The Day After.
Murray's Week in Review
What follows is a review of the week’s top stories in business and finance. If you read this post via email (as most of you do), you will find at the end of the email a “button” that says “view entire message.” Click on it and the full post magically appears.
1. Workers at two Mercedes-Benz plants near Tuscaloosa, Ala., rejected a unionization drive by the United Auto Workers, a setback for the union's hopes of making broader gains in the south after winning a highly touted deal at a Tennessee Volkswagen plant in April. About 56% of the vote went against the UAW, according to the National Labor Relations Board. Mercedes would have been the second foreign-owned automaker in the south to join the UAW after VW, and the union wanted to show that win wasn’t a one-off. Gov. Kay Ivey and other Republican leaders had argued that a pro-union vote would choke off the investment that has transformed the state into a major auto producer. The company even brought in Alabama football legend—and Mercedes dealer—Nick Saban to talk to workers.
2. One key driver of this week's new market highs: A doomsday mentality, which motivated companies to slash costs and stockpile cash in anticipation of a recession, propelled quarterly earnings to their best results relative to expectations in at least two years. As of Monday, the 459 companies in the S&P 500 that had reported had posted profits on average 8.4% higher than expected, according to data compiled by Bloomberg. About 79% had beaten profit expectations, compared to 76% last quarter. Now analysts are ratcheting up expectations for the current quarter, suggesting a profit slump could be fading and further fueling the stock market.
3. Mark Sullivan in Fast Company on this week’s AI product announcements by OpenAI and Google:
Just last year, big tech companies were telling us how great it was that their large language models, or LLMs, could summarize documents and write poems. This week, the two leading players in the AI chatbot race, OpenAI and Google, demonstrated AI chatbots that tackle much heftier problems. The leading models have become “multimodal.” They can understand and analyze not just text but audio, imagery, and computer code, and create answers in the same mediums. In a simple example, OpenAI’s ChatGPT or Google’s Gemini can intake a visual image (perhaps through the camera of a smartphone) and describe in words the content of the image. “Multimodality radically expands the kind of questions we can ask and the answers we can get back,” Google CEO Sundar Pichai said at the company’s I/O event. It’s likely that we’ll look back at this week and recognize it as a time when consumer AI chatbots became more sensory, more reasonable, and even gained some emotional intelligence. Our AI helpers are still a work in progress but they’re clearly leaving their embryonic phase.
4. The day after OpenAI unveiled its new ChatGPT chatbot, Ilya Sutskever, the co-founder and chief scientist who in November joined three directors to briefly force out CEO Sam Altman, announced he was leaving. With Sutskever’s departure, the firm lost its last influential senior leader known to question Altman's push to deploy AI fast. Jan Leike, who co-led OpenAI's superalignment group, a team focused on making its artificial-intelligence systems align with human interests as the technology grows more powerful, followed him, saying in a Twitter thread that “safety culture and processes have taken a backseat to shiny products,” and “we urgently need to figure out how to steer and control AI systems much smarter than us.” In fact the whole team, publicly positioned as the main group working on the challenge of keeping AI under control, has been disbanded. On X, Leike linked to this story, which says the company has been “hemorrhaging” employees who care about safety but have lost faith in Altman.
Altman may have anticipated the drama in a lengthy podcast with Lex Fridman in March, in which he insisted that as AI advances, safety will be “mostly what we think about, the whole company. And it’s not like you have one safety team. It’s like when we shipped GPT-4, that took the whole company thinking about all these different aspects and how they fit together. And I think it’s going to take that. More and more of the company thinks about those issues all the time.”
5. Alphabet, battling a narrative that it has fallen behind in AI, has spent the last year restructuring for the AI era in one of the most dramatic shakeups in its 25-year history. In April CEO Sundar Pichai announced he would smash together two of the company's major units — platforms and devices — into a supergroup that would focus on Android, Chrome, and the gadgets Google builds, such as the Pixel phone. The announcement came almost 12 months after Google combined two key artificial-intelligence groups, DeepMind and Google Brain. Pichai has redesigned his leadership team to move faster and foster more collaboration between historically siloed parts of the business. He has looked inside the company and moved up a mixture of long-timers and established leaders to run the next era of Google. After Tuesday’s event, and a year of abuse, Google actually looks to be sitting pretty on AI, given its unparalleled scale and content depth.
6. The Economist:
In recent weeks four tech giants—Alphabet, Amazon, Meta and Microsoft—have pledged to spend close to a total of $200 billion this year, mostly on data centers, chips and other gear for building, training and deploying generative AI models. That is 45% more than last year’s blowout. Tech barons such as Meta’s Mark Zuckerberg admit that it may be years before this investment generates returns. The tech firms are not only buying infrastructure. In the past few years they have joined a stampede to put venture capital into OpenAI, Anthropic and other makers of foundational models. Traditional VC firms bellyache that they have not seen such corporate big-footing since the dot-com boom. The tech giants are flush with cash—they can afford to splash out. But, if the past is any guide, a bust is coming and the firms carry such weight in the stock market that, should their overexcitement lead to overcapacity, the consequences would be huge.
7. Superpowers led by the US and European Union have funneled nearly $81 billion toward cranking out the next generation of semiconductors, escalating a showdown with China for chip supremacy. It’s the first wave of close to $380 billion earmarked by governments worldwide for companies like Intel Corp. and Taiwan Semiconductor Manufacturing Co. to boost production of more powerful microprocessors. The surge has pushed the Washington-led rivalry with Beijing over cutting-edge technology to a critical turning point that will shape the future of the global economy. “There is no doubt we’ve passed the Rubicon in terms of the tech competition with China, particularly on semiconductors,” said Jimmy Goodrich, senior China and strategic technology adviser to RAND Corp.
8. Virtually overnight, Middle Eastern money has become the most powerful geopolitical force in the tech industry. Tech founders and investors are quietly pilgrimaging to the sovereign wealth funds of the Persian Gulf states, pursuing deals with authoritarian regimes. The AI arms race is driving a seismic shift in the region’s prominence, changing how one of the world’s most advanced technologies gets built and the players who stand to benefit. Washington is steering some of this shift, using the industry to push the region away from China’s orbit and focusing particularly on the UAE, a key U.S. security partner. The White House hosted executives from firms including Microsoft, Google and OpenAI last June for a meet-and-greet with Tahnoun bin Zayed al Nahyan, UAE’s national security adviser. The Middle East is using the Silicon Valley partnerships achieve its own urgent goals: To become an AI powerhouse and lessen its dependence on oil, for which global demand is projected to peak this decade.
9. Good news: An array of data indicates that America is in the midst of an extraordinary startup boom. Applications to form businesses last year reached 5.5 million, a record. The monthly average is about 80% higher than in the decade before Covid-19, compared with just a 20% rise in Europe. Perhaps even more important than the numbers is the kind of ventures that are being created. In 2020 and 2021, the height of the pandemic, many new businesses catered to the work-from-home revolution. Since mid-2022, technology companies have dominated. A paper published in March by the Census Bureau found a particularly sharp increase last year in business applications involving AI. And while innovation traditionally has been focused in California’s Bay Area and urban dynamos such as Austin and New York, the recent boom includes smaller cities from Boise, Idaho to Raleigh, N.C.
10. Lawmakers in both parties laid into Federal Deposit Insurance Corp. Chairman Martin Gruenberg over widespread sexual harassment at the agency, with Republicans badgering him to resign and some Democrats signaling they didn’t have confidence in him to lead the agency. Gruenberg’s Capitol Hill testimony came after a scathing 234-page report, commissioned in response to a Wall Street Journal investigation, that described how sexual harassment, bullying and other misconduct has pervaded the agency for decades and outlined incidents of volatile behavior by Gruenberg, who is in his second stint as chairman and has been in charge 10 of the last 13 years. Gruenberg said he accepted the report’s findings, took responsibility for the agency’s culture, acknowledged “my own failures as chairman,” and would take anger-management training. The White House is unlikely to move to oust him without significant political pressure from Democrats, since that would leave the agency’s Republican vice chairman in charge. Wall Street bête noire Sen. Elizabeth Warren, often an attack dog at Senate Banking Committee hearings, defended Gruenberg, saying Republicans wanted more control over the regulation of banks and that calls for him to resign are “politically motivated.”
11. Walmart shares hit an all-time high as earnings and revenue topped expectations, thanks to significant e-commerce gains, profits from newer businesses like advertising, a growing delivery service and more high-income shoppers, especially for its groceries. The big-box retailer expects to hit the high end or slightly top its previous full-year guidance. America's largest retailer has been remaking itself as it heads for a collision with Amazon. Walmart is so big that that to meet its target of around 4% sales growth each year, it has to find an additional $26 billion in sales this year. About 90% of Americans already shop there. Amazon earns much of its profit from non-retail operations such as cloud computing and advertising, while the bulk of Walmart sales and profits come from U.S. stores. Walmart executives are most wary of Amazon’s ability to keep increasing profits through non-retail business, while eating more of the retail landscape with ever-faster shipping and a bigger product selection. (Note: The WSJ headline was overstated, but, alas, so was this one.)
12. Sony is “rethinking” its $26 billion bid for Paramount Global, lobbed in with Apollo Global Management, in part over concern about the steady deterioration in the cable ecosystem, David Faber reported. Paramount’s “special committee” continues working through that offer and the outstanding, complicated bid from David Ellison’s Skydance Media and Redbird Capital for Shari Redstone’s National Amusements, but time seems to be stoking doubts over the Apollo-Sony bid, especially over regulatory approval. Shunning a deal remains a real possibility for controlling shareholder Redstone, but, says one participant, “We’re running out of things to delay this on.”
13. Many bankers and industry executives say the “big five” Hollywood studios — Paramount, Warner, Disney, Universal and Sony — could shrink to three in the next few years. “Are we in the middle of a scaling back in Hollywood?” asks one LA-based dealmaker. “Absolutely.” Tom Nunan, executive producer of the Oscar-winning film Crash and a lecturer at the UCLA School of Theater, Film and Television, says there is a “pall” over Hollywood: “What everyone can agree on is that the business seems to be broken.” The source of this malaise is Netflix and the streaming revolution it unleashed, which lured customers away from the cable TV channels that were studios’ cash cows for decades. They have responded by spending billions of dollars building their own streaming services, but these have yet to compensate for the decline in cable — a situation bankers have likened to a “melting ice cube.” Inside the industry, a debate rages between hope and despair.
14. Netflix said that after just 18 months it has gained 40 million active users with its ad-based subscription plan, nearly doubling since the start of the year and up from 5 million a year ago. More than 40% of new signups choose the ad tier. The streamer plans to build its own in-house ad tech platform, challenging incumbents like Comcast, Google and Amazon. No doubt Netflix, the No. 1 streamer with 270 million subscribers, sees opportunities in a fragmented market where advertisers are fleeing TV. Netflix also unveiled its deepest dive yet into live sports, signing a deal to stream NFL games live on Christmas Day for the next three years, part of a “massive” content pipeline it shared at upfront meetings with advertisers. Its dominance is giving its new head of business affairs (poached from Skydance), leverage to squeeze talent in a belt-tightening era, after the streamer overspent on production deals to establish its bona fides.
15. BHP Group’s pursuit of rival Anglo American is coming down to a bet on whether BHP CEO Mike Henry or Anglo CEO Duncan Wanblad is more likely to successfully execute a major restructuring of the smaller firm. Anglo responded to BHP’s latest overture with a radical, and arguably overdue, breakup plan to thwart its suitor, saying it would spin off platinum metals, dump diamond unit DeBeers, sell steel and coal (and maybe nickel) businesses and focus on assets for the “green energy transition,” especially copper and iron ore. After two rejections, BHP, the world’s largest miner, faces a Wednesday deadline to lodge a binding offer for Anglo under UK rules. Henry's options include further sweetening the now $42.7 billion bid, which is what shareholders of both seem to expect; going hostile; or walking away. Ironically, Anglo’s plan provides a blueprint for BHP. Even if BHP’s bid fails, Anglo’s restructuring could well draw other bidders by making it an even more attractive takeover target.
16. The head of Petrobras, Latin America’s biggest crude producer, was ousted amid tensions with the leftwing Luiz Inácio Lula da Silva administration. Friction had been mounting since CEO Jean Paul Prates disagreed with government-appointed board members this year over whether Petrobras should pay an extraordinary dividend to shareholders. Since returning to the presidency last year, Lula has pushed Petrobras to reduce investor payouts to invest more in areas such as renewable energy and refineries, aiming to stimulate economic activity and create jobs. Critics fear a repeat of the mismanagement and scandal at Petrobras under past leftwing rule. Prates is the fifth CEO to be fired or quit in three years. Magda Chambriard, a former head of the Brazilian oil and gas regulator, was picked to replace Prates, pending board approval. Shares dropped as investors braced for a new CEO who analysts warn could be more willing than her predecessor to put the president’s priorities above those of shareholders.
17. A half-century after John “Jack” Bogle founded Vanguard Group, the roughly $9 trillion fund giant is doing what once would’ve been unthinkable: hiring an outsider as its CEO. To many, the House of Bogle handing the reins to Salim Ramji, a longtime BlackRock executive once considered a possible successor to BlackRock chief Larry Fink, sends a clear message: Vanguard, great popularizer of the low-cost index fund, has reached a pivotal moment in its storied history. On one hand, it has never been a bigger force in the passive investing world it helped create. But with the battle to win investors’ cash intensifying and after years of internal dysfunction within the fund giant, pressure is mounting to cut costs and deliver results. It’s difficult to overstate how profound the shift is, or what it could mean at its core for Vanguard and its 50 million customers. Only three executives have led the private company since Bogle retired a quarter century ago, and all three of them worked for him first. Ramji says he sees an opportunity to add “millions and millions” more customers.
18. BlackRock is closing in on the crown of running the world’s largest bitcoin fund as the asset manager’s initial skepticism over cryptocurrencies gives way to ambitions to become a significant player in the digital asset market. Its spot bitcoin exchange traded fund has garnered $16.7 billion of assets since it launched four months ago, putting it less than $1 billion behind market leader Grayscale, which enjoyed a 10-year and $28 billion head start. BlackRock has also launched the fastest-growing tokenized Treasury fund, which crypto hedge funds and market makers are beginning to use as collateral for trading coins and tokens. The moves are a sharp change, driven by rising client interest and rapid growth in digital assets, from only seven years ago when CEO Larry Fink called bitcoin “an index of money laundering”.
19. AMC Entertainment took advantage of a brief, bizarre recurrence of meme-stock mania that sent its shares soaring again, swapping a chunk of debt for new shares and shoring up its liquidity, raising $250 billion. Early in the week shares of AMC and GameStop soared more than 70%, adding a total $11 billion in market value, after Keith Gill, aka “Roaring Kitty” of Reddit’s wallstreetbets fame, seemed to return to social media. By the weekend, the two were crashing back to earth even as markets hit new highs, GameStop had warned on sales and Reddit users were wondering if it was even Gill who tweeted. Renaissance Technologies, the hedge fund started by the late Jim Simons, had loaded up on shares of the two companies before the rally. Others warned of market froth. (Note: If you've never seen the Netflix documentary on 2021’s meme-stock mania, “Eat the Rich,” it’s both enjoyable and a good explainer of the whole phenomenon.)
20. After averaging 4,067 fans at Gainbridge Fieldhouse last year, second to last in the WBNA, the Indiana Fever expect to be at or near a capacity crowd of 17,254 for each of their 20 home games this season. The reason is simple: rookie Caitlin Clark. Her arrival in the 27-year-old league is stirring memories of the days when Larry Bird and Magic Johnson turbocharged the NBA, lifting the league to its current status as a multibillion-dollar business. Clark’s arrival comes as the league is in talks over TV rights for many of its games, with the remainder up for negotiation in the next 18 months. A new labor agreement is also likely to be on the table. If Clark thrives at the professional level—and if her millions of fans make the transition with her—it will change the math for everybody.
Columns: Greg Ip: Robert Lighthizer’s agenda for a second Trump term. Schumpeter: What the head of Starbucks and Joe Biden have in common. Paris Marx: Apple desperately needs its next big thing. Zoë Schiffer: How the tech industry soured on employee activism. Christopher Mims: What I got wrong in a decade of predicting the future of tech. Robin Harding: What Japan’s most profitable policy experiment can teach us.
Footnotes: BLS inflation data was accidentally released 30 minutes early; no one seemed to notice but the bureau is investigating. Outgoing Boeing CEO Dave Calhoun gets shareholder rebuke and gets a 45% raise (italics mine). Tesla is rehiring some members of its supercharger team weeks after axing them. One apparent factor in Elon Musk’s surprise move to fire the team: everyone’s nightmare, a disastrous presentation to the CEO. Tesla must climb “Mount Everest” to win shareholder approval for Musk’s pay, according to its chair. Matt Gorman faces big decisions after replacing Adam Selipsky as head of the vital Amazon Web Services business. After losses, SoftBank will focus on AI. As Melinda Gates leaves the Gates Foundation, ex-husband Bill generously thanks her on X for her “critical contributions” to the foundation she co-founded and co-chaired, describing her as “instrumental” in its success. Alibaba profit plunges. The EU is investigating Meta over child-safety risks. Frank McCourt throws his name into the TikTok bidding pool, while a group of creators files a court challenge to the sell-or-ban law, days after owner ByteDance made its own legal challenge. Mary Barra on GM’s new 50,000-square foot technical center in Mountain View and rethinking its corporate HQ. Inside GM’s effort to save its $10 billion bet in self-driving startup Cruise. The woman who implemented thousands of layoffs in Citigroup’s restructuring quits. Red Lobster heads for bankruptcy. The books in OpenAI’s library. Venu is the name of the forthcoming Fox-Disney-Warner Bros. streaming venture. Under Armour and its returned CEO undertake a big restructuring. Warren Buffett was buying Chubb. Uber partners with Costco. Honda doubles EV and software investment. Colm Kelleher was always meant to become Europe’s most powerful banker. Microsoft asks hundreds of China-based AI staffers to consider relocating. I have spent entirely too much time thinking about Mark Zuckerberg’s outfit at his birthday party. If you are Zuckerberg’s stylist, The Verge wants to hear from you.
