The World's Factory

By Matthew Gutierrez, Shawn O'Malley , and Weronika Pycek · August 15, 2023

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Meta (Facebook) walked so ByteDance (TikTok) could run.

ByteDance, the Chinese tech company, is only 10 years old, yet it registered $85 billion in revenue last year. For comparison, it took Meta about 17 years to reach revenues of $85 billion.

?Just as Netflix paved the way in streaming, it’s usually easier to follow in the footsteps of industry innovators.

—?Matthew & Shawn

Here’s the rundown:

Today, we'll discuss the?three biggest stories in markets:

• Why the price of streaming keeps rising
• Inside Buffett’s latest portfolio changes
• China’s economy looks worse and worse

All this, and more, in just?5 minutes to read.

POP QUIZ

How much per month will a basket of the top U.S. streaming services cost you this fall? (Scroll to the end to find the answer!)

CHART OF THE DAY

IN THE NEWS

???Streamflation: The Rising Cost of Streaming Services (WSJ )

You probably knew by looking at your credit card statement: Streaming prices are up nearly?25%?over the past year. Thus, The Wall Street Journal has coined the term “streamflation.”

Between fall 2019 and mid-2020 alone, four major streaming platforms launched:?Disney+,?Peacock,?Apple TV+, and?Max. Their timing was good, as millions of people were at home in the early months of the pandemic.

But Disney and other behemoths are trying to?trim losses?and steer customers toward lucrative, ad-supported plans.

Streaming wars enter a new phase:?For years, customers grew accustomed to bargain prices as the streaming companies aimed for fast growth. But that led to tens of billions of dollars in losses. Now the giants are focusing on profitability.

• Will higher prices lead to more cancellations? Time will tell. Streaming giants want to reduce?churn?(the rate at which customers stop paying for a service.)

Zoom out:?Cord-cutting is real. Streamers had a record?38.7%?of Americans’ viewing time last month, while television viewing has fallen by about 50% and shows no signs of optimism. “Streamflation” could also mean people cycle in and out of subscriptions, bouncing around between providers to watch their favorite shows, then canceling.

• “It’s just so easy to just cancel and rejoin streaming services,” one industry insider said.“You subscribe to Disney+ for ‘The Mandalorian,’ or to Max for ‘House of the Dragon,’ then cancel once you watch it.”

Classic marketing: Create loyalty at low rates, then raise prices with add-ons after you develop a customer base.

Why it matters:

Disney, Netflix, and Warner Bros. Discovery say the ad-supported versions of their streaming platforms — a cheaper monthly subscription — generate more?revenue per user?than ad-free offerings. In other words, the ad revenue more than offsets the lower subscription cost.

• Netflix?has famously (or infamously) cracked down on password-sharing, leading many households to pay a new monthly fee to share an account with people who don’t live with them. But it has stood out for not raising prices this year. (Knock on wood.)
• About?40%?of Disney’s new “subs” have selected the less expensive version with ads. Yet?CEO Bob Iger?said about?94%?of subscribers to the ad-free subscription absorbed a recent $3 price increase and stuck with the service.

Pricing is part art, part science:?Last week, Iger said Disney grew its streaming business very fast, “before we even understood what our pricing strategy should be or could be.”

• Double the cost:?U.S. households that have at least one streaming platform subscribe to an average of?4.1 services, for which they pay?$29.64 a month, per S&P Global Market Intelligence, roughly twice as much as in 2018.

Warner Bros. Discovery’s CEO?has said many streaming services remain underpriced given the amount invested in creating content. “We’re not in the business of trying to pick up every subscriber, we want to make sure we get paid and that we?get paid fairly.”

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????Buffett Shakes Up Portfolio, Buys Homebuilders?(Yahoo Finance )

Wall Street’s favorite folk hero is back in the news. Warren Buffett and his conglomerate, Berkshire Hathaway, unveiled their second-quarter moves. Given his cult following and track record, the financial world takes note when Buffett’s Berkshire makes investment tweaks.

What’s Buffett up to??A few things…

Selling:?Berkshire cut its stake in Activision (the creator of Call of Duty) by?70%. The video game company has hit several regulatory roadblocks while trying to merge with Microsoft.

And more selling:?Berkshire also sold off its entire investment in the insurance broker Marsh McLennan while trimming its investments in Chevron, the insurance company Globe Life, and the materials company Celanese Corp.

• It also cut its position in General Motors by almost half and sold 2.3 million shares in the healthcare firm McKesson for $815 million.

Buying a little more:?Besides selling, Berkshire added to two of its existing investments, buying more than 12 million shares in Occidental Petroleum and 2.5 million shares in Capital One.

Starting fresh:?Buffett also made a few new bets. Berkshire reported new positions in?homebuilding companies, including D.R. Horton, NVR, and Lennar — all three are up over?30%?this year.

• Berkshire purchased some 6 million shares in D.R. Horton for $726 million, while the other two home builder investments were much smaller.

From April through June, Berkshire was actually a net seller of stocks, cashing out about?$8 billion?more worth of shares than purchased.

Why it matters:

There can be many reasons to sell a stock or to buy more shares in existing investments, but starting new positions in companies you don’t already own expresses a certain level of conviction in a business or industry.

Housing needed:?Buffett’s firm is leaning into?America’s severe housing shortage?— Freddie Mac?estimates ?that the U.S. is short roughly 3.8 million units of housing. Consequently, Berkshire is capitalizing on a homebuilding boom.

• That may sound strange, given that higher interest rates have weighed on real estate generally, but that’s what’s driving new housing construction.

See, many are delaying their plans to move houses since doing so would require a new mortgage. For the?millions of Americans?who locked in interest rates (by buying a house or refinancing) during the low-rate pandemic era, many would rather stay in place than watch their interest rate double.

• Low inventories of existing homes for sale are pushing those in the market for a house to go with new construction, turning to big builders like D.R. Horton, NVR, and Lennar.
• While pending sales of existing homes were down a whopping?22%?year-over-year in May, new construction accounted for nearly?one-third?of all active listings — up from 16% in the same month in 2019.

MORE HEADLINES

???Retail?sales ?continue to be better than expected

???Home Depot?beats ?earnings estimates, but sales dip

??? U.S.?gas prices ?hit the highest level in 10 months

???Hindenburg Research has a new?target

???‘Blind Side’ subject Michael Oher?alleges ?Tuohys made millions off a lie

???Data Signals Downturn in China?(WSJ )

The bad economic news just keeps coming out of China. After reports that China’s youth unemployment (those aged 16-24) has continued to spiral higher after exceeding?20%, officials are opting to simply stop reporting that data.

It’s part of a?bigger trend ?where Chinese officials have increasingly restricted data or commentary highlighting the country’s economic woes.

Watch what I do:?Still, economic planners’ reactions are more telling. China’s central bank unexpectedly cut a range of key interest rates, which the Wall Street Journal called “an?emergency move?to reignite growth after new data showed the economy slid deeper into distress last month.”

Deflation:?This comes after a report showed that prices in July?fell?(aka deflation) in the country, showcasing the weakness of Chinese spending while most other major economies struggle with inflation.

• China is “the world’s factory,” as some say. When the world stops buying as many manufactured goods (spending more on services like travel after the pandemic), those supplies get redirected back into China‘s domestic economy.
• But if there isn’t enough demand from Chinese consumers, then a supply glut of stuff can drive prices lower, partially explaining why China alone faces deflation.

Why it matters:

Elsewhere, one of China’s largest real-estate developers,?Country Garden, is on the brink of default after missing payments on its debt.

Given that the property sector has been a pillar of China’s economic growth miracle, accounting for roughly?one-fourth of its economy, the company’s problems are sparking bigger concerns.

• Adding to those concerns is a?24.5%?year-over-year decline in new construction starts for houses, while property investment fell?8.5%.
• Even more alarming, since real estate investments are the primary source of wealth for everyday Chinese people, the property downturn is zapping wealth and crushing folks’ economic prospects.

Staying on the sidelines:?Overseas, stalling relations with the U.S. and its allies are crimping foreign investment into China. In the second quarter of this year, foreign investments were just $4.9 billion,?the lowest amount recorded since 1998.

• Investors and companies globally will be watching keenly to see how China’s recovery initiatives pan out, but there isn’t much to be optimistic about.

TRIVIA ANSWER

A basket of the top U.S. streaming services will cost you about?$87 per month?this fall, up from $73 a year ago.

SEE YOU NEXT TIME!

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