The Lex Newsletter: fiddlesticks, Netflix and the Musk entrepreneurial-industrial complex

Dear reader,

I had two moments of abrupt and instructive disillusionment this week.

The first involved a busking violinist whose instrument was hooked up to a portable speaker. A tricky passage from Vivaldi’s “Four Seasons” was surging forth. I dug out a coin, intending to drop it in the violin case at his feet.

A gust of window blew the case shut. The violinist removed his hand from the fingerboard to reopen the case. The cadenza continued unabated.

He could thank the pre-recorded soundtrack on his smartphone for that.

My second disillusionment followed Wednesday’s 36 per cent drop in the shares of Netflix. The US streaming service warned it would lose 2mn users in the current quarter. It might still be cranking out the content. But like my fiddling friend, Netflix had proved far less of a virtuoso than patrons imagined.

The rest of this email is split into sections for ease of reading. Thanks go to readers for some smart comments under Lex notes this week. Don’t be shy if you do not post but would like to. We encourage intelligent debate by deleting any personal attacks.

If you have broader thoughts on our coverage — including suggested topics — please email me at

Islands in the stream

Economist Hyman Minsky theorised that markets are innately unstable. They are subject to sudden falls, he said, when investors simultaneously realise valuations have overshot long-run prospects.

The tech sector is suffering a series of stock-specific Minsky moments. The Netflix tumble was one of these. So was Meta’s 26 per cent one-day drop in February, after the Facebook owner also admitted to faltering growth.

My long-run theory has been that the battle for audiences in streaming is bound to trigger big write-offs of content spending during the inevitable shakeout.

Netflix spent about $14bn on content in 2021. It capitalises these costs, amortising them in ways some independent accounting analysts find perplexing. Total assets rose from $19bn to $44.5bn between 2017 and 2021, according to S&P data.

You could theorise that the drop in Netflix’s shares represents an attempt by the market to front-run inevitable asset writedowns by the company. My hunch is that rivals will have plenty of impairments too.

Lex would still characterise Netflix as a relative winner in streaming, given its first-mover advantage, strong brand and global reach.

Spotify has a similar position in music streaming. That contrasts with French rival Deezer, which has a weak brand and market share. Investors should tune out of its proposed New York Spac float, we believe.

The Elon Musk entrepreneurial-industrial complex

One salient characteristic of entrepreneurs is that people tell them “you can’t do that”, then they do it anyway. Elon Musk just operates at a greater scale than the others.

Warning him it is difficult and pointless to buy out microblogging site Twitter will simply encourage him to push ahead. Musk’s claim to have “funding secured”, to repeat his famous phrase, needs further proof points, as Lex noted. But he has the wind behind him provided Tesla continues to hit its targets, thereby supporting the stock price of his electric vehicle business.

Musk may, of course, be bluffing. Playfulness is his defining characteristic. But if he goes ahead, this would be a remarkable deal: a $40bn-plus takeover by one person, rather than by a multinational corporation run by career managers.

You probably would not sink your own hard-won personal equity into buying a social network patronised by conspiracy theorists, journalists and PRs. But we all know people who enthusiastically buy things we may regard as worthless, from non-fungible tokens to collections of porcelain thimbles.

With funding secured, Musk could mount a tender offer rather than seeking creeping control. The latter strategy has been nixed by the poison pill installed by Twitter last week.

Peloton resembles Twitter because it has a brand more impressive than its business plan. It also has a far more effective takeover deterrent. This consists of super voting shares that give founders and managers 75 per cent of the votes based on an economic interest of only 12 per cent. Lex sides with activists opposed to this inequitable set-up.

Costly cheese, Gromit

Lex’s virtual Christmas party in 2021 involved a sampling of gourmet cheeses distributed to team members by courier. We have, therefore, been watching jumps in the prices of dairy products as anxiously as Aardman’s cheese-loving everyman Wallace would.

Food costs are soaring as a result of the war in Ukraine, longer-running supply problems and broader inflation. The international reference price for cheddar is up by a third since early 2021.

Theft of Parmesan cheese wheels is set to grow, we believe, due to their high value and the ease with which they can be rolled out of dairies by dead of night.

More hearteningly for epicures, the price of caviar has been falling, despite an EU embargo on Russian imports. The decrease is thanks to an expansion of Chinese fish farming. The advent of lab-grown sturgeon eggs could further increase affordability.

Admittedly, the Parmesan-beluga price spread is a niche interest of the Lex team. The interests of consumers and investors are glaringly counterpoised for a much wider range of foods due to raging inflation.

Lex believes Nestlé is better placed to pass on higher input costs than Unilever and Danone because it has more premium products. However, all food companies will suffer if inflation proves deep-seated. I cannot recall any downturn where a significant proportion of businesses that had claimed defensive properties did not ultimately lose them.

Rising inflation means US interest rates will go up too. The dollar is soaring relative to the yen. Lex thinks the benefits will be modest for Japanese manufacturers such as Toyota. Their input costs are particularly steep and they have offshored much of their production.

We are more bullish on a project of UK engineer Rolls-Royce to create small modular reactors. These have a future thanks to renewed interest in nuclear generation as a means of providing baseload power. There are plenty of risks. But as readers pointed out, Rolls-Royce has SMR credibility because it already makes these power plants for submarines.

I usually wish you a pleasant break at the end of this newsletter. But that respite may already have started if you work a four-day week, as the Japanese government and businesses such as Hitachi advocate.

I doubt the campaign will succeed, having observed the failure of previous attempts to persuade Japanese employees to kick back and relax more. Lex readers are also pretty diligent. But enjoy the next couple of days, however you use your time.

Jonathan Guthrie
Head of Lex