Boeing Lays out Challenges Ahead

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2:14today, down about 8 % year to date. And just recently, Chief Executive Officer Kelly Ortberg laid out a set of challenges that surprised investors who had grown comfortable with the more steady performance at the U.S. Planemaker. Let's bring in Sid Phillip. He's the Chief Correspondent for Global Aviation over at Bloomberg News, joining us here in our studio. Sid, I was one of those observers who were saying, I think they got this thing turned around. They're cranking out the 737 max. The worst is behind them. The stock's behaving better. A little bit of a kink you know bump in the road here it seems like it does and it sort of shows that the the turnaround is far from complete and it's basically a much more challenging turnaround than the market expects because there are big challenges at Boeing and including ramping up production I mean Airbus has struggled with ramping up production of its rival A320 jets I mean they've been talking having to push the deadline on when they would get to rate 75 multiple times and so for Boeing ramping up to 47 a month has been something of a challenge.

3:14And so for investors who were expecting them to sort of go from 47 to 52 to 63, that's been something that's been a bit of a jolt for them.

3:25Scarlet Fu:So how did we get here? I mean, isn't this something where the CEO kind of manages expectations during earnings calls? I mean, there was an air show not so long ago where, again, he and Boeing executives can kind of give investors a sense of what is coming, that people are surprised now with this more subdued outlook? They are surprised by this now. And that's because the company had previously sort of talked about how they were going to get a 47 and then they were going to get the 52. And they sort of didn't really talk about the challenges there. And so Kelly Ottenberg talked about how wings were a pacing item and how they were struggling to produce enough wings for the aircraft.

4:04Wings, that's important. That is, and you can't really build a plane without those wings. And so for Boeing, this is a challenge in terms of just getting planes out the door. And that also has a effect on their financials because the 737 is a massive cash cow for the company. And the company had talked about how they expect to generate between one and three billion in free cash flow this year. And now the CFO yesterday talked about how it is likely to be around the midpoint and largely because of fewer deliveries. So what's the deal with just the logistics within the global aviation business? Because Boeing calls it out as an issue, as does Airbus as well.

4:47They really haven't fixed that since really the pandemic. Yeah. Since COVID, the aviation supply chain has been challenged. And so we were talking to Airbus a couple of months ago, and they were talking about how there's hundreds of thousands of parts on an aircraft. And if you have one part missing, you can't deliver those aircraft. And so for those companies, it's been a massive challenge just managing the logistics because during the pandemic, the industry sort of went to almost standstill and production sort of paused. And that really led to suppliers being sort of struggling to ramp up again when demand came back.

5:22And so for the planemakers, they have a sort of whack-a-mole where you have one issue being sorted out and another issue dropping up. And that's really been the challenge post-pandemic. And it continues to be a challenge for suppliers even today.

5:37Scarlet Fu:The other thing that's kind of dogging the stock and giving people reason to worry is that the president of the U.S. and China, presidents, I should say, will be meeting in Washington in about a week and a half for this summit. And I guess the expectations that Boeing is going to come out with some kind of announcement it's starting to dissipate. That is because the CEO did talk about how that he sort of managed expectations. They're saying the announcement that when President Trump went to China in May, he talked about how Boeing had secured a deal for 200 big aircraft. Now, that's really going to take some time to materialize in terms of actually placing an order.

6:20And Kelly Ortberg said that while the market had been reopened for aircraft in China, is still not going to materialize into this one massive mega order. It's going to be negotiated with the airlines, and they're going to sort of place piecemeal orders. And so I think that was, again, something of a setback because the market was expecting this big 200-plane order and possibly more because previously it had been telegraphed that the Chinese airlines would buy as many as 500 planes. And so that's really been something of a setback in terms of investor sentiment. 30 seconds left. What is the timetable for the 777?

6:57The 777X has now, the certification will slip into next year is what Kelly Ortberg said yesterday. And that plane has been seven years late. Oh boy. And they're still saying that it'll be delivered next year, but the airline customers have been skeptical about when those planes will actually get there.

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9:48founder and CEO of Resilient Health, joining us from Zoom. So, Donish, thanks so much for joining us here. What's your take on kind of the rollout of AI? Does it need some guardrails? Do we need to slow down at all? Look, I have a very contrarian view on this. So I know that a lot of people in the industry, especially the ones of the big labs, are trying to tell you that we need to start pacing. What they mean by that is not slow down the training, but slow down the release, because if we keep the releases the way they are, suddenly things are going to get really scary for everybody. Look, I'm originally from healthcare, right?

10:26So I know what regulatory capture looks like. And this looks and smells like regulatory capture. The big AI labs are worried about a very specific thing, and it's not recursive self-improvement, which is what they're talking about. They're worried about the rise of open source. If you look at what's happening, and you know, people can go to open routers data, which is, you know, this one platform that many people can use. And you can use many different models. Tokens for the big labs are dropping faster than anyone expected. And open source is rising faster than anyone expected. That explains why Nvidia acquired Hugging Face for a record deal.

11:08And I think that this is what they're really worried about. They are trying to slow down the pace of open source and adoption of open source, not really thinking about safety. And I have to say one more thing, which is, if you were listening to Dario, who obviously I respect, but if you were listening to Dario, we would have guardrails at GPT too.

11:27Scarlet Fu:So if that's the case, is are we just at a moment where people are deliberately misunderstanding what these AI lab founders are saying and kind of jumping on the moment, capitalizing on a moment to say, let's take a much closer look at this and slow things down dramatically, if not halt progress completely? You see, there is a lot of, so I'm an AI researcher, as you all know from background. And so there is a lot of vested corporate interest in making sure that these labs continue to thrive. And what they're learning right now is that when you keep adding more and more training data from the entire internet, yes, it's getting better.

12:07The scaling laws are continuing to prove out, but they're not proving out the way that they thought they would. And more verticalized, hyper-specific models are doing better, small language models, but also hyper-specific harnesses, which is sort of learned on local data, learned on sector-specific data, are starting to outperform them. And so I think what's really happening is you've got all of these different forces that are making these giant AI labs worried. And I believe that's what's driving this. And I'm not alone. There's a lot of people saying this out loud. Just to kind of set the stage, you'll hear letters RSI a lot.

12:43And RSI means recursive self-improvement. We've had that for 20 plus years, but it doesn't work that well. There's still a lot of technical challenges. And unless the big AI labs are going to suddenly start showing the data, I mean, we just saw a deep RSI from Google and they in their own paper this last week said that there are still significant challenges to generalizability. So these ideas sound great and they allow you to believe that AGI and ASI is going to take over. But the truth is that these labs are starting to see real pressure from the open source models. Give us a sense, Danish, the relative competitive landscape, the U.S.

13:22versus China, if that's even the right way to think about it. It is the right way to do it. Yeah. I mean, China has gone all in on open source. The quality of their open source models is tremendous. I think we have to be very careful about slowing things down because, again, look, there are many things that I think the administration is doing right and many things that they're doing wrong. They are right about this. And I think Jensen Huang at NVIDIA is right about this. This is not the moment for pacing. This is the moment for acceleration. We really need to be careful about allowing the corporate interests of a few large labs driving the decision making for the entire country.

13:59Scarlet Fu:What do you hope will happen when Xi Jinping and President Trump meet in Washington, in New York, in the US later on this month? Because AI is supposed to come up on the agenda here. I think we know China's stance on this. I mean, they came out and they said that fear mongering and foreign influence is not going to change their strategy. What I would hope is that we can come up with international standards on use in defense, use in biology, use in gain of function. I mean, these are the things as a physician I care deeply about, as an AI research I care deeply about. I don't think, I mean, again, contrarian viewpoint, I don't think these models are actually ready to handle consequential things like that because the harnesses, again, think of those as guardrails that you're putting on your own models, are not mature enough to be able to handle such sensitive, consequential information.

14:50I mean, we're seeing this in healthcare right now, right? And so I think that's what I'm hoping for is actually more guardrails on what AI can touch versus guardrails on the actual development of the models themselves. These models need to get way better. We need to continue to do this. Imagine the incredible work we can do if we can get there.

15:12Scarlet Fu:Stay with us. More from Bloomberg Intelligence coming up after this. So there's a lot of noise about AI, but time's too tight for more promises. So let's talk about results. At IBM, we work with our employees to integrate technology right into the systems they need. Now, a global workforce of 300 ,000 can use AI to fill their HR questions, resolving 94 % of common questions. Not noise, proof of how we can help companies get smarter by putting AI where it actually pays off, deep in the work that moves the business. Let's create smarter business. IBM.

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17:13Scarlet Fu:Learn more at bloomberglive.com slash techlondon.

17:21Scarlet Fu:You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. The video gaming industry, this is an industry that I'm pretty ignorant of. And it just amazes me when I look at the numbers for this business. The global video game industry generates roughly$214 billion in annual revenue, making it larger than the film and music industries combined. It's just extraordinary how big this business is. It's a global business, and it is just extraordinary.

18:01Our next guest, he knows what's going on there. Nathan Nadeau joins us here, technology research analyst at Bloomberg Intelligence. He's based in London. Hey, Nathan, let's talk about Take Two. what's the story here frame out the investment story for take two what's the market really geared towards i think it's just really the one thing that's grand theft auto six that game is a juggernaut it has sold half a billion copies of games in that franchise entire life lifetime and the sixth version installment is launching mid-november november 19 to be exact and for the first time they made a premiere and put it on Netflix.

18:37It's about 26 minutes long, longer than your five minutes trailer. And it was the most viewed film globally for that week on Netflix. And the fact that it caused engagement spikes on Netflix tells me that there's such hunger because it has been such a long wait since GTA V, which was launched 13 years ago. And there's a lot of expectations that have been baked into Take-Two stock because of GTA 6 release. And there's a lot of expectations. And to quote the CEO, terrifying. How terrifying? Some sales are estimates are expecting 85 million unit sales within two months of launch. I mean, our estimates is a bit more modest, but still, you know, on a high end.

19:23Why is the stock down 18 % this year? I think a lot of these expectations that were baked in were challenged by a few factors. One of them being some of the disc gameplays, videos were leaked. Obviously, going back a couple of months ago, there was such a long wait. Leaks is not new to Rockstar or the publisher of the games. But so close to the launch date, it's just, you know, where the stock and the expectations around the game is a bit sensitive to, you know, to whether or not the game can actually deliver. Because, you know, the last game alone, the fifth installment sold 230 million units.

20:11And so there's a lot of expectations for this version to actually sell as much, if not more. because even though that game sold, you know, 30 millions in each launch year, and that was 2013, every year since then, every year in the 13 years since it was released, it adds 300 to 400 million units, sorry, 300 to 400 million euros, dollars a year to Take-Two's top line. So this game has a lot riding on it. So I know the mobile gaming accounts for the largest share of just the global gaming market, maybe 50 to 55 percent what's what are the growth and profit dynamics of mobile gaming versus console gaming the average spend per gamer on console and pc are always going to be higher because these are where your hardcore gamers reside they are the ones who invest to buy a console or to buy a gaming pc i would like to game on my macbook air but i don't think that's possible anytime soon but mobile is where you have volume is essentially a volume game the average span is lower per gamer sure but then you're talking like 30x more gamers or downloads on mobile compared to pc and console combined just in 2025.

21:27so but it doesn't mean that take two can easily tap that market a lot of pc and console gamers historically has relied on partnerships partnering with a an expert in make maker of mobile games to actually launch mobile versions of their franchise. And I think Netflix is a good example because Take-Two actually put the GTA trilogy on the Netflix app for a brief period of time. And I believe you can actually download one of those games on mobile. And it was one of the top performing mobile games for Netflix. And it came from a Take-Two franchise. So essentially, this Netflix Take-Two partnership with the premiere could be a telltale sign of what's to come for Take-Two.

22:13All right. Globally, there are over 3.2 to 3.6 billion people who play video games across mobile, console and PC platforms. Nathan, who are these people? What's the demo here? You're really up to date with the figures. I'll tell you why. I just said into Google, how big is the video game industry? And then the Gemini AI overview is awesome. It's got great numbers. That's what's helping me out today. Who are these people that play these games? Right. More than half of these people are actually in emerging markets. So you have the bulk of mobile gamers actually reside in China. Your Western markets, whether it's US, Germany, France, or Western Europe, most of these people are going to be on PC and console.

22:55And naturally, because these are, you know, generically speaking, high income countries. So China, you got Middle East, you got Brazil, Latin America, generally speaking, Southeast Asia. So a lot of these markets where players, more than 90 % of players play games on mobile devices. And so, but they're not natural. They're not, they're not, it doesn't mean that these are the highest revenue generating country. There is a reason why a lot of these big game publishers continue to invest in the US markets. because, like I said, going back to how PC and console gamers actually generate more revenue per gamer compared to mobile.

23:37And Take-Two is one of those examples.

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