Prof G Markets - OpenAI & Microsoft Feud, Homebuilder Vibes Slump, and WBD Cuts Zaslav’s Pay

Episode Date: June 18, 2025

Ed breaks down why homebuilder sentiment fell in June and takes a look at the growing tensions between OpenAI and Microsoft. He and Scott then unpack why Warner Bros. Discovery is slashing CEO David Zaslav’s pay. Subscribe to the Prof G Markets newsletter Order "The Algebra of Wealth" out now Subscribe to No Mercy / No Malice Follow Prof G Markets on Instagram Follow Ed on Instagram and XFollow Scott on Instagram Learn more about your ad choices. Visit podcastchoices.com/adchoices

The Chevrolet employee pricing event is on now. Get a big cash purchase discount of up to $11,300 on the 2025 Chevrolet Silverado LDZR2 and Silverado HDZR2. With a factory installed lift kit and Multimatic DSSV dampers on both the Silverado LD and HDZR2, you'll have all the capability you need to leave the asphalt behind. Hurry in! Employee pricing is on for a limited time. Visit your local Chevrolet dealer for details. Hey there, this is Peter Kafka, the host of Channels. And this week I'm talking to Scott Frank, the writer and director who moved from movies to Netflix, which is where you can see Department Q, his newest hit. And we talked about how no one knows what the future of Hollywood is

going to be like, except that it won't be like the past. This business hasn't landed where it's going to land yet. And people keep looking backwards and saying, no, we just need to get movie going back to where it was. That boat sailed. That's not going to happen anymore. That's this week on Channels, wherever you listen to your favorite podcasts. Today's number, 50. That's how many messages the average employee now sends or receives outside of regular business hours. Meanwhile, meetings after 8 PM are up 16% from last year and one in five meetings are now happening outside of the regular nine to five.

People are calling this new schedule the infinite workday. Well, the infinite workday is a cute name, but I have a different name for this and I think it's catchier. I call it the American Dream. You wake up at 6, you open up Slack, you pound 10 Red Bulls and you grind it out for 16 hours. That to me is what America is all about, so I am rebranding it. It is not the infinite work day, it's the American dream. Welcome to ProfD Markets, I'm Ed Elson. It is June 18th. Let's check in on yesterday's market vitals.

The major indices fell as Iran and Israel continued their metal strikes. Oil prices spiked as Trump demanded Iran's unconditional surrender. The yield on tenured Treasuries dropped after US retail sales came in weaker than expected. And solar stocks tumbled after Senate Republicans moved to fully eliminate clean energy tax credits in the latest version of the tax bill. The biggest loser of the day was Enphase Energy which shed 24%. Okay, what else is happening? A new survey from Wells Fargo and the National Association of Home Builders found that US home builder confidence has fallen to its lowest level since 2022. All three components of the survey declined. That includes measures of prospective buyers, of expected sales, and also of present sales

which fell to its lowest level since 2012. They also forecasted a decline in single family housing starts this year. Why are home builders so pessimistic right now? According to them, it's largely because of the tariffs. According to the association, tariffs will increase construction costs by roughly $11,000 per home. And that would make sense, because many of the materials we need to build homes like lumber and steel and aluminum, they are in large part imported from abroad. For example, Canada supplies roughly 30% of softwood lumber in the United States. Meanwhile, a quarter of all the steel

in America is imported from abroad and most of it comes from Mexico and again Canada. So yeah, it makes sense that home builders aren't building homes because suddenly with the tariffs, building just for no reason got a lot more expensive. Now, when we take a broader look at the data, the situation becomes even more concerning. Last month, total housing construction in the US fell 13% year over year. Housing permits have also declined for four consecutive months. Housing starts have fallen 10% year over year. We'll get an updated report on that data later today. But this is all happening against the backdrop of what is just an unprecedentedly unaffordable

housing market. The median price of a home right now is almost $420,000. That is a record high. And per this analysis by that same association, the National Association of Home Builders, 75% of Americans cannot afford that. Just think about that. Three quarters of the country can't afford the median priced home. In some, we have a housing crisis. No one can really afford a home.

The only people who can are generally speaking the people who can also afford a second home. And that is why the share of home buyers that are first time home buyers just hit a record low. But as always, there is more to it. So our producer Claire spoke with Rick Palacios Jr. He's the director of research at John Burns Research and Consulting. And he discussed what else is dragging down construction. Yeah.

So, I mean, we entered the year with a negative outlook for home builders in particular in terms of sales volumes, single family construction, because we just, we thought they were coming into the year with too much standing inventory. And it was really a plan based off of the hope that interest rates would fall down. And I think anybody will tell you hope is not a good plan. And our view has been, look, if you're staring at mortgage rates close to seven, it's going to be a grind higher on resale supply. And that's going to start to eat into your market share and you're going to have to compete with the resale market and that's where I think the last two years of hire for longer has been this really weird dynamic where home builders have been able to do well especially relative to the resale market but almost 90% of that

maybe more is because the resale market wasn't participating from a supply standpoint and the resale market like any home builder you talk to will tell you the resale market dictates what I can do with sales and pricing trends and we're kind of at this fork in the road moment I think where a lot of home builders are realizing wait a second resale market is actually back rates aren't going down supply is here to stay I need to I need to rein it in. Seems like we're in a moment of stasis then do you think that persists for 2025? I think it does.

Yeah, I mean, the first half of the year, namely the spring, was supposed to be, and seasonally typically always is, the stronger part of the calendar year for housing, especially home builders. We didn't experience anything like that. And so now we are actually tiptoeing into the softer seasonal part of the year. And so

again, if your view is what we just walked through on rates and supply continuing to grind higher in that rate environment, the back half of the year is probably going to be slower than what the first half was. And the first half wasn't great. So look, I could go on and on about what a mess the housing market is right now. Sky-high prices, input costs rising, construction falling. To Rick's point, you've got resale supply starting to come back online, but as he also points out,

you've still got mortgage rates at 7%. And you think back to just four years ago when they were below 3%. So the long and short of it is kind of the same. US housing is still very much unaffordable and we've yet to see any indication either in the data, in this data or even on a policy level that any of that is going to change. I wish I could tell you different. Here's a new report from the Wall Street Journal. Tensions between OpenAI and Microsoft are quote, reaching a boiling point.

Supposedly the partnership between the two companies, which started back in 2019 when Microsoft invested in OpenAI, supposedly that partnership is flaring up. OpenAI is frustrated with Microsoft, they're frustrated by its tight grip on the company, and supposedly they're considering taking this to court. Per the Wall Street Journal, quote, OpenAI's executives have discussed accusing Microsoft of anti-competitive behavior. That effort could involve seeking federal regulatory review for potential violations of antitrust law. So this is quite something, this partnership, which I've criticized in the past,

but it's been very important to the AI ecosystem. This might now be coming to an end. A lot to dig into here. I think the first question we should probably address is why OpenAI is so upset? What triggered this reaction? Well, it's many things, but the moment that really set it off was a discussion with Microsoft about this new acquisition that OpenAI made

of a company called Windsurf. And the problem that OpenAI is running into right now is that under the terms of its contract with Microsoft, Microsoft will have complete and unfettered access to all of Windsurf's intellectual property. And the reason that is a problem is because Microsoft is basically a direct competitor to Windsurf. Windsurf is an AI code generation company and Microsoft's co-pilot does the exact same thing.

So that's what set this off. Now, if you listen to my other show, First Time Founders, you actually have some inside scoop on this conflict. Because on that podcast, I interviewed the founders of a company called Kodium. And just a few months later, that company Kodium changed its name to Windsurf. So you and I know these guys. And if you're interested in that company, I encourage you to go back and check out the episode. But when I interviewed the founders, I asked them specifically about this. I asked them, how are you supposed to compete with Microsoft,

which is developing Copilot, which directly competes with your product? And their response was basically, we're going to build a better product. There are reasons why we are able to compete directly with Copilot. The results are highly personalized, and we're seeing like a 30 to 40% boost in accuracy. So just the quality of our code suggestions are very competitive. And then the thing that we're really kind of trying to lean in on though, is our ability to deploy onto like a private server. And people can host Codium inside their company or in their work environment.

And for example, if you're like in the defense space or like the finance or healthcare space, they can't use Copilot at all. And that's kind of where we are focusing right now our efforts, but then we have some things down the pipe where we'll just be competitive even on the cloud front too. In other words, quality wins, or at least that's what you would hope. But with this news, we are seeing yet more evidence that actually no, in 2025 in AI, quality doesn't win, size wins. And the reality for Windsurf or Kodium is that it is smaller than Microsoft.

And ultimately, the story played out the way it always does in AI. Windsurf was acquired by another company that was fundamentally controlled by Big Tech. And now, Big Tech has access to all of Windsurf's IP. So that's what started this conflict. But there is a lot more that OpenAI is also upset about. And to understand that, you need to understand exactly how Microsoft controls them. There are three main abnormalities

in this contract between Microsoft and OpenAI. The first is that Microsoft owns all the rights to all of OpenAI's IP. In other words, despite the fact that they are separate companies, anything OpenAI creates, Microsoft can just duplicate and transfer over to its own business. In that sense, Microsoft isn't just an investor in OpenAI,

it really is an owner of OpenAI, and we've made that point before. The second detail is that Microsoft is also the exclusive compute partner for OpenAI's API, meaning if OpenAI needs more compute to build their enterprise product, as we have repeatedly seen in the past, they have to go through Microsoft to get it. And that is a very difficult position to be in if you're the biggest AI startup in the

world. And the third and final abnormality is this revenue sharing agreement. Currently, OpenAI has to pay 20% of its top line revenue to Microsoft. They have reportedly tried to bring that number back, but it hasn't materialized, and ultimately it's been a great thing for Microsoft. According to the information,

OpenAI had an operating loss of $5 billion last year. 700 million of that went directly to Microsoft. So this is not the kind of situation you wanna be in if you're OpenAI. If you're trying to be the number one AI company, you don't wanna be beholden to Microsoft, who is, let's be honest, also trying to be the number one AI company.

The incentives just don't make any sense here. But this all gets back to something I've been saying for a long time. And that is that OpenAI's original sin was taking that $1 billion from Microsoft way back in 2019. They should never have taken the money. Because as soon as you take the money, even if Microsoft makes all these strange concessions

and says, you know, oh, we're gonna be just a minority owner or we'll only take a limited share in the profits or we'll take a board seat, but it will be a non-voting observer board seat. None of it really matters. You took the money, which means you owe them something now. And this is what we're seeing across the entire AI ecosystem. It's not just open AI. As we discussed last week, it's also scale AI. It's also anthropic. It's also perplexity. It's also just OpenAI. As we discussed last week, it's also ScaleAI.

It's also Anthropic. It's also Perplexity. It's also Cohere. All of these companies have signed deal terms with Big Tech and it's all coming due right about now. This is the moment where the startup looks back at those contracts that they signed when they were very hungry for cash and understandably so. And now they have to ask themselves the following question,

was the money worth it? And so far we have gotten one answer and the answer has come from OpenAI. No, it wasn't. And now let's go to court. After the break, an update on David Zaslav and his pay package. Stay with us.

an update on David Zaslav and his pay package. Stay with us. Support for the show comes from Groons. If you've ever gone down the rabbit hole of trying different nutrition solutions, you've likely had the thought, surely, there's a way to improve my skin, gut health, immunity, and brain fog without offending my taste buds. Well, there is, it's called Groons.

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undocumented immigrants. And your response to this probably depends to some degree on your politics. But the Trump administration is also expanding Palantir's reach on something that would affect all Americans. The idea is to link together all the data that the government has about us. This is unprecedented. So anyway, Theo von freaks out. This sounds crazy, dude. And confronts JD Vance. It can tell if your kids are, you know, if your kids can have a limp or whatever, he'll be in the Christmas play. Veep is like, uh, it's going to be okay.

But FYI, I also just learned about this. I actually just read about it earlier today or maybe yesterday. Coming up on Today Explained, what's Palantir up to? We're back with Profit-G Markets. Our final story. We have updates on Warner Brothers' Discovery's compensation package for the CEO David Zasloff. This is a story we've been following very closely. When we last discussed it, the board of WBD was reckoning with this shareholder vote, which determined that David Zasloff's $52 million pay package in 2024 was too much.

And we agreed. We pointed to the fact that the stock has fallen around 60% since David Zasloff took over. It fell again in 2024. And despite that, the board decided to crown him as the eighth highest paid CEO in the S&P last year. We thought that was ridiculous and then it was put to a vote.

So did the shareholders. So what is the new update? Well, the board has decided to cut his pay. Zaslav's annual pay package will drop by about 50% after the company completes its spin in 2026. If Zaslav hits 100% of his operational and financial goals, his target pay will be $16.5 million. That is down from the $37 million in his current contract.

Now, does this revoke the 52 million that he was paid in 2024? No, it doesn't. He still gets that money. It's just that he will now be paid likely less in the future. So the argument from the board would be, yes, yes, we hear you shareholders. We get that you don't approve of the compensation. And this is how we're going to address it. We are going to reduce his compensation in the future. So let's get Scott on the line

because he has been following this very closely and he also made a prediction about this. I previously asked him if he thought that 2024 package would be revoked or annulled and he said unequivocally no it won't. It appears he was right. The 2024 comp is staying but it appears the future contract will be reduced. So let's get his updated perspective on this David Zaslav compensation story. Hey Scott.

Ariad. I'm doing well. How's Cannes? Cannes is great. I'm stressed. I got my calendar and wires confused and I stood up a bunch of people where I was supposed to be in a fireside shot and I've been in a bad mood. All the, anyways, no, no excuse. These are good problems. How are you Ed?

I'm doing well. I'm doing very well. I'm sorry to hear that. Okay, Scott, what do you make of this David Zasloff news? Uh, this is a hand joke from your cousin at Thanksgiving. This is. This is okay. So after taking $400 million out of a company for destroying 25 billion in shareholder value, Adam Newman probably takes the crown.

He got a billion dollars for incinerating 11 billion. And David Zasloff has gotten 400 million for incinerating 25 billion. And they're acting like this is a big fucking deal that they're reducing his current comp, but topping him up with a huge options package that if he gets the stock back to anything near where he talked a bunch of investors that into this brain dumb idea of buying time, more assets from AT&T and merging them with Discovery. If he gets it back to where it was when he said it was a good idea, I think he makes another $150 to $250 million. And I don't even hold him responsible. He's doing what people do. He's doing the best he can. The comp committee of this board is literally taking a half a billion

dollars into the street and incinerating it. I mean, are they worried that they would lose the magic of David Zaslov that he has offers from Hulu or from Fubu to go run their companies for three million a year? So they have to top them up with what will be an extraordinarily dilutive package if this company just recovers to where it was. So look, good for him. You know, he's doing what he's supposed to do, but the folks at the compensation committee here, hey guys, the compensation committee here are literally terrible fiduciaries for shareholder value.

One question I had, I can't tell how much of this is a response to what the shareholders voted for just a few weeks ago, where they said that the compensation in 2024 was too high versus the simple fact that the company is restructuring. Because on its face, this kind of looks like a response to the shareholders. The shareholders said, hey, $52 million last year was too high, and the board's come back and they've said, well, in 2026, we're going to pay him less. But I can't tell if that's because of that or if it's just because the company is splitting

in two and therefore it would make sense that you also split the CEO's compensation in two as well. To what extent do you think this was actually a response to the shareholder vote? It was an attempt to say, honey, I've changed and it's total bullshit. Yeah. We've heard you were reducing his current comp, but we're going to issue him a shit ton of options where if he actually does his job and gets the stock back up, it's total bullshit. Yeah, we've heard you, we're reducing his current comp, but we're going to issue him a shit ton of options where if he actually does his job and gets the stock back up, it's going to even be more dilutive for shareholders. This is the board attempting to placate shareholders by reducing his current comp

in exchange for a shit ton of options. Said he again, get the stock back to where it was before he talked shareholders into a stupid merger? Jeff Beukis read the tea leaves and said, this is time to sell. We can't compete with Netflix. When Ruben Murdoch and Jeff Beukis, the two brightest minds in media, sell assets at the same time,

that means you don't want to be on the other side of the trade. But David Zaslov, who wanted to move to Hollywood and be on top of the big media company, came in shareholders. This was a good idea, it wasn't. And he's taken, he's cut the share price in half, if not 60%. And now wants $150 million in equity comp, if he gets it back to where he started. The comp committee here are terrible fiduciaries. And he's clearly a very charming guy. I'm not even sure if he's not, he may be very good at what he does, but right now he's the highest paid banker in the world. Just as Adam Newman got a billion dollar commission on raising 12 billion for a

shitty, stupid company, David Zaslav is getting what will, what already is 400 million. It might be another 150 million for talking shareholders into the idea that it made sense to merge assets that he's now splitting up. This is when a board fails to live up to its duty to serve all stakeholders. He in fact, occasionally have to pay a CEO a couple billion dollars and they usually deserve it. In a market where you have to pay people to stay competitive. I'm not against paying people a lot of money.

What I'm against is paying someone about 140 million more than you would need to pay them. There are a lot of very talented in this business that would say, okay, if I get the stock back to where it should be, give me 10 or 20 million on 150. This is just, I get the sense David Zazov is good, good friends with the people on the comp committee of this publicly traded company. love is good, good friends with the people on the comp committee of this publicly traded company. This is, uh, the comp committee here, the directors, David's just doing what every person does in a capitalist society. He's trying to make as much money as he can.

He made me very good at what he does. The compensation here of 400 million to destroy 25 billion in value. And then another 150 million, if he just gets it back to where destruction began, means that the board is not doing its job. And this bullshit, trying to claim that they listen to shareholders is just ridiculous. Honey, I'm sorry, I'll stop behaving this way. I'm a new man. Now get me a fucking beer, bitch. Yeah. It's basically, if you do your job as expected, we're going to pay you $16.5 million. And if you go above and beyond, it'll go up to probably around $37, $38 million. Plus you got the upside in the options.

That's right. So this isn't a material change. And I don't think this is much of a response to the shareholders. That's right. By the way, more importantly, I'm watching Mobland. First time I've watched Paramount Plus ever. Have you seen Mobland, Ed? I've not. I've not. That's right. By the way, more importantly, I'm watching Mobland. First time I've watched Paramount Plus ever. Have you seen Mobland, Ed? I've not, I've not.

What's it about? Oh my God, you gotta watch it. Oh, wow. Dears Brosnan, Tom Hardy, that guy's a movie star. Yeah. Exceptionally violent and the best opening song in any streaming media right now. That's the real takeaway here is watch Mobland

and also have an activist come in and reelect or nominate directors to replace the current nominating committee of Warner Brothers Discovery, who are absolutely terrible to be shared with shareholders. That was a mouthful. Okay. Thank you, Scott. I will watch Mobland tonight and I'll get back to you.

Thanks for joining us. All right, my brother. Peace. Okay. That's it for today. Thanks for listening to Prof2Markets from the Vox Media Podcast Network. I'm Ed Elson. I'll see you tomorrow.

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