AI Investors Ask, Where’s The Money? & Spirit Airlines Goes Premium

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0:29Good morning, Brew Daily Show. I'm Neil Freiman. And I'm Toby Howell. Today, a new batch of startups is promising to test your blood with just a few drops. Sound familiar? Then the first meaningful online child safety bill in decades just passed the Senate. But opposition lies in wait. It's Wednesday, July 31st. Let's ride.

0:53The Olympics have been going on all week, but an even bigger competition has been raging on outside of Paris. the competition between Team Neil and Team Toby over who can sling more Morning Brew Daily shirts. And boy, do we have an update for you. To recap, last Wednesday, we offered dueling discount codes for you all to use in our merch shop, Toby20 or Neil20. Both codes got you 20 % off our t-shirts, but we wanted to see which one was used more often. And I am happy to report that Team Toby has made a stunning comeback to take the lead with 24 hours to go in the contest. Neil, anything you'd like to say to your supporters about your performance so far?

1:33Yes, people. I just want you to know that great moments are born from great opportunity, and that's what you have here tonight. That's what you've earned here tonight. If we played Toby ten times, he might win nine, but not this contest, not tonight. This is your time. His time is done. It's over. I'm sick and tired of hearing about what a great T-shirt-selling team Toby has. Screw him. This is your time. Now go out there and take it. I'm ready to skate through a brick wall right now. But because I am nice and because it's a fun social experiment, we decided to test the limits of Team Toby's support and have introduced a new discount code to help Neil out.

2:10For the next 24 hours only, you can use code NEIL21 for a 21 % discount at checkout. So let's see if that 1 % is enough savings to tilt things in your favor. But Neil, remind us, what are we playing for again? First of all, I don't even need NEIL21. We could go to Neil 15 and I'd still crush you. What we're playing for is that if I lose, I will run a mile for every t-shirt that I lose by. And then for Toby, if he loses, we need to have this happen, people. He's going to dye his hair pink. Remember, we asked you guys to submit ideas about what we should do. And we got a lot of hair dye recommendations.

2:46And then one person came up with the run a mile for every t-shirt. So let's get Neil sweating, people. Team Toby, let's come through. Now a word from our sponsor, Beehive. One thing about putting in all the hard work of coming up with a newsletter idea and writing your first issue is that it doesn't matter if you don't work to grow it. Hey, when Morning Brew started, my mom told all of her friends about it. Well, outside of Neil's lovely mother, you need better growth systems in place. And luckily, Beehive has three. First, you can add its built-in referral program with just a click of a button.

3:18Second, you can use Boost to advertise your newsletter within the Beehive Network for a small fee. Or third, you can turn on recommendations to cross-promote your publication alongside your favorite writers. Or fourth, you can pay Neil's mom to hype it up, which, look at Morning Brew, it clearly worked. Sorry, mom, I'd choose Beehive's growth features at this point. And you can, too, by heading to beehive.com slash brew. That's B-E-E-H-I-I-V dot com slash brew and get a 30 day free trial plus 20 percent off three months with code brew. This episode is brought to you by State Farm. Checking off the boxes on your to do list is a great feeling.

3:57And when it comes to checking off coverage, a State Farm agent can help you choose an option that's right for you. Whether you prefer talking in person, on the phone or using the award winning app, it's nice knowing you have help finding coverage that best fits your needs. Like a good neighbor, State Farm is there. In a rare showing of bipartisan support, a pair of bills overwhelmingly passed the Senate yesterday that aimed to make the internet a safer place to be for children. The two bills in the package, the Kids Online Safety Act, a.k.a. COSA, and the Children and Teens Online Privacy Protection Act, a.k.a.

4:33COPA 2.0, represent the first time that Congress has taken meaningful action in years around regulating social media's impact on kids and teens. COSA would force online platforms to take reasonable steps to protect users under the age of 17 from harm like bullying or sexual exploitation. It would also hand more power to guardians to control how minors can use certain features like autoplay. While COPA 2.0 is an update on a 1998 law that would ban targeted advertising towards minors. Notice I said only the Senate passed these bills. The House is pulling at Clark Griswold and going on vacation for the next six weeks for its summer recess.

5:12So we'll have to wait for it to vote on this package before it can make it to the president's desk. Still, COSA and COPA 2.0 pass the Senate with a lopsided 91 to 3 vote, showing that there is clearly widespread support for an initiative like this. There really is. And it's just remarkable that there hasn't been any movement on this issue since 1998, which was way before Facebook and even the iPhone was invented. The Internet is a completely different place at this point with social media. These recent bills were sparked by Facebook whistleblower Francis Hagen, who came forward with documents showing that Facebook knew that its platforms were harming some younger users and that it didn't take any steps to mitigate that.

5:54That got this show on the road a little bit. But Congress hauled in all of these tech executives. They testified. They apologized for all of the harm that they've caused to certain kids that were subject to cyberbullying and even led to deaths in certain cases. So it does seem to be widespread bipartisan support, at least in the Senate, to do something about it. But there is a lot of opposition from both the left and the right for these particular bills. Yeah, specifically out of the House, because even if the House was in session, they've been pushing for a different approach towards online safety than the Senate has.

6:25They've been advocating to put some of these protections within a broader data privacy bill that covers everyone, not just kids. So it does look like there will be some pushback to that. And then obviously some tech lobbyists and some free speech experts are worrying that the bill may be unconstitutional in some regards because it might empower government officials to basically regulate anything on the Internet that they dislike. And so there is – it's always a two-sided sword here. You want to give regulators power to protect these kids, but you don't want to give them too much power that they start infringing on the inherent free speech rights of the Internet.

7:01One of the main opponents of this bill comes from the LGBTQ community because they say that they could be weaponized to block certain content that LGBTQ young people have used to really come to grips with their identity and find like minded people. people. So they're worried that state's attorneys general who will be empowered by this bill could block all of that content. And it shows how the Internet is both maybe maybe as used for harm, but it also is a particular lifeline for certain communities to find people who are just like them. And it says it's and they say it's been so helpful to find people like me.

7:39And I don't want to have these regulators or people that I don't know are going to you know, they have this they have this mandate to block harmful or dangerous content, but that is really left up to them. And they say this infringes on their free speech rights. And then proponents of COSA in general have pushed back about the thorny constitutional debate issues about speech online, saying that they are looking at it more as they're seeking to bring consumer safety protections to social media. And then the example that they cite is that when regulations required seatbelts in cars, again, it's not preventing you from driving.

8:14It's not preventing you from doing anything. It's just trying to make things more safer in a dangerous environment for some of these kids. And some tech companies, a lot of tech companies are actually on board with it. Snapchat has come forward in support of it. So has Microsoft. Elon Musk and X have also come out in support of it. Meta kind of gave it a tacit endorsement as well. So clearly there is a groundswelling of support from this more powerful lobbying group of these parents and teens affected by online safety things. And so I think we're going to see movement here for the first time in decades.

8:47In the past two years, big tech companies have spent untold billions planting artificial intelligence seeds that they hope would one day yield a bountiful harvest of even more money. But the fruit still isn't ripe and investors are getting a little impatient. Yesterday, Microsoft kicked off a big week of tech earnings with disappointing results. It said growth in its cloud business, which is the one that was supposed to be juiced by AI, had slowed while it was forking over even more money on building out AI infrastructure. CapEx, or capital expenditures, jumped to$19 billion in the last quarter, up from 78 % the year before.

9:25For its total fiscal year, Microsoft spent$56 billion on CapEx. Now, CapEx is the number one most important metric in the tech industry right now. It just refers to all the money these companies are laying out to build those expensive physical data centers that power their AI systems like ChatGPT or Copilot. But there's growing concern that all this AI spending won't bring in enough revenue to justify the cost. And in the past month or so, you've seen a big market rotation out of AI stocks and toward other parts of the market. Just consider perennial stock of the week contender NVIDIA is down more than 16 % in the month of July.

10:04Toby, it seems Wall Street is losing its patience with the AI revolution just a little bit. I am trying to think of the proper metaphor for what big tech has done in the last year. This really isn't perfect, but you know the friend who picks up a new hobby and then buys all the gear for it and then never really uses it. I mean, like the guy who drops three grand on a new set of golf clubs, but then only plays once a year. But instead of three grand on golf clubs, it's$19 billion in CapEx and business investments in one quarter. And I don't know how to extend this metaphor to its cloud business as well, but it's like your friend who sells golf club also sells golf club storage and not a lot of people are going golfing in general.

10:42So it does seem like they got out a little in front of their skis. And what Wall Street really wants is just a path towards money. They're saying you've invested so much in AI. Are we going to see any returns anytime soon? Is the promise of AI going to manifest in the short term, in the long term? We just want to see some sort of profits contributing to justify this spend that you guys have done. And it's just, they're getting a little antsy for sure. And they're just bringing in a little revenue and they're saying, no, we'll bring it in in 2025. Don't worry. I actually have a better metaphor, I think.

11:16It's like hosting a party and you buy all this food and you overspend on the food because not having enough food and running out of food is way worse than just having a little too much to put in your fridge after. And that's exactly what's happening. You hear it from Zuck. You hear it from Alphabet CEO Sundar Pichai. They say, they acknowledge they're spending too much. I mean, Zuck in a recent interview said, I think there's a meaningful chance that a lot of the companies are over building now and that you look back and you're like, oh, well, we all maybe spent way too much. We spent billions of dollars too much.

11:49Sundar Pichai also said this, but they also said this. They said the risk of under investing is way less than the risk of or the way the risk of over investing is way less than the risk of under investing, given the potential of AI 10 to 15 years down the road. So they're locked in what you may consider a game theory arms race where they're all making not exactly rational decisions because they don't know what the other person is going to do. So they're just spending gobs of money to make sure that they're in a good place. But investors are kind of turning their backs on it a little bit. Here's the crazy part about all this.

12:22There are three options. One, the promise of AI comes good relatively soon. And we see this huge creases in productivity and huge creases in revenue. Two, it takes a little longer than expected to reap the rewards of AI. Or three, the promise of AI never materializes. In all three scenarios, You're going to have to incinerate billions of dollars to get there to find out which path we're going down. So regardless on if there's a pot of gold at not, regardless of how big the pot of gold or not, you have to spend this money to get there. So, yeah, you're right. Overbuilding is not a dirty world in Silicon Valley whatsoever.

12:56And I think people are playing the game theory. They're saying might as well have these data centers, have these NVIDIA chips rather than not have them. So as Meta and Amazon continue to report this week, that CapEx number will be something definitely to watch. Moving on to Starbucks, which is desperately counting down the days to PSL season. And that's because its business is stuck between a rock and a pike place. Yesterday, the struggling coffee chain reported that same store sales declined for the second straight quarter, with 6 % fewer people showing up to its U.S. stores than a year ago. The stock price nudged up following the earnings call, showing how a bar set so low isn't that hard to clear.

13:35Pressure is building on CEO Laxman Narasimhan to give Starbucks a jolt of caffeine. American consumers have chosen to get their morning brew elsewhere due to higher prices. Get this, in North America, the cost of the average order at Starbucks has increased by 50 % since 2019. Starbucks is also getting stuffed into a locker in the key market of China by a chain called Luckin, which now has more than double the number of stores as Starbucks in the country. And these struggles have invited a lot of criticism of management. Earlier this month, the activist investor Elliott Management took a stake in Starbucks and is pushing for changes.

14:11And former two-time CEO Howard Schultz has been chirping leaders from the sidelines, writing, I think we're not at our best now. Toby, I want you to put on your McKinsey consulting hat. What's going on at Starbucks and how would you fix it? I do not have a hat like that in my locker. But I think what you're seeing is a lot of the same headlines and a lot of the same headwinds that the broader fast food industry is experiencing. Because falling foot track, falling check size, leading to falling sales, consumers were just pushed up to the absolute brink of what they are willing to pay. And when they see these rising prices, they're finally putting their foot down and say, we're pulling back a little bit.

14:50Also, Starbucks just has lost its way a little bit in the last decade. It used to be this third place where you could go to hang out. They had these comfy chairs, the nice jazz music, the smell of coffee aromas. Now it's a glorified takeout counter. That's all it does because it realized that it could make more money by just having people pop in, get their mobile order, and leave. So I just think it's lost its way. It's lost its DNA a little bit. So I don't know if that's my consulting hat on there. But let's return Starbucks to what it was, which is this third place where a lot of people have been looking for in society these days.

15:22That's not happening. It's not happening. So it's not my consulting hat. It's my nostalgic. Yeah, that's your nostalgic house. But we're not going back to that time. That was when a lot of people bought hot coffee. But now Starbucks sells mostly iced coffee, a lot of lemonades and iced teas as well. And most of their out most of their stores now just have a drive through option. 70 percent of all of their locations do drive through. That's up from just 15 percent in 2005. So it has become sort of commoditized coffee where it used to be this premium brand. And so I don't know because I don't have a McKinsey hat in my locker either.

15:57But this management has to figure out a way to distinguish Starbucks from all the other coffee chains out there that are selling iced coffee and find a way to just drive profits. A big thing of that will be leaning into their mobile ordering. I know it's exactly the opposite of what you think, but that's exactly how they're going to make more money is making sure they deliver better results from their from when you order mobile. I mean, there was a stat from last quarter's earnings report, which was insane. was that one in eight people dropped their order out of mobile ordering because it was going to take too long.

16:29So they need to drive operational efficiency. This is what Howard Schultz is saying. And everyone's looking to see if he's going to pull a Bob Iger and come back to the company yet again out of retirement to fix things that are going on. We'll see if he does that. He's continuously denied it, but he clearly does not like the way things are trending. I think you do have a McKinsey hat in your locker. That was pretty well done. Up next, a look at the companies that are trying to bring back Theranos' doomed blood testing device.

17:20customers only. Taxes and fees extra and subject to change. Most reliable Wi-Fi based on Open Signal Awards USA. Fixed broadband experience report August 2024. Tuesday on NBC, Jimmy Fallon and Bozema St. John host a highly anticipated new competition show. I hired 10 creatives from all walks of life. They will be battling it out to see who can impress the world's biggest brands. This is a huge opportunity. This is the battle for the next big idea. This is not play play. We're spending millions of dollars. I'm so excited to embark on this adventure with all of you. Make the best I do win! On Brand with Jimmy Fallon.

17:57Series premiere Tuesday on NBC. You all remember Theranos, right? It's turtleneck-wearing founder Elizabeth Holmes and it's promised to diagnose a variety of maladies with a single drop of blood. Well, it may have just been ahead of its time because other companies are living out its finger-pricking dreams. Companies like Becton, Dickinson, and Babson Diagnostics have been doing their best to iron out the technical details that sent Theranos to the startup graveyard. Becton has this handheld finger prick device out on the market that is faster and less painful than a standard blood draw, while Babson has developed a device that collects one-tenth of the amount of blood typically drawn.

18:37Their claims aren't as lofty as Theranos. Babson plans to actually test the blood at a centralized lab or with other manufacturers' machines. But it's clear that even though Theranos spoiled the dream of a quicker, easier diagnostic test from a single drop of blood, there's still plenty of interest in alternatives to standard blood drawing. Yeah, let's remember what Theranos promised. They promised to take a, you know, some of your blood and then test for a wide range of diseases with that single prick. And they also invented a device called Edison that would be able to do it. This is the most important part.

19:11Right at the Walgreens where it was taken, making this whole process extremely simple. It was very fantastical. All of these guys who started these companies said, we didn't believe it as soon as we heard it because that seems absolutely outrageous. What happened with Theranos was this machine, this Edison thing, didn't work. And they ended up taking it to more traditional machines made by Siemens. and then Theranos was exposed and now Elizabeth Holmes is serving 11 years in jail just down the road from where these new finger-pick startups are happening in Austin, Texas. But it's interesting to hear them talk about Theranos and say, look, what they did was obviously objectionable and horrible, but they kind of shook up this industry that had been at this particular status quo for decades and just wasn't innovating.

19:58And she showed what was possible, or at least she showed at least some ambition in breaking up and sort of shaking up this industry that hadn't done much for decades. And you're starting to see some movement. I know they're not as ambitious as she was, which probably they can't be because it didn't work. But it would be very nice and helpful to our public health if you could do more tests and make this whole blood testing thing a lot easier than it is now. Right. Because if you look at what the current process is, you have to go. It's very invasive. You stick a needle for the non-needle-inclined out there.

20:32It's very dramatic. Into your vein and you draw a significant amount of blood. And then it goes sent out to a lab for testing. It usually takes a little bit. So these companies are just looking to, one, draw a lot less blood, a lot less painfully or a lot less traumatically if you don't like needles. So it's usually like a finger prick or an upper arm prick. And then what they do is just try to process it very quickly. They have devices that can immediately put it at the right temperature, start processing it, send it to their lab that's local, and then you get a text with your results just 24 hours later.

21:02That's the dream. It's not as ambitious as Theranos, but that they think is a meaningful step forward in the way that we currently do blood tests. And if you can get the amount of things you're testing for on par with that huge vial of blood you take from your vein, then that's another big unlock as well. And they do think that they're right around at par with these more invasive blood tests, which is a big step forward. And a big part of this is that you can just have a pharmacist do it instead of a specialized phlebotomist, which is a great word. Yeah, so we're rooting for these guys. Let's hope we don't see them in a Hulu documentary 10 years down the road.

21:36Some couples just aren't cut out for marriage. And after breaking off their engagement earlier this year, Spirit and JetBlue Airlines are making big moves in their single lives. JetBlue's stock popped more than 12 % yesterday after unveiling a turnaround plan that involves pulling out of more markets and pushing off$3 billion worth of new airplane purchases. Also yesterday, Spirit made the surprise announcement that it's introducing premium service for the first time, a major pivot for the company that pioneered that bare-bones type of flying that inspired many copycats. Let's go back to that ill-fated engagement.

22:11JetBlue agreed to buy Spirit for$3.8 billion in order to bulk up and take on the big guns, Delta, American, and United. But regulators decided that the combined company would be a bit too bulky and cause higher fares for passengers, so they blocked it on antitrust grounds. Investors were concerned that, left alone, JetBlue and Spirit would flounder and be devoured by their bigger rivals, but instead they're proving to be more chameleon-like than anyone expected and have shaken up their businesses to chart a sustainable path forward. They were both left to do a little soul-searching. Anytime you break off a long courtship, you do have to either look internally or look externally.

22:47I think Spirit looked externally and said, we're going to reinvent our look. I'm going to dye my hair blonde. I'm going to look like the cooler other carriers. So now it's looking for that increased revenue from some of those premium services. JetBlue, on the other hand, I think looked internally, maybe went on a darkness retreat, did a little ayahuasca, came to the realization that it needs to rework some of the routes it flies. So it's cut 50 of those unprofitable routes, pulled out of seven cities. It's doubled down on New England. It went back to its roots. So they are both handling the breakup in their own ways.

23:19but I think that they're both coming out of it stronger than when they went in, which is all you can really hope for when you break off a relationship. Wow, Toby, we'll have to go for your advice from now on. But I think Spirit specifically really marks the end of an era. I know I say it all the time, but because, I mean, just last week, Southwest also dropped its free-for-all boarding style and is now siphoning off one-third of its seats for premium cabins. And Spirit, which is really just when you think of ultra low cost budget airline, I mean Spirit. And now it's having it has essentially first class.