Analysing SpaceX, Roku/Fox deal, Revenue urgency for AI

Speaker 0 · 0:02

Hi. Welcome to this week's Media Unfiltered podcast. You could call this a sort of pre can episode if you like, and it's been quite a dramatic week when you look at m and a activity and, of course, the IPO of SpaceX. And the we're going to discuss the implications of the financial markets and also have a look at, what's going on with ad spend and some of the news that you might see occurring at Cannes next week. Just a little update, though, with, this particular podcast. We've been going now for three to four months, and it's been relatively successful, hasn't it, Ian? Like, huge feedback, viewership generally growing. So we're going to rebrand. Got a new website coming out. We've got a bunch of content coming out from Can. It's been really fun to do, really, energizing and engaging, and we're going a bit more serious, which is fantastic. So look out for that. Look out for the episodes that will come, and, you'll see us plastered over a few other publishers' websites as well, which is fantastic for for the next sort of six six months of this particular podcast. So without further ado, okay, SpaceX. Ian, obviously, big launch. We now have, you know, whatever Elon's worth today, which is lovely. And what's the implications of of that IPO and, obviously, OpenAI and others? And is there any sort of knock on effect for the rest of the stock market and in in indeed the media industry too? Yeah. I mean, it's an interesting one. I mean, you'll get some obviously, this sort of talk has been around, for example, what funds do in terms of allocations with,

Speaker 1 · 1:32

SpaceX, and that there's been, you know, SpaceX wasn't sort of it wasn't included in many of the sort of tracker indices, which is some interesting implications. But the the the actual IPO has gone off very, very well. I think what we'd almost say with here is that, you know, two things really to look at this. Well, one, I would say SpaceX itself and then sort of the implications for the media industry. I think if you look at SpaceX itself, you know, the interesting thing here is actually the the valuation of SpaceX. In a way, it's sort of well, not in a way. It's essential to actually funding the request for the investments that's actually required. So, yeah, if you look at this like a virtuous circle, the more that SpaceX actually increases in price and the valuation remains elevated, then essentially what happens is large scale investment is actually seen as a positive rather than negative. And you you could already see SpaceX is going on on the acquisition trail. It just spends, sort of $65,000,000,000, on an AI acquisition. Yeah. What will happen here is that that, of course, then feeds into the cycle of fueling future development of growth. We've seen this happen before with AI, by the way, and I think this is very much to the, what you see here. The opposite, of course, also is true. Yeah. If the valuation falls, then it's very likely the investment does does as well. But overall, what you're seeing here is to think must really what it's trying to do is you've got two gigantic bets here on obtaining leadership in space and in AI, and they're both coming through one vehicle. Because, obviously, with XAI moving into into SpaceX, it's all combined in. And I think, you know, what does that mean for an investor standpoint? Well, you know, you're really taking you're obviously taking a bet on Musk. But given the fact that he controls pretty much all the voting rights given his super voting b shares Mhmm. You you're effectively ceding control in the hope that what you see is a mass return that actually comes through. From an investor standpoint, you could argue, look, the potential upside could be could be enormous sort of on this Question it or the point being though is that you've given control to Musk in order to you know, I mean, you're effectively riding on these coattails and the decisions that he makes, and you don't really have any sort of, sort of voice in what happens. I think the implications for the sector, and this is where it sort of all fuel sort of blends in with Anthropic and and what's happened with OpenAI. And the combined valuation of these three is is over 3 and a half trillion dollars. Probably approaching 4, given what's happened with SpaceX. You know, the fact here is is that, yeah, I don't think actually the the issue that sort of people should be really concerned about in the media industry is the valuations. Actually, the point being is that to justify those valuations, what these companies are gonna have to do is they're gonna have to to show the markets that they've got the revenues and the profit growth to actually justify those valuations. And that, therefore, means that because that revenue growth doesn't really come from those companies or sort of at the inside, you know, put it bluntly, they're gonna have to take it from someone else. And, you know, when you go when you go out to the markets, this is not like in the private arena where you can just, you don't have as it were the put the discipline of the public markets and investors looking at your quarterly, the numbers and what you say on a call. You make a promise, you get held to it. Now the argument might go, well, look, media's sort of, too small a a sector and where actually the real budget or the real money lies in there is like labor budgets, for example. And I think, you know, that's fair enough. But what I would argue is media, logically, is the first sort of I would say is gonna be the first target for these companies to grab that revenue growth that they need to show to the markets that they can actually justify the valuations. The most obvious one here, of course, is advertising. I mean, the monetized they should model's already proven here. It's around a trillion dollars plus on here. And also as well, what you can do is that you can show to investors the results very, very quickly. And the problem that the media sector has got is that compared with those companies, quite frankly, they can't invest hard because of their cash flows, but also as well because their shareholders sorta won't like it. Yeah. If they start to have to make big investments to try and actually fight off these threats, then it will impact their share prices. And so what they have for for the existing companies in the media sector is really sort of they're trapped, and they're trapped here in terms of of what they need to do over the longer term. And you've seen this sort of time and time again. You saw it back in the thousands with newspapers and classified directories when Google came into the search market. They know sort of in terms of long term what they actually need to do. The problem is their short term priorities often conflict with that. And back in the February, it was often that newspapers were levered up, and so they had to meet interest payments. And that sort of damaged their ability to to sort of respond to what was happening with Google and the online platforms. And here, sort of with many of the media companies, it's part of their cash flows, but it's also as well the investments they need to make. And I remember covering ITVs so that when it announced its big rollout plan in terms of digital its digital strategy, it it mainly serves you right. The shares fell from, like, 15% on the day. Yeah, investors don't like that sort of big spend, especially when they can factor in the cost, but they don't can't necessarily see what the revenue upside is. So I think,

Speaker 0 · 7:13

I think look. The implications for this in the short term for the sector may not be evident. I think over the medium to longer term, they'll very much become sort of clear. It's very interesting what you mentioned there about though the responses and the, you know, being able to invest and what what negative impact that has on stock valuations. I I do think when you look at this SpaceX stuff, couple of things that you said it's terrifying ceding so much control to to one man effectively. And, a friend of mine who works in the industry painted it as the era of performative capitalism. Do you agree with that sort of statement? Performative

Speaker 1 · 7:47

capitalism. Capitalism. Yeah. It's sort of style over substance in a way. Well, I mean, look, I sort of go back to when funny enough, I mean, sort of when I was doing my, war studies degree, one of the courses that actually did was space power and sort of looking what was the what was the potential sort of effect. I mean, you could argue that essentially the the potential upside is is enormous, both in terms of of if you want to take the fancy stuff in terms of what can be done sort of in outer space, but also as well when it comes to sort of the short altitude sort of, orbits as well. So you could argue there is a a muncher case here. I think one of the things that's always been the the question mark around really exploiting space has been the energy question, and how you can actually how you can get the the sort of energy required to to shift payloads in space. Yeah. And, you know, you could therefore argue that what you're betting against here, if you are betting against SpaceX, is that you're betting against one must realize of his vision, which you would therefore say, well, in several other areas he has. And two, that essentially that so in some form, the energy question won't be overcome, which again, when you sort of look at at Musk as a yeah. There's there's a question mark there. I think there's also as well one other thing that also important, which is an important factor in this as well, and it was also the case with AI. You know, pretty much the US government has outsourced much of its space policy day to day to the likes of space well, to actually SpaceX full stop. Mhmm. So it plays a central role in The US's strategy around space and how it sees its superpower raised with China. And I think that source is one important factor to consider because what that will also mean as well is it there's probably several different layers that are happening here. So is it performative capitalism? I don't think so. I think, actually, Musk is one of those sort of people who who really epitomizes the dream big sort of, idea, and that's what I think you're seeing here. Yeah. Well, you know, it's it's it's currently worth,

Speaker 0 · 9:53

in this sort of $2.02 and a half trillion dollars, for the that's their, market cap. And, you know, they made a $5,000,000,000 loss last year. So and the shares are performing fairly well since launching. So we'll remain to be seen. One quick question, though, to you. Are these the investors in it, are these mainly institutional investors, or is it being driven by the sort of longer tail of sort of armchair investors just just from from your

Speaker 1 · 10:19

analysis of this? Yeah. I mean, I I think there's definitely a lot of of retail Yeah. When going into the market. And you've seen this before in, obviously, with much smaller stocks. Yeah. You've seen there is now the the the sort of Reddit momentum that gets behind a number of these names. Yeah. I think there are institutional investors. Look, you will have different funds will have limitations on what they can hold. Yeah. The whole thing around the the super voting shares, that will mean that sort of a number of funds won't be able to hold it. Although they necessarily won't be US ones, because The US is used to this structure, get in terms of having super voting shares. Of course, institutions will hold it. The fact that, essentially, you don't have the same sort of rules for SpaceX when it comes to tracker funds, etcetera, will mean that it's it's so the funds exposure is probably more limited. But I think a lot of momentum so far has really been driven by the retail investors. Yeah. Okay. So you you mentioned also the, the rise of AI and showing

Speaker 0 · 11:17

early incomes and advertising is the is an easy low hanging fruit. They've obviously launched chat has launched in a few different markets and, the progress is, you know, is minimal at this point because it's been so early. So it'd be interesting to see how much share they take, and I think that would be I I would assume sort of retail, social search would be the sort of area where that money would would come from rather than sort of other areas. But it'd be interesting to see how that how that flows. Like, this is totally anecdotal, but when we've talked about this a lot, the valuations of AI suggests that huge industries will perhaps be taken over. And, I've spoken to a few of my mates who are who are lawyers and asked them about this and in accountancy. And they've actually all told me, this is separately, they've all told me that AI is causing them more headaches and actually more work because people come in thinking that they can do a lot of stuff. They use AI. They're misinformed, and they're having to come in and clean up a lot of work that that their clients are trying to do themselves. So it's early days. It's early days. And, again, this is this is anecdotal. This isn't a survey. So that's what I'm hearing anyway from some of my friends in the industry. Another big bit of news, Roku has finally been acquired. It's been rumored for a long time. It's around $2,022,000,000,000 from Fox. What's your view on that, Ian?

Speaker 1 · 12:35

Oh, I mean I mean, as you say, I mean, this has been moving for a long time. I mean, it must have run the worst type of secrets. So that it in the markets that VOCO at some point would actually be acquired. So the fact it's happened isn't, you know, isn't really a big surprise. I think, you know, what would say here is that there's obviously look. You know, in terms of what Fox is doing, you would say strategically. I think this is you know, it makes sense, makes definite sense on here. It's a real strategic shift here. You know, what Fox isn't buying, it's not buying more shows. What it's really buying now is the home screen, and it's really a bit to control the interface between the the viewers and the ad revenues. And I think what you'd probably argue is that a lot of people have been talking about A lot of people do sort of soft deals, they'll do partnerships and things like that. Really, what's happened is Murdoch has taken taken the argument to the logical conclusion and said, well, actually, what we should just do here is actually buy, by Roku. And so from that standpoint, I think it becomes, you know, if we yeah. I think it's it's a very good deal strategically. You know, they become the most powerful gatekeeper in streaming without arguably seeing the sort of financial bloodletting that that a lot of the other companies have, have seen. Having said that, look at what the market reaction was. The share price fell 15%, sort of more than 15%, sort of, of on the back of the news. Now when a share price actually falls by that much, what that essentially tells you is that what the markets are, you know, are concerned about is they've overpaid. And, you know, they'll probably be, you know, they'll probably be issues around, you know, question marks about, okay, can they integrate the business, you know, what happens in terms of the, sort of, in terms of the management and so forth. And what really the markets price? Sure. I mean, it's an element of strategic logic, but that's not really the main driver. What they really price for stuff like this is the price the execution risk and they price the debt on here. And that's exactly what's what's happening here. So many companies think about this. I mean, Murdoch is Murdoch has a history of of making big bets that investors Yeah. Don't necessarily like at the time. Yeah. It goes with it. And in in many cases, they've actually turned out to be, you know, they turned out to be right. So he's been turned turned out to be right. And it looks very much the sort of, case here. The one thing that obviously people question about, you know, the conflicts of interest sort of of on there. And I think, you know, there there's gotta be a question mark over that. You know, if you're suddenly like a Walmart and a Sony, do you think, you know, Fox has now got sort of access to quite sensitive sort of competitive data, on here? And I think there's also an angle here obviously on sports. Yeah. I think Fox now has a bargaining chip as the league negotiates rights by being able to say, look, you know, controlling Roku. That puts us in a very good position as a gatekeeper and having sort of choke point powers. All in all, strategically, it makes sense, but the markets don't like it. Interesting. So the markets believe

Speaker 0 · 15:41

that it was perhaps overpriced.

Speaker 1 · 15:44

How how have they financed it, Ian? Well, I mean, if you look I mean, it's it's a mixture of cash and and stock. So you're looking at around sort of it's 22,000,000,000 in total and just over 14,000,000,000 is is a, cash. So you're looking around $96 per share. And then what you're also getting as well is that you're also getting as well for the remaining sort of roughly 8,000,000,000. You're guessing sort of, Fox share. So, yeah, the fact that Fox's share price has has fallen, that also means as well that the actual deal itself from a Roku Sam shareholder standpoint looks less attractive. You know, that it doesn't mean that Fox's debts are necessarily that high. I mean, you're probably looking at a leverage ratio when you take into account the the cost synergies, probably just under three. Not necessarily what you would want for a business that relies a lot on advertising, but it's not necessarily disastrous either on things. So so it's definitely doable, and it definitely repeats the pattern that we've seen here before from Murdoch in terms of, you know, he is willing to sort of push things to the edge sometimes in order to do a deal that he thinks is strategically sound. But look, I mean, there's a wider sort of angle here as well. You look at what's been happening. You've obviously got Paramount taking over WBD. You then had what's been happening with Disney in terms of of Hulu plus being rolled into things and so forth. And now you've got this deal. So there is obviously a lot that is happening within the sort of that's happening within the, the media stakes. And, obviously, the strategic moves that we're seeing is sort of driving consolidation. The interesting point I'd say here is that this is all very much US based. You know, if you look at what's happening in Europe, okay, you've got Sky which is is buying ITV. You haven't got the same acceleration, certainly the free to air space. Mhmm. That's a, pattern that you've seen in in The US. Well, you got Sky Deutschland being acquired by RTL, which is

Speaker 0 · 17:41

an sort of similar deal to Yeah. Sky buying Yeah. Buying ITV. So I think you are seeing it, and, you're also seeing diversification and a a sort of change of strategy from the broadcasters buying our home businesses, radio businesses, to to sort of leverage their pool of customers that they've got and sort of sell those two assets together. So you're seeing that. I think we'll see more consolidation. I I think with the Roku deal and Fox, Fox owned Tubi, and Roku gives them access to people's home and and a and a platform and a device, which is which is advantageous and a digital play as well because one thing that's happening in The US, not so much in the rest of the world, is the the pay TV delivery model is completely is decimated. So having a new avenue and path to consumers is is essential. I think, ultimately, whether you believe it's overpaid or not, it's a great deal for Roku. What a time to get out and, and have their business acquired, don't you think? Oh, well, look. I mean, it's the same. I mean, you've gotta you only gotta look at what happened to the local share price. I mean, the shareholders of Voci absolutely

Speaker 1 · 18:46

like it. I think there's one other thing as well, and it sort of feeds into what you're saying about the the sort of deals in in Europe. I mean, if you look at the putting aside the the Hulu sort of, plus and being involved into Disney, Chopsys is an internal thing. Yeah. What you've got in each of those four cases is essentially each of the selling firms. And, arguably, at least in two of them, quite openly, we're looking for an exit. You know, very much in terms of Sky Deutschland, it's been an open secret for years that Sky has been trying to to sell that business. I think with ITV, given where its share price had been an element of of, you know, some relative stagnation, for a a considerable amount of time. Again, an exit is quite smooth a smooth way to get out. Obviously, what happened with WBD, it's share price because they had huge amount of debt that it's held. It's share price sort of would always be held down, and therefore, the company decide to, first of all, set up the assets, and then they went through with a sell. And with Roku, maybe it's not been as public as perhaps some of those other cases. But, obviously, sort of as as we discussed at the beginning of this conversation, it's been sort of a worst kept secret that Roku at some point would get solved. So Mhmm. So I think this is also as well the other thing to consider that you're seeing in in many of these management cases what the you know, what they're deciding is the equipment sticking, you know, stick a twist. And in many cases, sort of, what's happening is they're deciding, you know what? Given where the trends are going, given the amount of investment that's likely to be needed, given the likely share price reaction, actually, what we're gonna do is we're gonna look for somebody to buy us. Yeah. Yeah. I think,

Speaker 0 · 20:26

a really good idea for a partner to sort of have this while while you were talking there is collaboration versus consolidation. I'm sort of leaning that we're gonna see more of on the right hand side than we are on the left hand side, the right hand side being a consolidation rather than collaboration. Very hard for these companies to work together, but, it's easier in from a regulatory perspective these days for one of them just to buy each other. So, that's perhaps what we'll see. As usual, Ian, do you wanna cap off with our normal tagline? Indeed. As usual, this is not investment advice, and thank you very much. Thank you for listening. We're gonna have a, Cannes update on this looking at the the the growth of the media industry and how traditional media can respond to the outrageous growth of the platforms and and tactics for that. And Ian and I will be talking about that, plus a lot of other things. So we'll catch up then. Again, thank you for listening.