Thanksgiving Mega-Pod: Bob Iger’s Power Grab, SBF’s Scandal, and Elon Musk’s Omnishambles
Derek offers a big-picture explanation for why everything in tech and media—from Elon Musk and Twitter to Bob Iger and Disney—seems to be falling apart at the same time
Today’s episode is a Thanksgiving feast of corporate scandal and media gossip. Derek kicks things off with a big-picture theory for why everything in tech and media seems to be falling apart at the same time. Then, we turn to the corporate shocker of the week: Bob Iger stunned the entertainment and media world by announcing his return to Disney as CEO, not even three years after the coronation of his hand-picked replacement, Bob Chapek. Matt Belloni of The Ringer and Puck joins to respond to some hot takes about the future of the Streaming Wars and the Mouse. Then, Derek revisits the FTX scandal. We’re joined by Matthew Yglesias, author of the Slow Boring newsletter, to take a fresh look at the downfall of Sam Bankman-Fried by analyzing the philosophy he supported, or at least claimed to support: effective altruism.
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In the excerpt below, Derek expounds “the interest rate theory of everything,” which he thinks can help explain the business and tech chaos dominating the headlines, from Elon Musk and Twitter to Bob Iger and Disney.
Derek Thompson: Today’s episode is a Thanksgiving feast of scandal and gossip, but I want to start with a grand theory of 2022 chaos.
When you read today’s headlines, whether it’s Bob Iger and the Disney challenges, the crypto crash, the layoffs at Meta, the layoffs at Amazon, Elon Musk’s shock therapy at Twitter, this new age in technology, I think there is a single story, a single theory that ties it all together. I want to call it “the interest rate theory of everything.”
This theory begins around 2007 with the housing crash. You have this huge downturn, a great recession, crazy-high unemployment. An entire generation is fucked. The Federal Reserve drops interest rates to zero or near zero to help get the economy going again. This does a few things. On top of stimulating the economy, it reduces the cost of capital, and it moves institutional investment away from bonds toward higher rates of return. Meanwhile, venture capital blooms at the same time that the smartphone is becoming this universal omni-gadget.
Tech revenue is surging, especially for the big boys: Microsoft and FAANG—that’s Facebook, Apple, Amazon, Netflix, Google. In Silicon Valley, you’ve got billions of dollars that are flowing into consumer tech and social media apps. Everything that comes out of this period is either free or heavily subsidized by venture capital. Here’s what I mean by that. In 2015, if you hailed an Uber and that ride cost Uber $20 for the company to break even, you often paid something like $15. Who was paying the other $5? Venture capital was paying the other $5. Why would they do that? Well, they wanted to dominate the world. Growth was more important than so-called unit economics. That is, whether you would turn a profit on each individual rider. They would rather lose cheap money in the short term than fail to grow at all.
You can tell the same story with something like streaming. As long as rates were low, investors were willing to give Netflix a ton of money, even though it wasn’t profitable, and Netflix was willing to give us that money too by giving us a discount on its streaming service so that it could continue to expand at a loss. It’s like low rates were this microclimate in which a certain kind of company bloomed, and those companies define the tech frontier. The pandemic created a really strange and brief oasis for tech. COVID accelerated internet use, social media companies hired like crazy, e-commerce exploded, basically fast-forwarded into the future by 10, 13 years, and it seemed like this tech fairy tale was just going to go on forever.
But all along, as people were predicting this forever boom for tech, “Oh, the roaring ‘20s are just going to be this heaven on earth for tech companies forever and ever,” suddenly something stranger was happening. As The New York Times’ David Wallace-Wells put it perfectly, “A decade of loose money and low growth and low interest rates coming out of the great recession created a bull market in bullshit.” A bull market in bullshit. Then you have this surge of post-pandemic inflation and rates rise. That means the end of easy money. All these companies suddenly have to hoard their cash and raise their prices. The narrative in markets has entirely flipped from growth toward profits, from dominate the world to unit economics. That means the valuations for these tech companies suddenly crash and their [price-to-earnings] ratios become pretty much normal.
What happens individually for these companies? Well, the price of Netflix goes up. The price for Uber rides goes up. The price for all these consumer tech apps that you use has to go up. Meanwhile, they have to cut costs. So they have to fire thousands, sometimes tens of thousands of people, at places like Meta and Amazon. That is the world in which we live. The microclimate suddenly changed and the tech companies had to change too. Think about how this story connects to two of the major sagas, the major scandals in tech today: whatever Elon Musk is doing at Twitter, and the changing of the guard, the changing of the Bobs, at Disney.
Musk, first. Elon Musk is the richest person in the world. Why? Largely because of Tesla stock. Tesla briefly became the most valuable car company on the planet, not because it earns the most revenue and not because it has the highest profit. It has neither. Rather, because for many years investors in a low-rate environment were valuing the company’s future profits and future growth rather than its current profitability. Tesla would’ve been a valuable company no matter what, but low rates helped to make its founder the richest man on the planet.
OK, that’s why Elon Musk has a lot of money. How does the rate story explain what he’s doing at Twitter? Well, you look at the chaos he’s unleashing, firing around 50 percent of the staff, upending the business. One reason he’s doing this is that he has dramatically leveraged up, taken on a lot of debt, to overpay for an unprofitable company during a period of suddenly skyrocketing rates. That’s really bad. It’s really bad. As a general rule, one thing you do not want to do is go deep into debt to overpay for an unprofitable enterprise during a period of suddenly skyrocketing rates. If you do that, if you find yourself in that position, what you’re probably going to end up doing is slashing costs at that company to the bone, which, by the way, is exactly what Elon is doing in his very Elon-y way.
It’s the same thing with Disney. When rates were low, the company embarked on this very bold, once-in-a-century strategy to pivot from traditional TV, a declining but profitable business, to streaming, a growing but unprofitable business. That is an incredibly risky thing to do in any environment, but it’s easier in a low-rate environment because investors are happy to park their money with you, trust in the leadership and say, “OK, bet on future growth. This might work.” But the world has changed. Now we’ve got rising rates and investors need up-front returns, which makes this facelift a very, very risky thing to do for Disney. That’s why its stock is down 50 percent this year. That’s why the stocks of all these companies that are in on the streaming game—Warner Bros. Discovery, Netflix, Disney—all of their stocks are way down, and it’s one reason, not the whole reason, but one reason Bob Chapek is out and Bob Iger is in at Disney.
This is my opening take. This is my grand theory. If you want to know why every story in tech and media is so freaking crazy all of a sudden, or specifically, if you want to understand the deeper story behind the revenge of Bob Iger, the scandal of SBF, or the chaos of Elon Musk, I think this is a good place to start. Interest rates explain everything around me.
This excerpt was edited for clarity. Listen to the rest of the episode here and follow the Plain English feed on Spotify.
Host: Derek Thompson
Guests: Matthew Belloni and Matthew Yglesias
Producer: Devon Manze
Subscribe: Spotify
