The Prof G Pod with Scott Galloway - Prof G Markets: Why Netflix Dominates, China’s Economic Strife, and a Year of Reckoning for Startups

Episode Date: January 29, 2024

Scott shares his thoughts on why VC-backed startups are burning through so much cash, and what 2024 has in store for them. He then breaks down Netflix’s latest earnings and discusses its unexpected competition. Finally, he takes a look at China’s markets in light of the country’s struggling economy. Learn more about your ad choices. Visit podcastchoices.com/adchoices

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NMLS 1617539. This week's number 22. That's the percentage of single American adults who have engaged in consensual non-monogamy. True story, I went to an orgy and Jesus showed up, which is a real bummer because he's always pretending to come again. I like that. Welcome to Prop G Markets. Today, we're discussing trouble in the startup world, Netflix's earnings, and international markets. Here with the news is Prop G media analyst Ed Elson. How are you, Ed? How are you?

I'm pretty well. I'm good. It's pretty freezing in New York. But I'm pretty excited about this show right now. And why are you excited I'm pretty well. I'm good. It's pretty freezing in New York, but I'm pretty excited about this show right now. And why are you excited about it? We've got some interesting stuff to talk about. Yeah. Oh, this show in particular, not your career in this show. Okay. Pretty excited about South by Southwest too. That's going to be pretty cool. That's right. You guys, the team is coming with me or I'm coming with the team, right? Yeah. You're coming with us. Yeah. That should be good. Can we talk about that on this podcast? Can we promote that yet? I'm talking about Jesus coming again. We can talk about anything we wanted. No, it would be inappropriate.

Yeah, right. That's what I'm worried about. That's what I'm worried about. I'm sorry, you need to show greater maturity and discretion around here. I provide a lot of cloud cover for basically any behavior here. Anyways, what were you going to talk about at South by Southwest? We just thought we were going to do a live audience recording. And it's sponsored by Atlassian, the Microsoft of Australia. I work for a software company down under. There we go.

By the way, true story. I was inralia i made that up right in real time i was in australia i went there and i had the best night of my life i met these two women at the bar at the w hotel and they took me out to this party it's that and i'm going to date myself that in excess in excess was hosting or the drummer from in excess was hosting and. And I'm like, oh my God. I don't know what that is, but. You don't know who InXS is? No. Oh my God. All right. Stop everything. We need to play a clip of InXS. Okay, we're back. So back to Australia. That's InXS, Ed. It sounded really good. Anyways, so I think this is the greatest place in the world. I'm moving here. And I think Australia, generally speaking, if it wasn't so far, everyone would move there. And at that time, I was pretty professionally esteemed. I peaked early. I don't know if you know this about me, but I peaked early.

Okay. I was quite famous and accomplished, or not even famous. I was doing well. And so I called, I forget, a friend of mine. I said, do you know any VCs down here? And he said, oh, the Kleiner Perkins of Australia is his firm. And he set up a meeting right away. And they said they were excited to meet me. And I said, I'm thinking about moving to Australia. I had just left San Francisco. I had gotten divorced. I didn't know what I was going to do with my life. So I thought, okay, I'll go to Australia and I'll move to Sydney and be a VC and everyone will love me. And I went through an interview or a round and they said, come back the next day. And then I made the mistake of finding out, doing some research on them. I found that their AUM, this was like the largest VC in Australia, granted this was

2000, I think, was $230 million. And I'm like, I've raised $80 million from my shitty little companies. And it just struck me that Australia is $80 million from my shitty little companies. And it just struck me that Australia is like Europe, in my opinion, a place where you want to spend your money and the US is where you want to make it. It's just a much bigger market here. Anyway, that's my Australia story. So what did the girls at the W Hotel have to do with this? Well, one slept with me, so they pretty much had everything to do with it. Is that wrong? No.

I mean, if it's the truth, I think that's all right. Let's play that NXS clip again. That's why I have such an affinity for Australia. Anyways, get to the news, Ed. Get to the news before I cancel both of us. Let's start with our weekly review of market vitals. The S&P 500 hit a record high. The dollar climbed.

Bitcoin fell. And the yield on 10-year treasuries was volatile. Shifting to the headlines. For the first time in its history, Microsoft reached a $3 trillion market cap. That's the second company after Apple to reach that milestone. The Consumer Sentiment Index rose 13% in January to a two and a half year high. It appears consumers are finally feeling the relief of slowing inflation. The SEC adopted new rules for SPACs that bring investor protections in line with traditional IPOs. SPACs will now need to assume more legal liability for

disclosures on information such as projected earnings. Following the dissolution of the Adobe Figma deal, which we covered a couple weeks ago, Figma is now offering employees equity packages that price the company at a $10 billion valuation. That's a 50% reduction to Adobe's bid to acquire the company. And finally, Tesla reported fourth quarter earnings that missed expectations and warned investors that vehicle volume growth for 2024 may be, quote, notably lower than last year. The stock fell more than 9%. Scott, thoughts? Well, so Microsoft, we've talked about this before. It's arguably, I would say maybe the exception of, well, Netflix, Apple.

There's so many companies that are so well run. We're constantly ship posting CEOs. But this company, Satya Nadella is sort of the first ballot Hall of Fame CEO. And a lot of people will say that he's just drafting off a lot of the investments that Ballmer made, but probably the best corporate VC investment in history with OpenAI. We talk a lot about recurring revenue and the power of high-margin assets, specifically software. Think about Microsoft. Microsoft, I bet, has 97% of the Fortune 10,000, the 10,000 biggest companies in the world, probably spend, I don't know, more than $10,000 a year and have a 2% churn with Microsoft.

I mean, what company above a certain number of employees can't have a recurring revenue relationship with Microsoft in the form of office? In addition, they've innovated around hardware. They've innovated around the form of Office. In addition, they've innovated around hardware, they've innovated around the video game space, and now they're kind of the de facto leader in AI. I mean, we say it's open AI, it's really Microsoft AI. And he's also been very deft at shifting the culture from what was seen as the Death Star to a company that's a great company to partner with. And as a result, what they've also done, which is really elegant, is he has stayed out of the crosshairs of the FTC and the

DOJ. And fortunately, he has Mark Zuckerberg, who's incredibly unlikable, and a bunch of Silicon Valley jerks who sort of just warrant more attention, right? And so he's kind of managed to figure out a way to assemble something that feels, has monopoly-like power and margins, but so far has avoided the same level of scrutiny. What are your thoughts, Ed? Well, I was just recently watching this presentation from Y Combinator that was back in 2013. And in the presentation, there's this comparison between the US and Microsoft, and it's a negative comparison, basically saying that, you know, the US is the Microsoft of all nations. It's outdated, it's slow, it's behind the times, et cetera. And the whole audience claps and laughs and loves it. The reality is that back then,

this was 2013, this was not a sexy company and people did not have high growth expectations for this company. And Satya Nadella took over in 2014, so it was a year after that. Ten years later, Microsoft has 10x the market cap. And earlier this month, it was the most valuable company in the world ahead of Apple. So this $3 trillion number, I don't think it means anything fundamentally, but I do think there's symbolic value to it. And that is the visionary leadership of Satya Nadella, which has been expressed through so many ways.

I mean, you mentioned the strategic acquisitions. We should mention LinkedIn. Activision, the fact that that passed a $69 billion acquisition. They've expanded Azure and the cloud services unit. And then, yeah, you mentioned AI. I mean, I feel like people forget Microsoft invested in open AI in 2019, and barely anyone knew what this thing was. And now here we are, they have, you know, pseudo acquired the most important company in the most important industry in the world. So basically from 99 to for the next 15 years,

the stock was flat. And I remember it even attracted an activist investor, David Einhorn came in and said, this company is underperformed and I think he made a shit ton of money. It was a good call. And as you've said, since, gosh, I guess in the last five years,

what are the returns on it? Oh, it's quadrupled in the last five years, what are the returns on it? Oh, it's quadrupled in the last five years. So this company, and it's unusual, I would say other than, I mean, IBM has, Apple, Apple and Microsoft are the kind of the turnaround stories. Both companies have had just a renaissance that is just remarkable. The consumer sentiment index rising 13%, you know, you can't tell consumers how to feel. I'm glad that we're finally seeing an uptick. I still get upset and angry when I think about how much prosperity we have and how concentrated it is. But if you were just to look at the top line numbers, it's just striking. And I'm this consumer sentiment and except and by the way it's it's completely separated by political party if you look at the consumer sentiment it's literally like as soon as biden's elected democrats go up republicans go down this question how do you feel about the economy isn't really an economic question it's a political question

but the good thing is with this, that basically for the first time, the Republican sentiment has jumped alongside Democrat sentiment. So I'm going to try and equate this or draw personal learning on it. And that is the metaphors relationships. And you'll see someday when you have a girlfriend, that that was good, that when you're upset, or your life isn't going well, especially young people, and a lot of people never go out of this, they have a tendency to project their anxiety, their depression, their upset on the relationship. And if you're unhappy, it must mean that it's the relationship's fault. And as you get older, you usually find out that it's your own shit or it's something else. And you're projecting it onto the relationship and potentially fucking up something that's actually a really nice part of your life. And I think what happens a lot of times in America is that we project our frustration or upset with the current political party and their policies. So I'll give you an example. When Trump was elected president in 2016, the next day, I sold most, if not all, of my stocks. I

went to cash. And by the way, the market's ripped. And any objective analysis of the economy from 2016 to 2020, the economy was strong and the markets did well. But I refused to believe that or acknowledge that. And unemployment among non-whites was really low. And here's the reality. And that is the economy is much less

under the control of the administration than people would like to believe. We also have a human bias that we want to think we have control over something, and that if we vote for a certain candidate that shares our value, that everything will work out in terms of the economy. And that's just, there's just so many factors at play in the economy that we disproportionately credit them or blame them for the state of the economy. But the economy right now is incredible. Let's talk about SPACs. I'm hoping that SPACs become a thing of the past. And the reality is there's just been enormous wreckage here, just enormous wreckage. And what it goes to is that the hurdles and the friction around getting public end up actually being what the SEC wants, and that is their investor protections in the sense that there are very few companies that go public via traditional IPO that are off 90% in 30 days.

And so I hope SPACs in their current form become a trivia question. What are your thoughts? I think it's almost already happened. I mean, once again, the SEC is right and also too late. Right. Because the damage has already been done. That's a great point. 95% of SPACs are trading below their merger price.

So, as you said, basically everyone's lost their money. Unless you were an early investor, the rich people got rich off of these things. But it's also too late because the SPAC era is dead. I mean, SPACs raised around more than $150 billion in 2021. Last year, they raised $4 billion. Because everyone understands now that, you know, without the regulatory arbitrage, these are shitty investments.

They're not going to make you money. The only thing is, you say it's too late. I think that's a really interesting point. They're right and late. However, however, SPACs have been around a while and investors have short memories. Just give them a couple of years and get one company to SPAC that's kind of hot, get the IPO pipeline backlogged, get Goldman's operating committee saying you're too early. It's a cool company and you maybe have a famous sponsor who knows the producer at CNBC, but you're too early. These things could come back. So I like the fact that there's additional regulation here. I think it's a good thing. The Adobe Figma deal falling apart. So you said they

offered people after the deal broke up equity at a $10 billion valuation, which is a 50% reduction to Adobe's bid to acquire the company. Now, there's some nuance here because it's a private company. So they want to give options out at as low a valuation as possible. And probably what's happened here, they needed to do something. Because it is impossible when you read in the newspaper that your company is being acquired for $20 billion and you go, okay, you immediately get a calculator out and you pull out the paperwork and say, how many options do I have? What's my strike price? Oh my gosh, maybe it's time to get a bigger home. Or maybe it's, you know, this is great. Let's finally take the family on a big vacation or let's pay off all our student loans. It's impossible not to start counting your money.

And then you read in the Wall Street Journal, deals off. That's a bummer. That's a bummer. So what immediately management sets about doing, and the folks at Figma are smart, they say, folks, it happened once. It'll happen again. We're either going to go public on our own. And here's the deal. We want you to stick around. So we're going to give you all additional equity at a valuation of $10 billion. And a smart acquirer wanted to acquire us at $20. So look how much money you're going to make the next two, three, five years if you stick

around. So they immediately had to say to everybody, okay, this was a head fake. We know you're disappointed, but you're going to make a lot of money here. And my guess is they really got generous with options to keep everybody on board. And then Tesla, you know, couldn't happen to a nicer guy. That's probably unfair. Anyways, Tesla's margins, Tesla's turning into an automobile company. What do I mean by that? It's a low bell today, Tesla shed the value of BMW. And the interesting thing here is that was only 10% down. Tesla is worth more than the German automobile industry. It's worth more than the US automobile industry. It just doesn't make any fucking sense. And so when this begins to look more like a traditional automobile company, it doesn't have the margins or the growth of a software company. It looks like a difficult, capital-intensive, low-margin business, see above an automobile company. It's going to start trading in line with its peers.

And I've been waiting for this to happen for five or seven years. I've been wrong so far. He's always able to pull a rabbit out of the hat. But my guess is he personally is going to spend a lot less time on this company and go where his opportunities are. And that is around SpaceX, specifically Starlink, which to me is just going to be, I mean, it's just a monster company. What are your thoughts? Yeah, I thought the most important thing was that they said volume growth is going to be notably lower because, you know, Tesla's been cutting prices for the past year. So they're basically saying, we're going to start charging, or we're going to continue to charge less per car, and also we're going to sell fewer cars. And then that's in addition to all of the terrible numbers.

I mean, revenue up 3%, but if you account for inflation, it's technically a revenue decline. Gross profit down 23%, margin down 50%. It's crazy. Having said all that, this is still a $600 billion company. The market is basically saying here, yes, it declined around 10%, but the market is continuing to say, we actually don't care about how many cars you sell. We still believe you're some sort of AI robotic software company. That's where you derive value. And that's why we believe you're going to grow into this ridiculous valuation. You know, I want to side with you, but it's been so long.

It's been so long. I just, I don't know. History is not on my side. I'm wrong a lot, but on Tesla, I'm, you know, all caps, all caps wrong. I don't want to say you're wrong. I'd rather say that you're not right yet. I'm early. Yeah. I'm early. Yeah, that's it. We'll be right back after the break with a look at trouble in the startup world. We're back with ProfitGMarkets. One of the hottest fintech startups of the pandemic era, Brex, is struggling.

According to the information, the company burned through $17 million in cash per month in the fourth quarter. A Brex spokesperson said the company's cash runway is now four years. With expenses running at twice the level of revenue, Brex needs to cut costs. And in an effort to do that, it said last week that it will lay off 20% of its workforce. So Scott, I think the stat that is standing out here is this $17 million per month burn number. Let's just start with a general startup question. As someone who has built and run startups, why do you think spending has gotten so out of control here? than they needed. And in the back seat is a driver saying, go big, go hard. Because to a certain extent, a lot of these guys would almost rather get a zero than a meddling outcome. When I was building L2, my backers didn't want to sell when I wanted to sell. Because their attitude is,

we didn't invest this company to get 160 million back, which we sold L2 for. We want this to be a billion-dollar enterprise. That's not why we invest. And now they got 3x their money back in 27 months, and they were disappointed in that. They're like, that's not what we do. I think they would rather get zero or have a shot at 10x than have kind of private equity-like returns, right? That's just not the business they're in. So there's this zeitgeist of go big, go hard. Maybe it's a good company, it's growing, spend money. But you have these companies everywhere. You have companies or enterprises that have created cash-eating machines, but not cash-generating machines. And the question is, where is the inflection point? So a lot of them are cutting costs. And 2024, I think, is going to be a big year of reckoning

because a lot of these companies raised so much capital that they were fine through 2023. But 2024, things are going to start to, I think, get ugly. So more than 3,000 VC-backed startups shut down last year. One in five funding rounds was a down round. That's up from one in 20 in 2021. The number of VCs that are actively investing in deals declined 40%. More than a quarter of a million tech workers were let go. And then we saw 650 corporate bankruptcies last year, and that's the highest number since 2010. It's a 13-year high.

So you mentioned this idea of this reckoning or this death march it feels like the death march has sort of occurred in 2023 but it sounds like what you're saying is that this will at the very least continue and potentially get even worse is that what you think will happen in 2024 oh yeah the these companies think they were went through the valley of death in 2023. They haven't even gotten to the desert floor yet. A lot of these companies will come out stronger because there's some good companies and the lack of financing gives them cloud cover to cut costs. If I look back on all my companies, the ones that have worked were the ones I started in recessions because I didn't have a lot of money, which meant you got to proof of concept really quickly.

Otherwise, you went out of business. And because I didn't have cheap capital, I imprinted a DNA on the company that was just tighter, lower spend, could find office space and people inexpensively. And then once the market came back, I had wins at my back. I had a company doing $5 million. The company comes back. The economy comes back. And boom a company doing 5 million. The company comes back, the economy comes back, and boom, we just take off. We're under the races and we have the right DNA. Almost every company there's been a flaming bag of shit crash into a wall at 300 miles an hour has been a company I started in boom times. Everything's expensive. Good people,

mediocre people are expensive because all the good people are sitting and resting, investing at Snowflake or whatever. And you have the ayahuasca big gulp hallucination that this shit's actually working because you were able to raise $40 million off a PowerPoint presentation. And you can throw so much money at customer acquisition that you get customers. You overbuild the product. You're basically sending people a mattress that cost you $1,000 to produce and you're charging them $700 so yeah they love it and the question is do you ever get to a point where the brand

and the margins and everything are strong enough that you get to an inflection point and the majority of these companies or a lot of them never get to that inflection point the ones that have good businesses and cut costs and really tighten their belts and get lean and mean they end up better off like 25 will probably be have good businesses and cut costs and really tighten their belts and get lean and mean, they end up better off. Like 25 will probably be a great year for IPOs for some of these companies to get through this because this gives them again, cloud cover to get in fighting shape.

So you think 2024 is basically the year where, I mean, 2023 was the year of efficiency, tighten the belt, but 24 is like, you now have to be profitable. And if you don't, if you're still running on VC funding, then, I mean, would VCs just let these guys die? Well, they'll try and sell them. If you have a, you know, a company that's raised $100 million and has built a, you know, a $5 or $10 million software company, there's some value there. Very few of these will be chapter seven. Chapter 11 is when you go out of business or you declare bankruptcy, but there's value there and you sell it to an acquirer. Chapter seven is you put a padlock on the door because the business makes no fucking

sense and you have so much money, you just have to basically tell everyone to go away. A lot of these VCs are very good at kind of playing chess or whatever the term is, find a home, find a foster home for this company. And that is, the acquirer will say, will come in and say, okay, this is a nice piece of technology. You're doing $10 million in revenue. It's worth 30, 40 million to us, or maybe it's worth 100 million. All the investors get wiped out. They want the majority of the money to go to the existing employees to stick around. The VC's investors get 10, 20, maybe 30 cents on the dollar back. The last round gets more. They get to live on to fight another day, and they get sucked up into a bigger company. And what the acquirer will demand that they do is all the dirty work. They'll say, okay, we looked at your company and your burn rate. You got to clean up your house. You got to fire people. We don't want to do that. So they'll say, all right, get your house in order. And I think a lot of companies in 2024 will say, all right, there's no viable exit as an independent company. We either got to sell or we got to cut costs dramatically such that we're not selling a

liability into a company unless they have some sort of distinct IP. I invested in a company called Neva, which was subscription search. We never got the kind of traction we'd hoped for, but the team was so incredibly talented and they had built some interesting kind of AI-driven search that Snowflake came in and basically bought them. It was sort of a semi-aqua hire, some IP, and the investors got their money back, which is an incredible venture investment because you get basically buying a lottery ticket. You don't hit your numbers. You get your dollar back. That will happen with a lot of these companies. There'll be a mix of them. A lot of them will become kind of peace with honor. They claim they're getting

sold. Basically, they'll get sold for a dollar. And it's also a lot of opportunity. I talked to one of the more successful VCs or partners of the more successful VC firms. And he said, if you have capital right now, the opportunity is going, the capital is going to two places. It's going to early rounds for AI companies, or it's going to basically series D and E rounds at good companies, but at much lower valuations, at down rounds. So this is a good time to deploy capital, actually, in the venture capital community. But I think it's going to be difficult for startups that aren't AI-related.

And if you don't have a business that is somewhat viable with some cost cutting and some additional capital, I think you're on the green mile right now. Netflix delivered a blockbuster earnings report, adding 13 million net subscribers in the fourth quarter. That brings Netflix's total subscriptions to more than 260 million, up 13% from a year ago. Revenue came in at $9 billion, up 12% year-on-year, and the company's password sharing crackdown, price hikes, and ad-supported tiers appear to be paying off.

Meanwhile, Netflix also announced a 10-year, $5 billion deal for the rights to the WWE's weekly wrestling show Raw. That deal marks the streamer's largest leap into live events to date. Scott, let's talk about the earnings. What are your thoughts? Netflix has grown their free cash flow from $1.6 billion to $7 billion. Why? Because for the first time in Netflix's history, they haven't increased their content budget

in two years. Why? Because there was a universally, multilaterally enforced pause in spending called the strike. And the company that had the preexisting deepest well of content that wasn't time-based, it wasn't late-night TV, it wasn't sports, was, in fact, Netflix. And they just ran away with it. And they continue to execute really well. The result is a company that now has incredible valuation they can use for acquisitions and also to reinvest in a company. And what have they done? They've decided, okay, we're going to start going into the last kind of final frontier of streaming, sports.

And we could argue games and news are also the final frontiers. But sports and the WWE is so – it's not only sports. It's incredible sports because it's every week. Whereas the Premier League is only whatever it is, six or seven months. And I don't know how long the hockey and baseball leagues are. As you mean, there are no off seasons. Year round. And so it's 500 million a year.

So NBC spent 450 million for the Premier League. I can't believe the WWE goes for more than the Premier League. That's just criminal. But anyways, a lot of people like whatever his name is, Dwayne The Rock or, you know, Men in Speedos with masks on. Not that there's anything wrong with that, Ed. Not that there's anything wrong with that. NBC paid $646 million a year for the Olympics. CBS and Turner Sports pay $1.1 billion a year for NCAA men's basketball tournament, and YouTube is paying $2 billion a year for NFL Sunday ticket. I mean, this company is just firing on every cylinder. Basically, what you have is, I think the entire streaming market is distilling down to sort of

three big players. Netflix is the chassis and the engine. Everyone has to, it's almost a utility at this point. It's like, well, I don't want lights in my house. Well, of course you do. You want Netflix. That's where you start. And it's got something like a 2% churn rate. Three and a half per month. Three and a half percent per month. And what is it for, say, Apple or Paramount? Apple's at 7%. Paramount's at 7%. Max, 7%. Showtime, 8%. Peacock, 6.5%. It's the lowest. Okay. But the difference between 3% and 6% is not, it's exponentially different. It's not twice as good.

It means that when you compound these numbers over a year, one company has to spend so much money on marketing just to stay at water level. And the other company can reinvest all of that money they would have to spend on marketing on content,, which results in a better service, which results in, you know, smaller churn, wash, rinse, and repeat. It's just the difference between a company that has predictable cash flows and exponentially more, more to reinvest because they don't have to spend all of their top line back into repopulating their subscriber base. And you can see how it happens. Ted Lasso's great. So I signed up for Apple TV, binge watch, cancel, right? It doesn't happen with Netflix. There's so much stuff on there that people want to watch that they don't churn. And then they go into something where a big portion of the American populace likes to watch it every week. I just think this is a

genius move. And these guys are, you know, they continue to sort of, I mean, think about this. They're spending $5 billion on this deal. What is Paramount worth? $7 billion? So they can go to $5 billion deals. They can go spend the value of Paramount on a deal for wrestling. So who can keep up with that? And back to the three buckets here, you have Netflix, which is sort of the core utility that you have to have. Then you have, I think, Max, which is HBO. HBO is the artisanal network. I think they'll do a really good job. I think CNN is actually more strategically valuable than they get credit for. It'll be an ingredient brand. And then family will be Disney. And everybody else is just going to be trying to find a dance partner as the music goes down and the

lights come up. Those, I think, are kind of the three big winners, if you will. Yeah, I mean, it's no question it's a great quarter. I think the thing that stuck out to me is the same thing that stuck out to me last quarter. And that is, you know, they go through everything that's going well. So subscriptions up 70%, revenues up to 12%, operating margin up almost 20%.

And they say something to the tune of, you know, we continue to drive growth and engagement among our users. We're ahead of Disney, we're ahead of Max, we're ahead of Peacock, et cetera. And as a percentage of TV screen time, we're proud to say that we are the second most popular streaming platform in the US. And you're like, what's the other one? What's better than Netflix? The elephant in the room here, it's YouTube. And you know, YouTube is the most popular streaming platform in the US,

not across laptops and mobile, but across TVs. It accounts for 9% of all TV streaming time. You have Netflix at 8%, Disney at 5%, Amazon at 3%. And by the way, it gets even worse when you look internationally. In Brazil, YouTube gets more than double the viewing time of Netflix. Again, this is just TVs. In Mexico, it's almost triple. The only country mentioned in this earnings report where Netflix is the number one TV streaming platform is Spain. And it's barely number one. It's 4% for YouTube and 5% for Netflix. So, you know, we constantly talk about how consumers are moving away from the big screen. They're going to their phones. They're going to mobile native platforms like TikTok, YouTube, et cetera. And all of that is true.

But I think less discussed is the additional fact that at the same time, you have the mobile native platforms that are moving onto the big screen and stealing market share in the TV space. So my question to you, I mean, imagine you're Netflix. What does this YouTube data say about the state of streaming? And how should Netflix be dealing with it and presenting it to shareholders? Well, I mean, that's really a cogent analysis. The reality is that HBO and Disney Plus, they're not their competitors, right? Netflix is competing squarely against Alphabet. And who was our big tech stock

pick from our November predictions deck? Alphabet. I mean, YouTube, it's kind of like the video game market. Relative to its revenue and its power, it doesn't get the same coverage. What I found most interesting about that was that they purposely said we're number two. And I think that means they're planning to make some pretty big acquisitions in 2024 and want to send a message to the DOJ and the FTC, we're not the monopoly here. We're number two. Because very few people brag about being number two unless they're purposely trying to send a signal to regulators, in my view, that you shouldn't, don't stay out of our hair should we decide to go buy, I don't know, Epic Games, right?

Because Netflix now has the currency with their valuation to go make some pretty extraordinary acquisitions. And I don't know if that's even on their roadmap, but I think they want that. I think they always want to be seen as the underdog and not the player that Lena Khan or Jonathan Cantor should be focused on. I would argue they even have a bigger competitor than YouTube, Ed. What is that? What is that? TikTok. 100%. 100%. They're competing against TikTok. We'll be right back after the break with a look at the international markets. We're back with Profit Markets. China's central bank has decided to cut its reserve requirement ratios, that is, the amount of cash Chinese banks have to keep on hand relative to deposits. But another way, they're encouraging banks

to take more risks in order to get more capital flowing into the economy. This move comes after what has been a disastrous start to the year for China's economy. GDP growth is down, the real estate market is in crisis, and the population continues to decline. Meanwhile, in the past month, the Shanghai Composite and Hang Seng indexes have fallen 7% and 10%, respectively.

So, Scott, the popular image of Chinese economic policy is that it favors long-term stability over short-term growth. But this is a short-term action, and it's not the only one they've taken recently. They've also been ordering institutional investors to not sell their stock. And just this month, they restricted short selling at CITIC, which is the largest brokerage in the country. So we'll talk about the markets in a second. But first, let's just go over the economics. What is going wrong in China? Yeah, we've just been so obsessed with our, you know, there's such an idolatry of China in terms of, you know, how well it's done, right?

It's been the economy and investment that's kept on giving. But the reality is China for the last few years has been a total shit show. So GDP grew 5% in 2023, but it's expected to come down to 4.5%. The unemployment rate for people ages 16 to 24 hit 21%. And so what does China do? What did the CCP do? They're like, let's just stop reporting it. 21%. Home prices fell the most in December in nearly nine years. And they're facing not only an economic crisis, they're facing a demographic crisis. Probably one of the greatest strategic errors in the history of the modern economy was the one-child policy, because now

they're dealing with an aging population. And the demographics here in the U.S. are worse than they used to be, but they actually look pretty good. We still have population growth, and people want to come here. Two-thirds of people, once they make a million dollars or more in China, have either left or want to leave. There's still not a lot of trust there. There's still a fear that if you piss off the wrong person, the wrong person calls someone else and you are fucked. And so once you get money, people want out. Everybody wants into the U.S. This is where people want to come, right? And that's true of London. It's true of Vancouver. This is a place where lifestyle, private property laws, freedom of speech are very attractive to people, great investment opportunities. So they have both human and financial capital flight risk.

Their population is shrinking, fewer and fewer young people to support an increasingly aging population. It saw its seventh year in a row of declining births. That is the ultimate kind of cynicism or the ultimate disparaging statement on a nation is when young people decide they're not optimistic enough to have kids. Like, we just don't want to bring kids into this world. The combined value of the Chinese and Hong Kong markets has lost $6 trillion, as we referenced before, since its peak in mid-2021. Contrast that versus India. They grew 7% in 2023, and the macro tailwinds by the early 2030s, it could have one of the largest working

age and middle-class populations. It looks like India's new China, these actions that China have taken, I would argue, feel more desperate than effective. Because when you tell people they can't sell stock over the long term, that makes them less inclined to buy it because then you're saying you're putting up gates. It's like in a hedge fund. Occasionally, a hedge fund gets out over its skis, its returns go down, and it lacks liquidity, and it doesn't want to sell its positions for fear it'll create a scare in the market, and investors start redeeming, and they don't have enough cash on hand. So they do something called they put up gates. And they say, even though your investment documents said all you need is 30 days

notice to get your money back, we're putting up gates. That sometimes is the smart thing to do. We don't want to fire sell. We don't want to be a for seller. The market is shitty for our holdings right now. And we don't have the money. And if we were to try and raise the money, it would cause a run on the markets and everyone loses. Fine, I get it. Once you put up a gate, your hedge fund is effectively out of business. Because when you tell people they can get their money out, and then you tell them, oops, just kidding, you can't, there's a line around the corner at the bank or the hedge fund. China is in a world of hurt right now. And I also think there's something to be said for free markets. They put a chill on the economy with what I feel were kind of overzealous restrictions. I think all of this is a giant ad for the old, you know, good old US of A. dollars in value just disappeared from Chinese stocks in the past three years. And there's

obviously the fundamental economic problems with that that are associated with that loss. But the other thing that's happening is this drastic reduction in multiples. Because in the past decade, the average price to earnings multiple in China has been cut in half. And then when you look at the forward price to earnings multiples, and that is the market value of a company divided by its expected earnings over the next 12 months, the median multiple in China is currently five, which is one of the lowest in the world. You compare it to the Eurozone, it's 12. The world average, 15. You can compare it to the US, which is 20. And you mentioned India, compared to India,

India is at 21 times forward earnings. So not only are the fundamentals bad here, but the valuations of those fundamentals are horrendous. Like, you know, that 5x multiple is comparable to companies in Pakistan and Turkey. So do you think it's possible that, you know, the Chinese market is getting valued too cheaply? Is there an overcorrection here? Because I just find that difference pretty staggering. Well, okay. So growth has slowed, an overzealous government or a constricting government, demographic problems, over-levered real estate sector. I mean, there's a lot of things here, capital, human and financial capital flight, tensions with the US, growing tensions with their biggest

trading partner, what used to be their biggest trading partner. There's a lot not to like. Now, based on everything you have learned, Skywalker, what would you do here? What would the investment thesis be? That's a pretty tough question to answer. And it was sort of what I was asking you. But I would say, I will say fuck it and say go in. Because, I don't know, I think that the Chinese Communist Party has done a pretty good job overall, to the extent that, you know, if we're saying it's comparable to Turkey, I would say that the geopolitical risk is not as bad. But, you know, I don't say that with confidence, as you can hear in my voice well as skywalker said when he was trying to raise up his ex-wing fighter from the swamp uh he said i think he said something along the lines of i you know i i i can't do it and he said well that is why you fail and that is you you were exactly right but you just said it with a level of insecurity that you instilled no confidence in anyone look this is the bottom line when you hear

all of this bad news all of this bad news and you news, and you said an average P of 5 versus 21 in India, this, in my view, would be a great time to buy a low-cost ETF or index fund in Chinese stocks. I wouldn't try and be a hero and go into individual stocks in China. That's dangerous. But China is still an incredible economy and society. They are the world's 3D printer. They're the world's manufacturer. In any room you're in, in Western Europe and the United States, there's just hundreds if not thousands of things in that room making it work that came from the supply chain coming out of China. Very hardworking. The CCP is, in my view, I don't know what the term is, mendacious fox, but they're smart. So at that price level, oh yeah, this is, again, what are some of our themes? Diversification, run into the fire. And at five, I mean, this feels like it's been oversold. When the narrative is all one way,

when it's all zigging, you want to zag. Yeah, I think that was a little bit more compelling than mine. Well, it's because I'm old. It's because I'm old. Let's take a look at the week ahead, Scott. We'll see earnings from Apple, Amazon, Meta, Microsoft, Google, Pfizer, and Boeing. We'll also hear from the Federal Reserve on the next interest rate decision, and we'll see the unemployment rate for January.

Any predictions, Scott? So my prediction is I've joined this WhatsApp group of all these intelligent folks looking at TikTok, specifically what is the influence of TikTok on American youth as it relates to whether it's Russia, Ukraine or the Hamas-Israel war. And I'm fascinated by that stuff. My thesis for about two years now is that the CCP would be really stupid not to be putting the thumb on the scale of anti-American content or content that further divides us. And some of the research that came out of this working group, and it was actually, I believe it was featured in the Wall Street Journal, is that amongst young people under the age of 25, it's about a three to two ratio. Take five young Americans, three are pro-Palestine, two are pro-Israel. All right. The ratio of videos, pro-Palestinian videos served to young people on TikTok to pro-Israel videos is 54 to one. Something is wrong in Mudville. And by the way, that ratio far exceeds the ratio of pro-Palestinian to pro-Israeli content or videos served on Meta or YouTube. So either Meta and Alphabet are very pro-Israel and the powers that be there are putting their thumb on the scale of pro-Israeli content or something is going on at TikTok. And the incentives here, in my view, are incredibly obvious. The CCP cannot beat us militarily. They clearly can't beat us economically.

The way they beat us, the way they diminish us globally, geopolitically, is to divide us. And that is exactly what they are doing right now. So my prediction is the following. Sooner rather than later, we're going to look back on TikTok and how feckless and how naive we were. And we're going to think, how could we have been this fucking stupid? And you wouldn't believe that TikTok is a younger audience

and a younger audience is naturally predisposed to suspicion about the US and suspicion about white colonial, you name it. I mean, it's basically a causation question because you're basically saying that these young people haven't reached this conclusion independently. They've been controlled and influenced by the CCP, which is why they are pro-Palestine. And I think that a lot of young people hearing that who are pro-Palestine would find it offensive that you are claiming that they've been influenced by someone else, that they didn't reach that opinion on their own. So you are where you spend your time.

I'm influenced by the media I watch. I am. My political views are a function of the Wall Street Journal, The Economist, the BBC, CNN, you know, a touch of Fox just to go behind enemy lines. That's where you develop your opinions. I mean, some people can go into a cave and develop their own opinions, I guess. The level of influence or the frame through which young people see the world is dominated by TikTok. It just is. And so the question becomes, all right, maybe this is just a reflection, a mirror of how they feel. The way you normalize for that is you look at other platforms and the ratios are exponentially

different. They're so starkly different that what is coming into sharp relief here is that this isn't just a reflection. I believe that young people are dramatically more pro-Palestinian for good or bad reasons, let's not even argue about that, than older generations. That's clear. That's clear. That does not explain 54 to 1. This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our executive producers are Jason Stavers and Catherine Dillon. Mia Silverio is our research lead and Drew Burrows is our technical director. Thank you for listening to Prop G Markets from the Vox Media Podcast Network. Join us on Wednesday for office hours and we'll be back with a fresh take on markets every Monday. Lifetimes

You have me In kind Reunion As the world turns And the dark flies In love, love, love, love