Jul 21, 2019

Axios Edge

By Felix Salmon
Felix Salmon

Situational awareness: Shinzo Abe's LDP has won today's upper-house election in Japan, although the size of his majority is still unclear.

1 🚘 thing: Now might be a good time to buy a new Tesla, if you're so inclined: Elon Musk's carmaker has started to adopt Detroit's time-honored discounting strategies. I prefer a hammock, myself. If you have one handy, might I suggest repairing there to read these 1,974 words? It'll take you roughly 7 minutes.

Heads up: Axios Trends is coming out on Saturday, and as an Edge subscriber, you're on the list. This time it's all about climate change. I'll have an item the following day showing which countries are likely to see their GDP go up as a result of global warming.

1 big thing: The evolution of media consumption
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Chart: Chris Canipe/Axios

The media consumption wars are heating up.

  • After decades in which media consumption was dominated by domestic TV, we're entering a much more fragmented and international world. Services like Netflix and TikTok (the mobile video clip app that aspires to be the next Netflix) are global in scope and ambition. That sets them apart from forthcoming rival subscription services being planned by Disney, Comcast and AT&T.
  • Artificial intelligence has already proved its value with the success of TikTok, which was released internationally in 2017 by the Chinese AI giant ByteDance and has racked up 950 million downloads. The app curates unique individualized content streams by choosing from millions of 15-second videos uploaded by its users, and the effect is mesmerizing — even more addictive than precursors like Twitter.
  • Some new platforms will blur the lines between social media, video games and professionally produced video entertainment. The video game Fortnite is a form of social media, for instance, while the forthcoming Quibi video platform is likely to include many interactive elements.

Much of the battle between services will be fought over what executives think of as "intellectual property" and everybody else thinks of as "shows."

  • One possible loser: The two most popular shows on Netflix are "Friends" and "The Office." Both are now being pulled from Netflix to anchor new services. "The Office" is going to Comcast's new NBCUniversal platform in 2021 for $500 million, while AT&T's WarnerMedia is paying $425 million to bring "Friends" to HBO Max.
  • One possible winner: Disney owns the most valuable franchises in the world, including not only Mickey Mouse and "Toy Story" but also "Star Wars," "Avatar" and the Marvel Cinematic Universe.
  • What we don’t know: As analyst and REDEF columnist Matthew Ball notes, none of these services wants to be in the business of "selling individual shows to a given TV watcher from time to time." They want to build brand loyalty in their own right, and it's unclear whether having a well-known anchor tenant will get them there.

The shrinking picture: Netflix and Amazon became giants in this space by delivering unlimited video content on demand, uninterrupted by ads, all for much less than even an HBO subscription, let alone a typical cable-TV bundle. On mobile, however, where games and social-media apps are only a tap away, the most popular and addictive content looks very different and often isn't professionally produced at all.

Bonus: Netflix plunges
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Data: FactSet; Chart: Axios Visuals

Netflix's ambition is to replace television — to be the thing you turn on out of force of habit as you sink into your couch, whether or not you really have any idea what you want to watch. With a large enough library, and detailed enough data about your viewing preferences, Netflix should always be able to find something to entertain you.

The company disappointed the market with its second-quarter earnings report this week. International subscribers grew more slowly than anticipated, while the number of U.S. subscribers actually fell.

  • Subscriber growth will return in the third quarter, thanks in large part to season 3 of "Stranger Things." The lesson here is that Netflix needs a steady stream of new hits if it's going to keep on growing.
  • In Hollywood, no one can predictably manufacture a new hit every quarter. The more that Netflix is reliant on hits for future growth, the less excited Wall Street is going to be about the company.

The other side: Netflix kept substantially all of its U.S. subscribers even after hitting them with a 20% subscription-price hike. Even if a higher sticker price made it harder for Netflix to attract new subscribers, existing customers seem to be extremely loyal to the brand.

2. Warren's Wall Street frenemies

Illustration: Rebecca Zisser/Axios

Elizabeth Warren understands Wall Street better than any other presidential candidate. She studied it in her previous career as a Harvard professor, and she has effectively built her own think tank inside the Senate, coming up with genuinely novel ideas for how to improve financial regulation.

  • What to watch: Warren has already received the grudging respect of many on Wall Street. Her diagnoses of where the financial services industry falls short are generally accurate, and her proposed regulations would probably give a competitive advantage to financial giants with large compliance departments.

Driving the news: Warren blasted the private equity industry this week. She understands that bankruptcy and limited liability can be good for capitalism and society as a whole, but that they can also be abused. When that happens, private equity companies can end up making profits from portfolio companies that go bust. Employees invariably bear the brunt, alongside trade creditors and even consumers with gift cards.

Our thought bubble: Private equity is the polite term for what used to be called leveraged buyouts. Mike Milken gave buyouts a bad name in the 1980s, and Warren is betting that private equity is similarly unloved today. Axios' Dan Primack says that Warren's proposals would kill much of the private equity industry, especially the turnaround sector. He may well be right. The question is whether it would be mourned.

What's next: Warren's academic research changed the way bankruptcy was thought about. Her proposal for a Consumer Financial Protection Bureau became reality, with broad public support. When she says that the unbanked spend more on interest and fees than they do on food, she touches a nerve. It's easy to see potential profits for smart financial services industry executives who embrace her legitimate criticisms and try to get ahead of these issues.

3. Housing as an investment

Illustration: Rebecca Zisser/Axios

Many thanks to everybody who wrote in last week, responding to my item about the volatility of house prices. There were a lot of you! Many of you thought I was saying that houses are a bad investment. I wasn't saying that. They are a riskier investment than most people believe, however.

  • The winners: Homeownership has created enormous wealth for middle-class Americans, especially those lucky enough to have been able to buy in coastal cities before homes shot up in value. While most stocks are held by the richest 10% of Americans, houses are owned by the richest 40%. As a result, homeownership has helped to reduce inequality. Mortgages are a fantastic enforced-saving mechanism!
  • The losers: Not everybody who bought a home benefited by doing so, even before the Great Recession. Some neighborhoods have seen steady declines in property prices, and often a home can feel more like a liability than an asset, especially when you need to fix the foundation or replace the roof.

The big picture: Homes are extremely illiquid assets that are very expensive to buy and sell. If you rent, then you're better positioned to roll with financial punches and move somewhere cheaper when you lose income. It's also easier to move to higher-income opportunities elsewhere. And renting doesn't involve taking on hundreds of thousands of dollars in debt.

  • By the numbers: The NYT has a spectacularly good rent vs. buy calculator, but it does involve looking into the future to see how long you'll stay in your home, what will happen to prices and rents, what will happen to the stock market, etc. Tweaking those numbers can ultimately give you whatever answer you're looking for.
  • So here's a simple rule of thumb: If you can buy for a total monthly payment lower than it would cost to rent the same place, and if you're sure you're going to stay in that home for at least 5–7 years, then it's a good idea to buy.

Go deeper: I'll write much more about homeownership, and its role in the American economy, in 3 weeks' time. If you have questions, now's the time to send them in.

Bonus: Mortgages become more efficient
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Data: LendingTree; Chart: Axios Visuals

There's been a quiet revolution going on in the mortgage market. In 2017, it took an average of 74 days to close on a mortgage, per LendingTree. In May 2019, the most recent month for which data is available, that number had come down more than 50%, to 36 days.

The decline is a function of an increasing number of lenders embracing digitization. The surprise is that it took this long.

4. Brexit meets Boris

Illustration: Sarah Grillo/Axios

Boris Johnson is going to become the new leader of the Conservative party — and therefore Britain's new prime minister — this week.

What they’re saying: There have been too many Johnson profiles to count. If you want to understand who the man is and what the implications are for the country, 2 of them stand out.

  • Simon Kuper explains Johnson's Eton-and-Oxford background, and how harmful it is.
  • Fintan O'Toole details Johnson's mendaciously self-destructive tendencies and how they're now going to be applied to the country as a whole.

Threat level: With Johnson becoming prime minister, the risks of a no-deal Brexit rise to an all-time high. That could send the pound down to parity against the dollar. Parliament is deeply opposed to that outcome and will always vote against it; the risk is that J0hnson will be able to suspend parliament in an attempt to stop it from doing so. A vote this week makes that less likely, but not impossible.

Reality check: Even if the U.K. parliament votes against a no-deal Brexit, it still happens unless the E.U. and the U.K. agree to yet another delay. It's hard to imagine Johnson ever agreeing to that.

5. The cost of bail for immigrants
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Data: Transactional Records Access Clearinghouse; Chart: Chris Canipe/Axios

If you're an undocumented immigrant seeking to make your life in America, your first best opportunity to get out of a crowded detention center is to persuade an immigration judge to set bail for you. Axios' Stef Kight took a dive into the data.

By the numbers: While the number of immigrants getting bailed out has been steadily increasing, so has the size of the bail bonds.

  • As recently as 2005, all bail bonds issued by judges to immigrants were less than $2,000. Last year, just 5% of bonds were less than $2,000, and 40% were $10,000 or more.
  • In 2006, the median immigrant bond price was just $50. Two years later, the median bond price had grown by a factor of 100, to $5,000. Today, the median is $8,000.

Details: Before an asylum-seeker or unauthorized immigrant sets foot in court, Immigration and Customs Enforcement makes the initial determination of who qualifies for bail and how much that bail should be. That determination has an anchoring effect for judges. Furthermore, a growing number of new immigration judges have a law enforcement background and seem inclined to be tougher on immigrants.

Go deeper: The cost of bail for immigrants is surging

6. The week ahead: Britain gets a new prime minister

Illustration: Rebecca Zisser/Axios

Results from the U.K. Conservative Party leadership contest are expected on Tuesday, writes Axios' Courtenay Brown. Theresa May will officially hand over power on Wednesday.

  • Elsewhere in the EU, markets are betting the ECB will move its record low interest rates even lower on Thursday. The deposit rate is currently -0.4% and could fall to -0.5%.

In the U.S., second-quarter GDP is out on Friday. The economy is estimated to have grown at a 1.8% annualized rate, a much slower pace than Q1's 3.1%.

  • A slew of tech companies will release quarterly results: Snap is out on Tuesday, Facebook comes on Wednesday, Amazon and Alphabet on Thursday, and Twitter on Friday.
  • Tesla and Boeing are out with results on Wednesday. So is Deutsche Bank, with its first report since announcing its costly restructuring plan.
7. Building of the week: The Washington Monument

Photo by Aurora Samperio/NurPhoto via Getty Images

The Washington Monument, built to commemorate the first president of the United States, topped out in 1884. It was the tallest structure in the world for 5 years, until it was overtaken by the Eiffel Tower.

  • The monument was designed by architect Robert Mills, but its stark simplicity was not really Mills' doing. Mills originally wanted the obelisk to sit atop a 100-fo0t-tall colonnade, but that idea was scrapped due to budget constraints.
  • The Saturn V rocket that ferried astronauts to the moon in 1969 was slightly narrower and significantly shorter than the Washington Monument. To commemorate the 50th anniversary of the moon landing, a life-size image of the rocket was projected onto the monument this week.

Go deeper: Axios' deep dive into all things lunar.

Felix Salmon