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The Growing Costs of Netflix’s Dominance: DealBook Briefing

The cost of bringing shows like “Stranger Things” to Netflix is going up.Credit...Netflix

Good Tuesday morning from Andrew Ross Sorkin in New York and Amie Tsang and Michael J. de la Merced in London, where we’re pondering when a unicorn isn’t a unicorn. More on that in a moment.

Breaking: Morgan Stanley reported $1.8 billion in net income for its third quarter, up 12.5 percent from the same period a year ago. Trading revenue fell 9 percent, to $2.8 billion.

A reminder: DealBook’s sixth-annual conference, Playing for the Long Term, is on Nov. 9.

Want to join us? Apply to participate here.

Today, the big question facing Netflix, the darling of growth investors around the world, is: How long can it keep the content machine running?

The biggest number from yesterday’s third-quarter earnings call was that the company will spend between $7 billion and $8 billion on content next year.

Netflix has continued to pay for original content — from “Stranger Things” to “The Crown” — by borrowing in the debt markets.

Right now, the company has held onto a B1 credit rating from Moody’s, a relatively high-tier noninvestment-grade level.

In its letter to shareholders, the company said, “We anticipate financing our capital needs in the debt market as our after-tax cost of debt is lower than our cost of equity.”

But as interest rates keep rising, and competitors like Hulu pose the risk of more bidding wars for content, will that continue to hold true?

The high points

• The 5.3 million in additional new customers during the quarter — which brought Netflix’s total to 104.2 million — beat expectations.

• Revenue rose 30 percent in the quarter from the same period a year ago, to just under $3 billion.

• Net income leapt 152 percent, to $129.6 million.

• Netflix says it isn’t worried about moves like Disney withdrawing its catalog from the service, pointing out that Disney movies aren’t available in its international markets. Its total paying international subscriber base jumped 43 percent, to 52.7 million.

What traditional video providers are still worried about

From a tweet by BTIG’s Rich Greenfield:

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“MVPD” refers to “multichannel video programming distributor,” industry parlance for cable and satellite TV providers.

The Netflix skeptics

WSJ: “In a streaming market growing more competitive by the day, Netflix can’t afford to have its users change the channel.”

Bloomberg Gadfly: “But at some point the company must stand on its own financially — and that means it needs a lot more customers, and most likely higher bills from those customers, in coming years.”

“These financial structures and their valuation implications can be confusing and are grossly misunderstood not just by outsiders, but even by sophisticated insiders.”

That’s what Ilya A. Strebulaev, a professor at Stanford University, and Will Gornall, a professor at the University of British Columbia, wrote in a new research paper on so-called unicorns, start-ups valued at $1 billion or more.

Companies are using sophisticated investment terms to inflate their valuations. Take them away, and, the professors found, almost half of the unicorn population would fall below the $1 billion threshold.

More from Andrew’s latest DealBook column on their paper:

When Mr. Strebulaev first circulated a draft of his paper, he said, “a number of companies contacted me, or, rather, their general counsels contacted me.” He encouraged them to point out mistakes or factual errors. “I haven’t heard back from them,” he said.

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Credit...Tom Brenner/The New York Times

But will their alliance, showcased at yesterday’s news conference, work?

“We are fighting for lower taxes, big tax cuts, the biggest tax cuts in the history of our nation,” President Trump said at the gathering.

One potential hurdle is the group of Republican lawmakers who fear growing the deficit. But they’re an increasingly isolated group within their own party.

Rachel Bade and Burgess Everett, Politico:

While Republicans earlier this year set out to rewrite the tax code without blowing a hole in the national budget, most Hill Republicans, from G.O.P. leaders to conservatives have started to side with [Trump’s budget chief Mick] Mulvaney, acknowledging that they’ll grow the deficit for a time with the tax package.

What Washington disarray means for business

Corporate America is growing anxious, in part because of the upheaval in the nation’s capital.

Melanie Nolen, Chief Executive:

According to the two latest surveys by Chief Executive, September and October’s ratings for expected business conditions 12 months from now have slumped to their lowest level since November 2016. In September, respondents rated their level of optimism for the year ahead at 6.75 out of 10. In October, it was slightly higher, at 6.85.

In other Washington news

The Trump administration’s hard line on issues like an expiration date for Nafta and putting country-of-origin labels on auto parts could lead to the end of the free-trade agreement.

Josh Wingrove and Eric Martin, Bloomberg:

Nafta’s fate may now hang on how flexible the U.S. is about its demands heading into the fifth round of talks, scheduled for Mexico City around the first week of November. While the parties had wanted to reach a deal by December, officials familiar with the negotiations say the talks are likely to drag on for months.

A preliminary count of P.&G.’s board election showed that Nelson Peltz lost by 6.15 million votes, or only about 0.2 percent of the company’s outstanding shares.

David Benoit and Sharon Terlep, WSJ:

The company hadn’t released the actual preliminary tally until Monday, when it disclosed in a securities filing that Mr. Peltz received 973 million shares and that the P.&G. director with the least number of votes, Ernesto Zedillo, won 979.2 million.

Mr. Peltz says: “Trian continues to believe that the election is too close to call.”

P.&G. says: “P.&G. shareholders have spoken.”

The next step: An independent arbiter who will certify the votes. That could take weeks.

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Credit...Mark J. Terrill/Associated Press

As the financier (and close friend of Mr. Trump) prepares to negotiate over how much of the Weinstein Company he wants to buy, let’s take a look at the embattled studio’s most valuable assets.

Television

The Weinstein Company previously tried to sell a stake in the unit, home of “Project Runway” and a forthcoming mini-series about the cult leader David Koresh, at a $650 million valuation. It ultimately didn’t strike a deal.

But partners like Amazon have already pulled out of projects, leaving the media investor Amir Malin to wonder to the NYT, “The question is whether the television division is a going concern or a liquidation.”

Upcoming movies

Though best known for award-winning movies like “The King’s Speech” and “The Imitation Game,” the Weinstein Company’s best-known division, the studio doesn’t have a promising slate of forthcoming titles.

Its library of movies

Around 200 older movies were sold to Goldman Sachs and Assured Guaranty, leaving little left in the archive.

The bottom line

Mr. Barrack would get any Weinstein Company assets at a fire sale price.

Ben Fritz, Cara Lombardo and Erich Schwartzel, WSJ:

Larry Hutcher, a co-managing partner at Davidoff Hutcher and Citron LLP who specializes in corporate buyouts and disputes, estimates that Colony could get as much as a 40 percent discount if it buys Weinstein Co., based on the damage already done and the urgent timeline of the sale.

Nordstrom

The retail chain’s founding family said that it wouldn’t pursue a leveraged buyout company of the department store operator until at least after the holiday season.

Tiffany Hsu, NYT:

In a regulatory filing on Monday, the company cited “the difficulty of obtaining debt financing in the current retail environment” in the family’s decision to suspend its plans.

Sears

One of the biggest believers in the embattled retailer’s turnaround efforts has stepped down from the board, though Sears said that it wasn’t because of disagreement with the company’s management.

Cara Lombardo and Allison Prang, WSJ:

Sears Holdings Corp. director Bruce Berkowitz, whose firm holds a 27 percent stake in the retailer, is resigning from company’s board later this month after less than two years in the role.

Here’s how investors reacted to the news from each company:

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• Michael Novogratz, the former Fortress Investment Group executive, has agreed to join the board of advisers for AirSwap, a platform based on the digital currency Ethereum that allows people to swap tokens or digital coins. (CNBC)

• Christopher Burghardt will leave his role as head of policy in Europe at Uber to join Chargepoint, an electric vehicle network company. (FT)

M. & A.

Apple Explored Buying a Medical Clinic Start-Up The tech giant’s health team has been having discussions about expanding into primary care for more than a year, according to a person familiar with the matter. (CNBC)

Owner of Newcastle United Puts Club Up for Sale “I must make it crystal clear that I am not wealthy enough in football now to compete with the likes of Man City,” the businessman Mike Ashley said, referring to the Manchester City soccer club, which is owned by a member of Abu Dhabi’s royal family. (F.T.)

Bombardier Turns to Airbus to Salvage Airliner The arrangement gives Bombardier a way to make an end-run around two preliminary trade rulings that, if finalized, would impose tariffs that would more than quadruple the cost of the CSeries in the United States, its key market. (NYT)

Bryan Cave in Merger Talks with British Firm The St. Louis law firm is in discussions with London-based Berwin Leighton Paisner to create a company of 1,500 lawyers across 12 countries. (Bloomberg)

Toys ‘R’ Us is exploring options for its $2 billion business in Asia The chain and its local joint venture partners have spoken to investment banks about studying the feasibility of listing the Asian business on the Hong Kong stock market, according to people with knowledge of the matter. (Bloomberg)

Policy and Legal

Democrats say Trump bank regulator may be holding job illegally Six Democratic senators assert that Keith Noreika, the chief of the Office of the Comptroller of the Currency, has been in the job a month too long. (Bloomberg)

Taylor Impresses Trump for Fed Chair President Trump gushed about John Taylor, the Stanford University economist, after the interview, one of the people said. (Bloomberg)

Sumner Redstone’s Former Companion Sues His Daughter and Grandson Manuela Herzer has sued for more than $100 million, accusing them of spying on her with the aim of ousting her from the media mogul’s life. (WSJ)

Banks and Banking

Activist Fund RBR Capital Targets Credit Suisse for Breakup Advisers will argue for a three-way split into a Wall Street investment bank that revives the old First Boston brand, an asset manager, and a wealth management group that includes Credit Suisse’s retail and business banking operations. (FT)

Wells Fargo to Compensate Clients for Volatility E.T.P.s The bank was ordered by a regulator to pay $3.4 million after recommending exchange-traded products linked to stock market volatility without fully understanding the risks. (WSJ)

Private Capital (P.E. and V.C.)

When $100 Billion Is Not Enough SoftBank’s Masayoshi Son wants to set up a technology investing pool to supplement the huge Vision Fund, sources said. (Recode)

Dog-walking start-up loses potential investors after reports of lost pets: Wag was seeking $100 million to fund an expansion when a client publicly criticized it after her dog was lost, according to unidentified people. (The dog was found mostly unharmed three weeks later.) (Bloomberg)

I.P.O.s and Offerings

China Offers to Buy 5 Percent of Saudi Aramco A direct stake for PetroChina and Sinopec would give Saudi Arabia the flexibility to consider various options for its plan to float the world’s biggest oil producer and give China more secure oil supplies.(Reuters)

JBS Cancels I.P.O. of International Unit: The meat processing giant — embroiled in a series of scandals in its home country of Brazil — disclosed in a regulatory filing that it was indefinitely postponing a listing for the business. (S.E.C. filing)

Money Managers

The Crash of ’87, From the Wall Street Players Who Lived It Paul Tudor Jones, Stanley Druckenmiller, Michael Lewis and others took part in an oral history of Black Monday. (Bloomberg)

What’s the Risk of Another Black Monday? While the scale of the famous slide might never be replicated — controls are now in place to halt trading in times of sharp declines and official intervention is expected — some people have warned about the dangers lurking in modern hedging strategies. (FT)

Business and Economy

Kimbal Musk Wants to Feed America, Silicon Valley-Style Elon Musk’s younger brother wants to change the business of food “back to one based on health, local food grown on chemical-free farms.” (NYT)

Everyone’s Fed Up With G.E.’s Accounting Tricks“Last quarter, General Electric Co. reported earnings of 28 cents a share. Also 13 cents a share, 19 cents a share and 15 cents a share — all at the same time.” (Bloomberg)

Look Over Here, Amazon Newark says it has everything Amazon needs for its second headquarters. Among other things, the city sits above the fiber optic cable spine running along the Eastern Seaboard, and there’s a Whole Foods downtown. (NYT)

Is Uber Helping or Hurting Mass Transit? A study by the U.C. Davis Institute of Transportation Studies suggests that Uber and its like are drawing people away from public transit and making traffic worse. (NYT)

Former Uber Executive Asks That Lawsuit Be Dismissed A woman who was raped by a driver in India sued Emil Michael and other company executives but Mr. Michael argues that she “has not met the burden of pleading sufficient facts” on accusations ofintrusion into private affairs, public disclosure of private facts, and defamation.” (Recode)

Theresa May Avoids Immediate Brexit Showdown There will be a haggle over money before the next European Union meeting in December. “There will probably have to be a crisis in November,” a British official said. (FT)

Kushners’ Control of New York Crown Jewel in Jeopardy Vornado, which owns 49.5 percent of 666 Fifth Avenue, is unlikely to invest further in the property without first being reassured of its future, said three people familiar with the thinking of Steve Roth, C.E.O. of Vornado. (Bloomberg)

Investors Can’t Get Enough of Tajikistan’s Debt But the I.M.F. has warned that a rush to snap up the debt of financially fragile countries could end badly, as many may not be able to meet financing requirements if interest rates rise sharply. (NYT)

Follow Andrew Ross Sorkin @andrewrsorkin, Michael J. de la Merced @m_delamerced and Amie Tsang @amietsang on Twitter.

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