizer has missed it. I also think it's kind of funny that Johnson & Johnson, I think after they did the COVID vaccine, and it was like kind of deemed the worst one. They were like, we're not even going to try. We're not even going to try anything else. Hey, know thyself. I mean, you just have to look at the difference between the fates of Novo Nordisk and Pfizer.

I mean, Novo Nordisk has almost, it's up 50% on the year so far. It's the second biggest drug maker in the world just because they nailed this way. versus Pfizer missed the boat. And now suddenly they also lost out on like the $100 billion of COVID era revenue that they were pulling in from the vaccine. So a lot of things went wrong for Pfizer this year, which is why it is my dog of the year. All right, before we jump into the next part of our show, we're going to take a quick break. It's time to refresh your yard during spring backyard days at the Home Depot. Get low prices guaranteed on propane grills starting $179 like the next grill three burner gas grill or get $50 off of a

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Music you can feel fills the room. And no more chat with Danny from accounts. Your life deserves music. Your music deserves Bose. Find your perfect product at Bose.com. When people think Christmas, they think family, holiday cheers, or presents like normal people. But this is Morning Brew Daily, so we think business. So on the back half of the show, we're going to break down the business of Christmas,

and we're going to start with the centerpiece of it all, which is the Christmas tree. And this was fascinating. I just want to give you a sense of this multibillion-dollar industry. It is so large. There's actually two trade unions around trees. One is team natural tree and one is team artificial tree. and what I found fascinating, there are three ways in the U.S. to get a Christmas tree. One is you buy a permit for $10 or less, and you chop down your own tree.

If our listeners are not lumberjacks, then we're left with two options, which is you go to a Christmas tree farm. There's about 3,000 of these in the U.S. where you can buy or chop down your own tree. But economic and kind of weather pressure has seen 500 Christmas tree farm shutter in the U.S. between 2014 and 2019, which leaves us with the main way now, which is to buy one from a retailer who has, imported trees. In 2022, we imported three million more natural, or three million natural Christmas trees, mainly from Canada. And that number is doubled what we imported in 2014. On the artificial side, the U.S. imported over 20 million trees, mainly from China. And natural trees used to be a two to one ratio, and now it's closer to one to one. And the last thing I'll say about Christmas trees,

the markup is wild. About 400 to 500 percent. This is what happens when you have a kid whose Christmas will be ruined if you don't have a tree. Like the businesses have you right where they want you. Toby, what was your thoughts on the economics of Christmas trees? I think it's the worst business of all time. Christmas trees take over a decade to grow large enough to sell. So can you imagine your sales cycle being a decade, essentially? And so I'm totally out on the business of Christmas trees. I was digging into who are the top producers in the U.S. of Christmas trees. and the number one is Ash County, North Carolina. I guess that makes sense, but I never really associated growing Christmas trees

with North Carolina. The other top five, there's two places in Oregon, another place in North Carolina, and then one place in Michigan. Oregon and Michigan makes sense to me. North Carolina, I don't know, I'm from Florida, so that just feels too close longitudally to be growing Christmas trees.

Well, shut up to North Carolina. Are you an artificial or a natural tree guy? I am team natural. If you're going to do Christmas, I feel like you've got to go on natural with it. I'm totally with you on that one. And although the stats are showing that, it's getting a lot closer than we'd like to admit. Yeah, we're becoming the old people that are like, ah, back in my day, we had natural trees.

So we might be getting too old for this. Team artificial. Our next Christmas business we want to look at is the elf on the shelf. Parents listening to this show right now are no doubt already nodding their heads because they know all about elf on the shelf. But for the rest of us, elf on the shelf is kind of like an advent calendar, but with rules for your kids. In the days leading up to Christmas, a parent sets up an elf doll, usually on a shelf, to observe their kids' behavior and report back to Santa Claus. It pairs with a book and just lets parents have fun with creating scenes of mischief that the elf might get up to in the night while the kids are sleeping. It's created this viral hype cycle that has led to 21 million global sales of the so-called scout elves and over 75 licensing partners for its parent company, the Lumistelico.

This business is genius in so many ways, Kyle, because of this built-in virality. Parents get to become creative as heck when it comes to placing and having fun with their elf on the shelf. And this is a confession, honest to God. I had no idea what elf on the shelf meant until I read this article. Like, no idea. I just thought it was like this funny meme where you rhyme two things together because everyone like would then do their own spin on it. I absolutely love this story.

You mentioned the numbers. The founder story is amazing as well. It was founded in 2005 by Carol Abersold and her twin daughters. And they viewed this project as like a happy distraction when their mom was not feeling well. And then they wanted to make this book about Elf on the Shelf. Initially, no publisher would take it. So Bell amassed, like, insane credit card debt, emptied out the 401 case. Like, they went all in on this.

And now they've turned it into a $100 million empire. So not only is it like a fun festive thing, but shout out to these entrepreneurs who took an idea to the extreme and made something out of it. Yeah, they made a juggernaut out of it. At the end of the day, I think parents just want to play with their kids. I mean, the Toys Ocean did a study, and they found that 64% of parents want to buy toys and games this holiday season that they can share with their kids. An elf on the shelf is definitely one of those things. I mean, you're kind of manipulating your kid a little bit because you're saying, look at this all-empowering. This is Santa Scout watching your every move, and if you do anything out of place, it's genius from a parenting perspective.

but the kids love it and obviously gives the chance for the parenting kids to connect. Yeah, parenting pro tip. Keep this out all year. Santa's actually watching you every single day. You'll have a great acting kid. Let's move on to our final story. Like Christmas trees, Santa, and your uncle drinking too much eggnog on Christmas Eve, Ponsettas are a staple of the Christmas tradition.

This is one of the most popular plants in the world. They have annual sales of 90 million units and global retail impact of nearly $1 billion. But the question is, like, where did a Ponsetta come from? It actually has a really fascinating history. It's indigenous to southern Mexico. It was very revered in that culture. And then an amateur botanist and statesman, John Roberts Poinsette, actually discovered, quote, unquote,

the plant in 1828. He brought it back to the US. And the problem with the plant from a business perspective is they would only last about two or three days. And you couldn't transport it. This guy named Paul Eck revolutionized the Poinsetta game. Like he is the OG of the Poinsetta in the US. He started selling them in California, and there's this Plant Padet Act that came out in 1930 that allowed you to patent certain breeds of a plant.

This guy just went to work, found a breed that would last longer, that could transport easily. And by the 1990s, the family was selling 500,000 potted plants and more than 25 million cuttings, which basically allow you to make other plants to other growers, and they would get royalties. At the peak, the company had a virtual monopoly on the U.S. Poincetka market, maintaining a 90% market share. and had 150 patents. Eventually, they found a way around the patent. It started selling in Home Depot, Lowe's and Walmart. And once that happens, it's over for your business.

But Pollack had a hell of a run. This is an incredible story. I don't think I ever would have known that it's native to Mexico and that it's been renamed. And honestly, the guy John Poinsett, who ended up taking it to the U.S., not a great guy, kind of a southern slave owner. So not, like, the history of Poinsetta actually is a little bit,

more controversial than I'm sure a lot of people listening ever imagined, but the business side of it was so interesting that it was like the perfect storm of being able, this act was passed that allowed you to patent certain type of plant breeds. And then through a lot of experimentation, they found this hardy version. And apparently this family protected it like it was the secret Coke recipe. Like it was literally the ticket to millions of dollars. But then some graduate student in 90s just reverse engineered it and suddenly the floor fell out of Poinsettas. And places like Lowe's and Home Depot sell them as lost leaders, like they don't not sell them for a profit. You can get a point setter there for a dollar, two dollars. And they just use it as a loss leader, which kind of

ended up handicapping like these mom and pop businesses. So absolute roller coaster of a history you did very well bringing it down though, Kyle. Well, and now our audience knows the economics with Christmas trees, Elf on a shelf, and Poinsetta. They're ready for some holiday conversation. Absolutely. And you mentioned egg. I'm starting to get a little thirsty as well. So I think we'll wrap up the show there. Kyle, once again, great to have you. Two shows back to back.

What age three. Yeah. Let's roll the credits. If you have any good memories from the last year of Morning Brew Daily, send me a note and tell me about them. Our email address is Morning Brew Daily at morningbrew.com. Emily Milliron is our editor and producer.

Samantha Velas and Raymond Lou are our associate producers. Echenowagu is our technical director. Billy Manino is on audio. Hair and makeup is also. We're trying to get rich off of the Ponset of business. Good luck with that. Devin Emery is our chief content officer, and our show is a production of Morning Brew.

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