In a way, CNBC is the perfect business: it has a great brand name, and it caters to a rich audience. CNBC managed to create the world’s most lucrative reality TV programming, by finding stars who are already famous, and paying them $0. Really, the only problem is that their audience is aging and they can’t afford to target anyone younger. Essentially, CNBC is a bet: anyone who remembers what the market did in 2008–9 but not what the market did in 1998–99 is never going to enjoy financial news, so it’s better to focus on a dwindling, but lucrative, demographic.
Venture capitalists haven’t made up their minds on this yet: two big bets in the last year have been that young people see markets as a fundamentally boring utility, and that young people see markets as an exciting game.
On the utility side:
- Personal Capital has raised $175m.
- Wealthfront has raised $130m.
- Before selling to Northwest Mutual, LearnVest raised $69m.
- Betterment has raised $205m.
- SoFi, which is in a totally different business, offers automated financial advisory services as an ancillary product. So do an increasing number of traditional brokerages.
When people talk about these services, they use terms like “set it and forget it” or “totally automated.” And you don’t see lots of shots of crowded exchange floors or bronze bull sculptures in their marketing materials. The hypothesis these companies are based on is that the market should not be exciting; it should be like an ATM with slightly more features.
So it’s a bit surprising that in a world where robo-advisory is a fundable idea many times over, Robinhood, the app that lets you daytrade on your phone, is worth $1.3bn. Maybe the market is entertaining after all.
Efficient Markets Are Legal Casinos
Some investors treat stocks as a vehicle for savings; others as a fun way to gamble. Instead of an Ancient Egypt-themed casino, you can gamble on an extreme sports-themed stock. And gamblers like a game that’s fair minus the rake — one of the ways the numbers racket would generate random numbers was by looking at the least significant digits of daily stock market data.
So there’s a symbiosis between passive investment managers, active investment managers, and day traders: day traders push prices slightly out of alignment, indexers mostly maintain equilibrium, and active investors take the other side from the day traders and process new information. In theory, the more efficient the market is, the more attractive it is as a gamble: if you know that most trades have a similar risk/return, even if they’re obvious and popular, then investing is just gambling with a lower rake. (It’s not a coincidence that brokerages make the most money from clients who trade a lot, and that casinos make the big money from patrons who count cards but also accept comped drinks.)
The other sweeping change in finance is that it’s gotten more social. CNBC is one-to-many, but message boards and StockTwits are many-to-many. This has two effects: first, it means gamblers are more likely to stick around, since they have peers in addition to game. And second, it means that there’s a new way to profit from frenetic traders: instead of bleeding them dry through commissions, use them as marketing. It’s sort of like the economics of running a gym: someone who signs up and never works out is pure profit; someone who signs up and works out every day is a cost, but they’re also great marketing.
What This Means for Financial Media
This bifurcation — gamblers and savers who are using the same venue for basically opposite tasks — is more extreme than what we’re historically used to. In CNBC’s heyday, there were investors who liked taking lots of risk, and investors who had lower risk tolerance, but they were on a pretty stable distribution. In 1999, an aggressive investor might own a lot of Intel; a cautious investor might settle for owning a little.
There’s one force that will keep these two groups together: ads. The lifetime value of a young professional who signs up for a robo-advisor is enormous; it represents a stream of cash flow that compounds faster than the S&P (since it includes capital appreciation and additional deposits), and it’s fairly sticky. The whole point of set-it-and-forget-it is to forget it. So robo-advisors have a huge incentive to advertise heavily, especially if they can target a demographic that thinks a lot about money.
And that’s where the daytraders come in. Not as a target audience: as a source of material. People who daytrade on RobinHood, post about it on StockTwits, and tune in to Cheddar every afternoon are a constant source of raw material for market coverage. The content creators might use StockTwits every day; someone in Betterment’s target audience might use it once a quarter (“Hm, I have these Oracle shares from when I worked there a couple years ago; wonder if I should sell.”), but if there’s more material for them to read, there’s more ad inventory to target them.
This won’t last indefinitely. The big rounds robo-advisors are raising are a clear indicator that they’re all in land-grab mode. It’s hard to pay the bills on 25 basis points per year unless you scale up massively. So 2017 is the right year for a land-grab in financial news: CNBC has prudently given up on attracting a younger audience, and several companies have precommitted to subsidizing anyone who can attract an online audience that’s at all interested in money.
The fact that CNBC will peak and decline doesn’t strictly mean that there’s anything wrong with CNBC. Some businesses just happen to work on a generational cycle: the people and companies change, but the underlying concept is more or less unchanged. Boxing appears to have peaked in the 50s and declined ever since (at one point there were two separate national magazines devoted to fiction about boxing), but both mixed martial arts and professional wrestling have produced Forbes 400-level fortunes. Financial media may work the same way: the next CNBC won’t look much like CNBC, until you look at its P&L statement.