Over-the-Top Video and Haute Couture Banking

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Phone company buys dial-up internet company.

I mean, I sort of kid, AOL Inc. gets less than a quarter of its revenue from selling "AOL-brand dial-up access service," and Verizon does plenty of non-phone things. But Verizon agreed to buy AOL for $4.4 billion ($50 a share) in cash, and here are some words, or at least letters:

Verizon’s acquisition further drives its LTE wireless video and OTT (over-the-top video) strategy. The agreement will also support and connect to Verizon’s IoT (Internet of Things) platforms, creating a growth platform from wireless to IoT for consumers and businesses.

AOL is a leader in the digital content and advertising platforms space, and the combination of Verizon and AOL creates a scaled, mobile-first platform offering directly targeted at what eMarketer estimates is a nearly $600 billion global advertising industry. AOL’s key assets include its subscription business; its premium portfolio of global content brands, including The Huffington Post, TechCrunch, Engadget, MAKERS and AOL.com, as well as its millennial-focused OTT, Emmy-nominated original video content; and its programmatic advertising platforms.

It goes on in that vein -- "OTT" gets three more mentions in the news release -- and it's a little funny to think of AOL as "mobile-first" and "millennial-focused." I wonder how many of those dial-up subscribers are millennials, or are dialing up from their cell phones.

Reports from the field.

Here's a report from the Boston Consulting Group on the outlook for the capital markets and investment banking industry. It's ... consultant-y? The calls to action seem reasonable enough: "Revenue growth is elusive, yet it remains a key profitability lever"; costs are hard to cut; "CMIB players must actively seek synergies with other businesses, including lending, transaction banking, asset servicing, and even treasury, in order to unlock new revenue opportunities and optimize operating models, cost bases, and investments," and

As we have said in previous reports, each institution must choose its own path on the basis of its legacy, its particular strengths and weaknesses, and its aspirations—be it to become a powerhouse, advisory specialist, relationship expert, haute couture institution, hedge fund, or utility provider. (See our 2013 report, Survival of the Fittest, and our 2014 report, The Quest for Revenue Growth, for descriptions of these models and their strategic implications.) Each choice presents tall challenges but also great opportunities for the most adept players. But no matter the business model, achieving meaningful revenue growth will require improving client centricity, building stronger client-related analytics, tapping opportunities from adjacent businesses, and attracting and retaining the right kind of talent.

"Haute couture institution" would definitely be a shift for some banks, though one or two might be able to pull it off. BCG's other conclusion is that "digital technology must be higher on the senior management agenda"; the technology bit of the report argues that "the information advantage that investment banks have traditionally enjoyed is being eroded" by technology, and sort of endorses more use of the blockchain. Also it says stuff like this:

In sum, the line between paradigm changers and disrupters is not well defined in these early stages. But if investment banks react creatively to the new digital dimension, they can find ways to turn potential disruption and disintermediation into real opportunity and competitive advantage. (See “Co-Innovate to Assimilate.”)

Would pivoting to haute couture be a paradigm change or a disruption?

Elsewhere, Goldman Sachs put out a research note on "Millennial Moms," and it had to know how that would go over. Business Insider published at least four [update: five][update: six] posts on it (by Shane Ferro, Myles Udland, Andy KierszElena HolodnyPortia Crowe and Ashley Lutz), and Bloomberg published at least two (by Julie Verhage and Joe Weisenthal). (Disclosure: I used to work at Goldman, am not a millennial by their definition, currently work at Bloomberg, and am writing about the Goldman millennials report right this second.) The report is full of sentences about consumption habits that are probably basically sensible but sound sort of bonkers: "We believe this generation’s attitude towards brands is being shaped by a unique set of values, chief among them a more idealistic and aspirational lifestyle than prior generations." "The rise of small brands could reprise retail’s role as curator." "What baby name trends tell us about Millennial views on branding." Is naming a baby basically a branding choice? Yes, of course, obviously, but when Goldman Sachs says it you really notice the late-capitalist dystopia. 

People moves.

The path that Deutsche Bank has chosen on the basis of its legacy, etc., seems to be a bit closer to "haute couture institution" than "bond-trading powerhouse," which has come as a surprise to a lot of people, possibly including its heads of fixed-income and currencies trading, since three of them have left since the beginning of 2014. The latest is Richard Herman:

“For a short period of time at least, to quote Samuel Jackson in ‘Pulp Fiction,’ I’m going to ‘walk the earth,’” Herman said Monday in a memo. “This is an entirely personal decision.”

The scoring here is: That Sam Jackson line is a good line, and if you are leaving without another job lined up it is perfectly appropriate to say "I'm going to walk the earth" to people, or even in your departure memo I guess. It is a bit de trop to say "to quote Samuel Jackson in 'Pulp Fiction.'" Everyone's seen the movie. Don't over-explain the joke. Also following up with "You know, like Caine in 'Kung Fu': walk from place to place, meet people, get into adventures," is probably acceptable, if that is in fact your plan. 

Meanwhile at UBS here is a thing that Andrea Orcel apparently actually said?

Mr Orcel insists he has never called anyone on holiday or asked anyone to cancel their leave. If bankers want to cancel their holidays themselves so they can stick around to help with a deal “I respect that choice”, he says.

Mutual funds and unicorns.

I do not really share Andrew Ross Sorkin's concerns about big mutual funds investing in big private companies; my view is that the capital markets are evolving in such a way that capital is increasingly being allocated to businesses in private markets, while public markets are increasingly about returning capital to investors. But he makes some good points here, including that valuation of private companies tends to be more subjective than valuation of public companies with a liquidly traded share price, and that it's important for mutual funds to know exactly how much all of their holdings are worth. Though I would not overstate that point; Uber, at least, raises money every five minutes, so you have a pretty good mark to market. (Yes I know liquidation preferences, blah blah blah, who knows what a $50 billion Uber valuation really means.) Also this seems true and important:

Another of the reasons that mutual fund companies say they need to buy into start-ups is the dearth of I.P.O. opportunities and the increasingly extended period that start-ups stay private. That’s true. But the mutual funds are creating a self-fulfilling prophecy by making such investments, which provide disincentives to private companies to go public more quickly.

If companies can raise money as easily in private markets as in public ones, then public markets -- with their disclosure requirements and short sellers -- just look like a burden.

Some market structure.

The Securities and Exchange Commission is on a big market-structure reform push; here's a statement from Commissioner Luis Aguilar about the need for reform and the SEC's policy goals. His list of priorities is sort of interesting; it goes like:

  1. Protecting the interests "of investors and issuers who utilize the equity markets to meet underlying economic goals, rather than to profit from continual trading."
  2. Market efficiency, liquidity and pricing accuracy.
  3. "To support the interests of the market participants that support our markets, such as registered dealers and market makers."
  4. To "generally disfavor the interests of traders that seek to take unfair advantage of other traders."

This seems like a good list; I feel like a lot of people would move number 4 up and might delete number 3, maybe even number 2. Elsewhere, here is a comment letter (and related articles) from Haim Bodek and Peter Kovac urging the SEC to reform the "trade-through rule," Rule 611 of Regulation NMS.

And here is a story about how big traders get short-interest data from their brokers and data providers before the exchanges make public the official version. This is a broader concern: A lot of things (stock borrow, credit-default swaps, etc.) trade in private markets whose prices are not publicly disclosed, but affect the prices of publicly traded securities. The lesson is, if you don't have access to the private-market data, be careful trading the public things.

A mortgage hustle.

When you get a mortgage you get a lot of mailings that are like "Hello MATTHEW LEVINE if you make 26 biweekly payments of $X per year instead of 12 monthly payments of $2X you will pay down your mortgage faster and save money on interest." If you are me and have your amortization schedule set up in Excel, this comes as no surprise to you, because 26X is more than 24X and interest compounds and so forth. But it is a mystery to some people, or so says the Consumer Financial Protection Bureau, which is suing Nationwide Biweekly Administration "alleging that Nationwide misrepresents the interest savings consumers will achieve through a biweekly mortgage payment program and misleads consumers about the cost of the program." According to the CFPB complaint, Nationwide applies only 25 of a consumer's first 26 biweekly payments to her mortgage; the 26th goes to Nationwide "as a setup fee." Nationwide also charges $91 per year in processing fees, and the median consumer "will not save enough to recoup the fees she has paid Nationwide until she is nine years into the program." Also math is hard:

In mailers and other marketing materials Nationwide distributes to consumers, and in mailers LPA distributes to consumers, Nationwide and LPA falsely claim that consumers enrolled in the IM program will achieve savings without paying more.

For example, one Nationwide mailer claims that “you do not increase your monthly payment” and that savings are realized “without increasing the amount of your monthly payment.” In one video on Nationwide’s website, Lipsky states, “you’re not increasing your payment. You’re just switching to a smaller biweekly or weekly amount.”

And if there were 48 weeks in a year, that claim would be uncontroversially true. Because there are 52, though, it is at least open to question.

Elsewhere in hustles, I enjoyed this SEC action against retirement planners who allegedly sold life settlements to customers claiming that they were "insured with large, A-rated companies and backed by Federal Reserves." So close to being a thing! Also a neat trick:

Presumably because the life settlement interests were not registered as securities with the Commission, the two life settlement providers with whom Novinger and Speers had selling agreements required investors to be accredited. To help investors bolster the putative value of their net worth, Novinger, Speers, and Novers furnished some of their investors with a “Net Worth Calculator,” which improperly inflated investors’ assets by including anticipated Social Security, pension, and other similar payments for 240 months (20 years) into the future. This practice had the effect of giving the false and misleading appearance that the investor had a large enough net worth to be considered accredited and therefore was an appropriate investor for this unregistered offering. 

Things happen.

Merger Wednesday. Why Would Anyone Want to Restart the Credit Default Swaps Market? BIS Calls For Single FX Code Of Conduct. The Supply and Demand of S&P 500 Put Options. Blackstone cuts Hilton stake in largest ever sponsor block trade. ‘Cov-lite’ on the Rise as Buyout Borrowers Dictate Terms. Chinese company increases its valuation by registering the domain www.p2p.com, which consists of "a few photos and a Chinese caption stating 'This domain is worth $100m.'" "Yale could use a new international airport, Mr. Burns." Bill Gross: The Amount of Money I'll Give Away 'Is Staggering, Even to Me.' "Moaning Myrtle's full name was Myrtle Elizabeth Warren." Wall Street warns Hillary Clinton: Don’t be like Ed Miliband. Bourbon barrel shortage. This 18-Year-Old’s Tongue Is So Long She Can Lick Her Own Eyeball.  "He’s all about change-oriented post-medievalism." Olive Garden's New Breadstick Sandwiches Come With Unlimited Breadsticks

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This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Zara Kessler at zkessler@bloomberg.net