Mad Hedge Technology Letter
September 11, 2023
Fiat Lux
Featured Trade:
(DEATH OF LEGACY MEDIA)
(CHTR), (DIS), (NFLX), (NXST), (DISH)
Negotiations between Spectrum’s parent company, Charter Communications (CHTR), and Walt Disney (DIS) finally got over the impasse and they struck a deal.
No deal for both would have been catastrophic for both.
Disney faced the potential loss of 14.7 million Charter pay TV subscribers, or 20% of ESPN's current linear subscriber base of 74 million.
That equates to linear revenue losses of roughly $5 billion, or 6% of overall revenue.
Cord-cutting has been occurring at a brisk pace in the last few years, but the lack of solidarity among the legacy media negotiators appears to turn the trickle into a breaking of the dam.
What am I talking about?
Disney decided to go nuclear by removing its channels from the cable provider. Charter (CHTR) proposed that Disney (DIS) offer its customers free access to Disney’s streaming services, especially ESPN; Disney rebuffed the offer, but CHTR finally agreed to add Disney+ Basic ad-supported offering being provided to Charter customers who purchase the Spectrum TV Select package at no additional cost, "as part of a wholesale arrangement."
This is really the beginning of the end for legacy media and this melee could trigger a swift bout of consolidation as disagreements become the norm and not the outlier.
It’s no surprise the cost of creating content is going up and these channels like DIS feel they can just pass the costs
Remember that many people pay for cable just to watch college football and the NFL.
Roughly 25% of Charter’s clients engage with Disney content, Charter said on a call last week.
DirecTV is also embroiled in its own content squabble with local broadcast network Nexstar (NXST), which recently pulled over 200 stations in more than 100 metro areas from DirecTV’s network over a similar price dispute.
While the cable TV business has been declining for years, there’s concern this is the last hurrah.
Down the road, the winners out of all of this may be internet TV operators, including YouTube TV, Hulu TV, FuboTV, and Dish’s DISH’s (DISH) Sling. Some of these have been gaining steady traction even before negotiations soured, with Hulu’s web traffic up 7.2% year-over-year in July and Sling’s traffic up 11.8%.
Web traffic may pick up as consumers look for ways to watch their regularly scheduled programming. Online search interest in five major live TV streaming services picked up Sept. 1 when news of Disney’s blackout became public, according to Google Trends data.
I believe that online momentum will translate to a long-term subscriber bump for these companies.
CEO of CHTR Christopher Winfrey and CEO of DIS had to make this deal.
The ongoing chaos in the legacy media markets signals that cord-cutting will supplant the legacy markets within the next 10 years.
Baby Boomers are the last stalwarts of the legacy media market and they are retiring in droves.
Netflix (NFLX) is another streamer that is in line to pick up some of the demand for streaming content.
With high rates, the era of excesses is rearing its ugly head.
Platforms are being careful with the type of agreements they make as less quality content is facing a bleak future.
Live professional sports are lynchpin to why many consumers don’t quit cable.
I believe the next contract cycle will see many pro sports leagues go all streaming much like the American soccer league MLS did with Apple TV.
When pro sports migrate 100% into digital, expect to be outsized winners and losers while distributors like SlingTV should sink like a rock.
“A good sign as to whether there’s free speech is: Is someone you don’t like allowed to say something you don’t like? If that is the case, then we have free speech.” – Said Owner of X formerly Twitter Elon Musk
Mad Hedge Technology Letter
September 8, 2023
Fiat Lux
Featured Trade:
(THE SUSHI HITS THE FAN IN CUPERTINO)
(APPL), (MCHI),
When it rains – it pours. Let’s talk about China (MCHI) and Apple (AAPL) CEO Tim Cook.
I admit that I was quite harsh on Tim Cook 7 years ago when writing this Mad Hedge Technology letter.
I routinely delivered scathing critiques of him and perpetuated the narrative that he was only an operations guy.
Then I lightened up as he drove the company to higher highs even though the company didn’t foray too far from its bread and butter the iPhone.
My fierce criticism revolved around Cook betting the ranch on an Eastern adversary at a time when deglobalization started to pick up pace.
After knocking out the $2 trillion market cap and vaulting past $3 trillion, I gave Cook a pass for the time being.
Fast forward 7 years and the sushi has hit the fan and Cook has an absolute fiasco on his hands.
The trouble brewing in China is not necessarily entirely his fault, but sleep with the enemy, and it is hard to whine about the consequences.
In one fell swoop, 60 million hardcore Apple customers are dropping Apple products.
It’s a swift kick in the nuts for Cook.
Funnily enough, just a few months ago, Tim Cook was one of the few U.S. CEOs to venture to China after its reopening with his usual kowtowing to the communist party.
In March, he declared that Apple and China had a “symbiotic kind of relationship.”
It is bizarre to hear such an important figure in the American technology apparatus so infatuated with the Chinese.
Beijing is ordering officials in all departments to stop using iPhones.
Then Beijing extended the ban to state-owned enterprises.
How important is China to Apple?
China is key to Apple’s supply chain and to its sales.
About half of Apple’s smartphones are made in a giant factory complex in Zhengzhou, nicknamed “iPhone City”, operated by electronics manufacturer Foxconn.
China is also a significant consumer market for Apple, as it is the largest market outside the U.S. The company generated $15.8 billion in sales from China alone last quarter, 20% of its total.
Chinese consumers gravitate to the iPhone too: Apple has 65% market share for premium phones over $600.
There is a big element here in getting Chinese people to use their own smartphones.
I know many people who use Chinese smartphones because they are flagship quality but 40% cheaper than iPhones.
The only piece lacking is usually the Apple quality high-end camera, but most people don’t use their phone for a high-definition YouTube channel.
My sense is that the 60 million white-collar Chinese people will grumble about the brand downgrade to Huawei or Xiaomi, but the drop-off in performance isn’t so crazy that they are willing to go rogue and find a roundabout way to use an iPhone.
This sets the stage for all Apple products to get banned full-stop in China which is 20% of Apple’s revenue.
That includes Apple watches, earbuds, computers, and the whole shebang even the services part of the equation.
Deglobalization is rearing its ugly head again and this event could be a catalyst to take Apple shares back down to more affordable levels.
I would look at buying the dip once this negative news works itself through the system.
However, this event is akin to the tech sector getting stunned with a left hook to its face, and it will take time to recover don’t expect any American corporations to do business in China anytime soon under these souring conditions.
“The art of living is more like wrestling than dancing.” – Said Roman Leader Marcus Aurelius
Mad Hedge Technology Letter
September 6, 2023
Fiat Lux
Featured Trade:
(SEPARATING THE WHEAT FROM THE CHAFF)
(PTON), ($COMPQ), ($TNX)
Part of the excesses that became ubiquitous with Silicon Valley is starting to get reigned back and that’s a good sign for the tech sector ($COMPQ).
It also means the boom years for the tech sector are over.
I am not talking about the full set of perks tech employees receive at their fingertips in order to entice them to spend most of their time at the office.
I am more referring to ideas that were hyped up as grand but never made a material dent in the tech ecosystem.
Not all tech ideas hit it big and some are complete busts.
Ideas like the Uber of battery-powered scooters are now getting the thumbs down and capital is getting pulled by from these marginal business concepts.
From the get-go, these companies presided over poor unit economics and they could only sustain operations in a world of cheap capital that doesn’t exist anymore.
Rates ($TNX) are high and could shoot higher.
Legally, cities have a say in whether they want their beautiful promenades and piazzas littered with ugly scooters.
In France, Parisians voted to ban battery-powered scooters, confirming that many regarded them as absolutely infuriating.
Banned from the French capital by popular vote, self-service electric scooters are enjoying their last day in Paris on Thursday, marking the end of five tumultuous years of controversial use, much to the dismay of their users.
From 1 September, Paris will become the first European capital to completely ban these self-service two-wheelers.
Many Parisians have become fed up with seeing them as not only an eye sore but also a safety hazard.
Since August, the 15,000 scooters have gradually been taken off the streets.
Of the 5,000 scooters going out to pasture produced by the German company Tier, a third will remain in the Paris region, in 80 communes around Marne-la-Vallée or Saint-Germain-en-Laye. The rest will go mainly to Germany.
In Paris, some 400,000 people chose a scooter to get around in 2022, according to operators.
The operators are banking on their customers switching to bicycles, which are already offered by everyone, which should enable them to avoid redundancies, at least for the time being.
There most likely will never be another boom of battery-powered scooter platforms dressed up as technology companies.
These types of low-quality tech firms are feeling the heat and examples are plentiful such as Peloton (PTON) which has also hit rock bottom.
The next big idea down the pipeline is generative artificial intelligence, but even that has been dialed back somewhat after stocks were priced in for parabolic growth rates.
As the expectation for better technology ideas results in the need to improve business models, there seems to be no room for bottom-of-the-barrel tech like the Uber of battery-powered scooters.
It seemed like a bad idea from the start so it’s surprising it took this long for them to get exposed.
Moving forward, expect tried-and-tested brand names in tech to outperform these mediocre businesses. It’s never been more difficult to grow tech companies with these high interest rates and the death of bad tech ideas will go into overdrive as interest rates continue to surge.
This will help our trading because knowing the pulse of the tech sector is half the battle.
Quote of the Day
“It is easier to find men who will volunteer to die, than to find those who are willing to endure pain with patience.” – Said Roman Leader Julius Caesar
Mad Hedge Technology Letter
September 1, 2023
Fiat Lux
Featured Trade:
(BEST BUY PUTS IN A SHIFT FOR TECH)
(BBY), ($COMPQ)
