Binge and Purge
AT&T
We talked a couple months ago about the Warner Bros Discovery merger - AT&T sold Warner Media to Discovery at a staggering loss after only three years running the media giant. The shake-up at Warner has created confusion in the consumer market - shows and movies have been cancelled or pulled off HBO’s streaming services with no obvious rationale. How did AT&T manage to botch things so badly, and leave a top production company scrambling to save pennies to service its massive debt?
We’ve talked a little about financialization, which involves companies attempting to take things not traditionally governed by markets - like art - and shoehorning them into financial metrics - DAUs, subscribers - in order to drink from the investor cash firehose. The incentives created by shareholders and investors’ constant push for growth at all costs means that sometimes a phone company buys a media company and tries to run it like a phone company - or a telephone executive’s idea of a media company - and tens of billions of dollars go up in smoke.
The NYT has a detailed account of how the deal went south, from Trump’s personal vendetta with CNN:
Mr. Trump’s ire was especially intense toward CNN’s chief executive, Jeff Zucker, ignoring (or forgetting) that it was Mr. Zucker, as head of NBC Entertainment, who put “The Apprentice” into NBC’s prime-time lineup and made Mr. Trump a TV star.
…which led to the hiring and subsequent half-million dollar investment in noted M&A expert Michael Cohen. It also delayed the merger by two years, which gave streaming competitors (in AT&T’s view) a bigger head start.
Would it have mattered even if the deal had closed in 2016? Maybe not:
While the AT&T executives acknowledged that they knew next to nothing about Hollywood, they had proven entertainment executives running Time Warner’s divisions. They thought they could bring AT&T’s vast storehouse of consumer data — even artificial intelligence — to the notoriously uncertain task of greenlighting movies and TV shows.
When your ‘plan’ for a $100 billion dollar acquisition is to use your phone(?) consumer(?) data(?) to green light TV shows and movies, you may have lost the script, pun intended. What happened instead was that AT&T’s phone company executives interfered with Time Warner’s proven entertainment executives - attempting to turn HBO and its other properties into walled gardens rather than continuing the studio’s practice of profitably selling its IP to other networks and producers. AT&T believed it could compete in the streaming space by severing distribution deals, cancelling projects it couldn’t use internally, and changing Warner’s freewheeling art-focused corporate culture into one of PowerPoint decks and bean counters.
The story contains damning accounts of the guys who ran AT&T and thought they could fold one of the country’s biggest film producers into their lumbering behemoth of a phone/tech/media/whatever company, and it is honestly dead stock MBA Dipshit behavior: lots of tech executive tropes like ‘vertical integration’ and ‘cost syngeries’ topped with haughty disdain for the way its entertainment divisions made art.
The MBA Dipshits believed Warner faced twin threats - ‘cord cutting’ threatened its cable dominance, and the billions being spent by its (perceived) rivals Netflix, Disney, and Amazon on original content dwarfed what the studio could budget. Therefore, the obvious answer was to yank its licensing agreements - forgoing billions in revenue - and launch its own streaming platform to compete with the heavyweights. How did that go?
By December 2020, HBO Max had attracted only 12.6 million subscribers. In contrast, Disney+ had signed up 10 million on its first day. That December, Disney was at 87 million subscribers. HBO Max’s archrival, Netflix, stood at 195 million.
Six months after launch, HBO Max was a flop - you may remember its disastrous launch via a poorly-made, constantly crashing app (a problem it still has!) Though compared to Warner’s other big streaming idea CNN+, HBO Max is positively geriatric:
CNN+ debuted as scheduled on March 29. After a week, it had only 100,000 subscribers, even at a steeply discounted rate of $2.99 per month. CNBC reported that fewer than 10,000 people a day were watching the streaming service. Nearly 800,000 watched CNN on cable.
[…]
Just 10 days later, Mr. Zaslav pulled the plug on CNN+.
There is lots of blame to go around, and those who stepped forward to be interviewed for the story are happy to point fingers at one another. The problem (always) is that companies with tens of thousands of employees across a dozen different lines of business are essentially too big to manage. AT&T and its disparate subsidiaries should have been a dozen companies, competing for smaller chunks of the huge American media market, cutting deals with one another, and maybe even raking in billions of dollars producing content viewers enjoy.
There is an argument to be made for movie studios needing to be large and flush with cash - making movies has become ludicrously expensive in the age of super heroes and directors who demand huge budgets. But the idea a cell phone company could upend the business of filmmaking with its hand-wavey ‘consumer data’ is something that sounds great in a boardroom, or to a stock analyst, but in reality it was a complete disaster:
Less than four years after the merger, AT&T abandoned its grand initiative. It spun off its Warner Media assets and ceded management control to Discovery. The new company, Warner Bros. Discovery, took on $43 billion of AT&T’s debt, and AT&T shareholders kept 71 percent of the company, a stake worth less than $20 billion. That amounts to a loss of about $47 billion for AT&T shareholders, based on AT&T’s $109 billion valuation of the deal at the time it was announced.
The byproduct of all this business dipshittery is Warner Bros Discovery is now slashing and burning its content offerings - dropping popular shows from its streaming services to realize tax savings or avoid paying royalties to creators because a key part of the sale saddled Warner Discovery with $47 billion dollars’ worth of debt and the new megalith still mostly owned - and has a board appointed by - fucking AT&T! Thanks to a small group of oafishly overconfident executives we’re left with the smoking ruins of one of the country’s better film studios, all because the phone company convinced everyone they could wring more money out of it.
Peak TV
Ironically, a studio like HBO would have been perfectly positioned to take advantage of the sudden slowdown in the content creation wars. AT&T’s Warner was chasing companies like Netflix and Amazon as they shoveled billions into production furnaces in pursuit of subscriber growth. For those of us sitting at home flipping through the endless streaming offerings on an endless number of competing services, life has been good for the couple years. There is so much content debuting any given month an entire blogging genre has sprung up to keep us abreast of watch options.
Like so many things we talk about around here, those billions of content dollars were sort of not…entirely real? I mean, invoices were and contract deals were paid out to Shonda Rhimes or whoever, but Netflix’s ability to spend those billions was predicated on the company’s continued growth in the areas Wall Street cared about. Then, well, the magic Wall Street number went down:
But Wall Street soured on the buy-at-any-cost strategy starting in the spring, when Netflix, the streaming powerhouse, announced that it had lost subscribers for the first time in a decade. Netflix’s stock nose-dived, and other entertainment companies soon watched their share prices fall, too. Hollywood companies quickly shifted, putting a new emphasis on higher profits instead of raw subscriber counts.
Isn’t it kind of funny how this happens? For years, Netflix has been lumped in with the tech giants - as part of the acronym FAANG which I guess is now MANGA, whatever - because its performance as a company was predicated on its subscriber numbers going up and to the right forever. But, due to multiple factors, streaming service subscriber numbers cannot go up forever, as competitors flood the market and people share passwords and people in the Internet-having world do not birth ten children apiece to expand the world’s population. So! The number Wall Street decided was important has become less important, and now another number - profit! - is suddenly important. Sure, okay.
The problem is that you cannot churn out endless vampire shows or produce expensive sci-fi when you are worried about profits, because unlike releasing a film at the box office or - like HBO used to do! - making a few prestige shows a year that air on premium cable, there is a fuzzy relationship between an individual show and profitability. Despite Netflix’s penchant for uh, creatively reporting viewership of its content, how does it know whether one of its hundred new releases was responsible for user growth, or whether a show somehow made the company money if subscriptions stayed flat? On the other side of the coin - how does it know if a show lost the company money? There is so much noise in the daily operations of a streaming giant, and Netflix has reached peak saturation in most of its major markets so…can it really quantify whether Red Notice drove a hundred thousand people to mash that subscribe button? Doubtful.
Like tech, where we continue to see layoffs and a sudden focus on profitability, the decline of Peak TV is really just a contraction following an investor-fueled bubble:
“It’s part cost-cutting and stock price chaos, and part correction for the buying frenzy over the past five years where series were literally ordered over the phone without any proof of concept,” said Robert Greenblatt, the former chairman of NBC Entertainment and WarnerMedia who is now a producer.
Which, you know what, that’s fine. I do not expect the many streaming companies I help fund to produce a million shows a year all of which are catered to my specific tastes, and I’d be totally fine watching Top Chef reruns in between seasons of good quality television and movies I actually enjoy. That’s how life used to be! Remember those days? Not to mention there is a nearly endless library of interesting content already out there, which some services have started importing to the US from exotic locales like Britain and Canada. I realize it is sexy for TV executives to spend their time searching old catalogs for British ambulance comedies and they’d rather be cutting 9-figure production deals with JJ Abrams over smoked salmon pizzas at Spago, but this is the world we live in now. TV needs to be profitable! For the moment.
There are a few holdouts - streaming companies run by MANGAs who earn most of their money elsewhere (and Disney) haven’t slowed down as much:
There are a few outliers to this year’s trend: Apple TV+ and Amazon have increased the number of adult scripted series they have purchased this year. So has Disney, according to Ampere’s research.
The TV and film business is, by its nature, messy and complicated and extremely hard to quantify. Tech companies keep trying, and streaming companies keep trying to insist they are actually tech firms with special ‘data-driven’ insight into the film business, but at the end of the day making great art is expensive and very hit-or-miss and nothing about the tech revolution or AI or consumer data has changed that.
Southwest
During the latest big winter storm to hit the US, Southwest Airlines started cancelling hundreds and then thousands of flights. When the dust (snow?) settled the airline had cancelled an astonishing fifteen thousand flights over more than a week, and service has just now returned to something resembling normal. What on earth happened?
The simple answer is: software. For years, the company has failed to make necessary investments to upgrade the software that manages staff allocation and customer service:
Stranded customers have been unable to get through to Southwest’s customer service lines to rebook flights or find lost baggage.
Employees also said they have not been able to communicate with the airline, the president of the union that represents Southwest’s flight attendants told CNN Monday.
Basically, Southwest does not have automated systems to track where passengers and staff are at any given time, and requires customers and staff to call in and rebook manually with a customer service rep. It is blind to where crews end up after flights are cancelled, so stranded staff clogged phone lines trying to notify the airline of their location so they could be reassigned or booked in overnight hotels while they waited for weather to clear.
None of this is news to the airline - in October 2021 it had a smaller meltdown of its systems resulting in a few thousand flight cancellations. Nor is it news to Southwest’s executives, because employees and labor unions have spent the last year trying to call attention to the issues:
Throughout the past year, the flight attendants’ union picketed in front of various airports as part of their contract negotiations. One protest sign the demonstrators carried? A placard declaring, “Another victim of SWA’s outdated technology,” with a graphic showing a stuck software progress bar. In September, they put the same sign lamenting the company’s outdated technology on the side of a truck and drove it in circles around Love Field (Southwest’s core airport) in Dallas, as well as the nearby Southwest headquarters. In March in an open letter to the company, the union even placed updating the creaking scheduling technology above its demands for increased pay.
How bad does your software have to be that your employees prioritize fixing it over their own pay? Southwest operates on a ‘point-to-point’ model, meaning they fly a ton of short haul domestic routes and do not funnel passengers through main hubs like other major airlines. While this is in some ways a business advantage - less unnecessary flights, customers can fly more places direct - it doesn’t work if your software is not tracking where your staff are, whether or not they’ve had flights delayed or cancelled, and how to most efficiently rebook both crews and passengers when disruptions do happen. This technology exists and other airlines have used it for decades now, making Southwest’s refusal to modernize all the more bizarre.
They have had the cash, however, to spend $8.5 billion on stock buybacks to buoy share prices impacted by the pandemic, and the airline’s CEO saw his pay rise to $9.2 million in 2020 despite furloughs and layoffs. Through last year’s crisis and the current one, Southwest executives claim their software is good and the crisis was bad luck, but their employees and the hundreds of thousands of passengers stranded over the holiday season aren’t interested in their excuses. The DOT and Congress are investigating and company executives will soon be dragged into hearings, which might finally provide the motivation to buy software written this millennium.
Cocaine
We have been talking about cocaine a lot lately, haven’t we? Despite quality complaints from users of the stimulant in the US and UK, we are in the midst of what Bloomberg is calling the biggest cocaine boom in history:
This region, [Colombia’s] Putumayo province, is a key supplier of the unprecedented surge in cocaine production. While fans of the hit Netflix series Narcos may have the impression that the era of Pablo Escobar’s Medellin Cartel in the 1980s and 1990s was the heyday of the cocaine trade, in fact, a much bigger boom is going on right now.
Who knew! I am glad Escobar’s hippos are around to see it, at least. Colombia has seen a massive surge in the amount of cocaine produced, and is now exporting it to ‘corners of the planet that have never seen it before’ which is market penetration Netflix and Warner Bros Discovery would kill for, frankly. Unfortunately, the illegal cocaine trade does involve quite a bit of literal killing, as part of the trade and among those ingesting the supercharged white:
Some 10,000 miles from those farms in the Andes, arrests for cocaine possession in Australia have quadrupled since 2010. US overdoses involving cocaine have quintupled over the past decade as dealers took to mixing the drugs with synthetic opioids. Ecuador imposed states of emergency on its largest port, Guayaquil, this year as warring cocaine traffickers spread terror with car bombs and contract killings.
Contrary to anecdata, the purity of the cocaine coming into Europe has doubled in the last decade:
And the average purity of cocaine on the streets of Europe has risen to more than 60%, from 37% in 2010, while residue from the drug in major cities’ wastewater has doubled over the past decade.
Pausing briefly - it is fascinating to me how good we are at testing wastewater for things like cocaine and COVID-19. What a job that must be! Sending your weekly reports to the mayor’s office, watching ‘virus’ lines tick up or down, while the line labeled ‘cocaine’ just goes up and up.
Unfortunately, like with any illegally grown drug, poor farmers in South America are being exploited, threatened, and controlled by organized crime gangs, living in poverty producing a crop that is raking in billions for its exporters around the world.
Colombia had been on a path to severely curtailing the cocaine trade as recently as 2015, when the government stopped spraying coca fields with a dangerous herbicide that was thought to be carcinogenic. A 2016 peace deal with FARC rebels and the government’s push to encourage coca farmers to plant alternate crops have done little to curtail the drug’s production.
However! Colombia’s new president claims the government will take a new approach, abandoning the failed policies of the US in the region dating back to Clinton:
In his inaugural address after taking office in August, [Gustavo] Petro called for a new approach in the war on drugs, saying that the policies pursued by Bogota and Washington for decades have fueled violence while failing to cut consumption.
Petro says his government will target the mafia, rather than the coca farmers, who are nearly all very poor.
Like many things in Central and South America, we have the US to thank (blame) for this mess, and while the Colombian government may have the best of intentions, it will be very difficult to uproot such a profitable, entrenched global industry.
For those VICE interviewees still complaining about the quality of their blow - blame your dealer! Colombia is cranking out more of the good shit than ever, it’s not their fault you’re snorting baby aspirin.
Short Cons
NYT - “New York has paid companies millions of dollars to help children with disabilities in religious schools. But the services are not always needed or even provided.”
CFPB - “The car-buying experience turns into a nightmare for many of Credit Acceptance’s borrowers, who face unaffordable monthly payments, vehicle repossessions, and debt collection lawsuits.”
NPR - “North Korean hackers have stolen an estimated 1.5 trillion won ($1.2 billion) in cryptocurrency and other virtual assets in the past five years, more than half of it this year alone, South Korea's spy agency said Thursday.”
CNN - “Nearly 1.6 million asylum applications are pending in US immigration courts and at US Citizenship and Immigration Services – the largest number of pending asylum cases on record, according to analysis of federal data…”
Do you know someone planning on spending $100 billion dollars to acquire a media company despite knowing nothing about how to run a media company? This newsletter can help!