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China Unleashes Crackdown on ‘Pig Butchering.’ (It Isn’t What You Think.)

It’s called “pig butchering.”

Armies of scammers operating from lawless corners of Southeast Asia—often controlled by Chinese crime bosses—connect with people all over the world through online messages. They foster elaborate, sometimes romantic, relationships, and then coax their targets into making bogus investments. Over time, they make it appear that the investments are growing to get victims to send more money. Then, they disappear.

In recent months, China has unleashed its most aggressive effort to crack down on the proliferation of the scam mills, reaching beyond its territory and netting thousands of people in mass arrests. Its main target is a notorious stretch of its border with Myanmar controlled by narcotics traffickers and warlords.

For decades, frontier fiefdoms such as those in Myanmar have been havens for gambling and trafficking of everything from drugs to wildlife to people. Now, they are dens for pig-butchering operations.

The scammers operate out of secretive, dystopian compounds, many of which are run by Chinese fugitives who fled their country to places where it was easier to flout the law. They cheat Chinese citizens out of billions of dollars each year, as well as victims across the globe. The U.S. Treasury Department in September warned Americans about the scams.

In addition to remote hillside towns in Myanmar, these heavily guarded enclaves are also found in gambling hubs such as Cambodia’s Sihanoukville and Poipet. Cambodian authorities have carried out sporadic raids with China’s help, but the problem has persisted.

For Beijing, it is a significant source of embarrassment that Chinese criminals are at the centre of scams ensnaring people the world over, said Jason Tower, Myanmar country director for the United States Institute of Peace, an independent research organisation founded by the U.S. Congress that specialises in conflict mitigation.

China is “quite sensitive to the narratives that could potentially emerge,” he said. “These are largely Chinese crime groups which China, for years, did very little to check.”

The operations flourished during the Covid-19 pandemic when border trade stopped and internet use surged. They have also fuelled a human-trafficking crisis.

Many of the scammers entrapping people are themselves victims of human trafficking, lured abroad by fake job ads and held captive by withholding pay and passports. The United Nations human-rights office says more than 120,000 people may be forced to work as scammers in Myanmar, with another 100,000 in Cambodia.

One Malaysian trafficking victim told The Wall Street Journal that he was trained to spend weeks or months “fattening” his victims by gaining their trust before “butchering” them. His story was similar to those told by others lured into working in the scam mills. After responding to an ad on a job-recruitment website, he said he accepted an offer for a customer-service role in Cambodia. Once there, he was driven to a prison-like complex in Sihanoukville and forced to work as a scammer under threats of violence.

He said he had a handler who trained him, supplying him with a smartphone preloaded with fake social-media accounts, a “victim list” containing contact information of potential targets and various scripts designed to break the ice and build their trust. After several weeks, he said he convinced a driver who brought people and supplies to the compound to help him escape.

Regional migration researchers have documented trafficking from dozens of countries. Many victims come from Southeast Asia but some from as far as Brazil and Kenya.

“China is starting to signal that enough is enough,” said Inshik Sim, a Bangkok-based lead analyst for the U.N. Office on Drugs and Crime’s regional operations.

In August, China launched a “special joint operation” with three nearby countries and increased pressure on armed groups that oversee remote parts of Myanmar, convincing them to hunt down, round up and repatriate almost 5,000 Chinese nationals suspected of illicit activity.

Chinese authorities have zeroed in on several border areas that are part of Myanmar but are fully controlled by armed groups. These places have often drawn large investments from Chinese nationals—both legal and illicit. Many Chinese people, including notorious fugitives, live in these enclaves, where the Mandarin language and Chinese currency are commonplace.

The Wa Self-Administered Division, located along China’s southwestern border, is of particular interest to China, in part because Beijing has so much leverage over it. The area is home to the ethnic minority Wa people, who claim the territory as their ancestral home. China has been the group’s main benefactor for decades; historians say they helped the Chinese Communist Party flush out enemies who fled across the border in the 1950s and ’60s. The area later became a major economic gateway to resource-rich Myanmar.

Independent researchers say its de facto leadership, the United Wa State Army, commands a force of more than 20,000 people armed with modern Chinese equipment such as portable surface-to-air missiles and armored vehicles.

The area has been a major source of opium for almost two centuries, and in recent decades has become a leading producer of synthetic drugs such as methamphetamine. The U.S. Treasury blacklisted the UWSA in 2003 under the Kingpin Act, and has sanctioned dozens of people and businesses linked to the group, calling it “the largest and most powerful drug trafficking organisation in Southeast Asia.”

The UWSA and other criminal networks have increasingly turned to scamming in addition to the drug trade.

According to a 2022 report in Chinese state media, authorities blocked 2.1 million fraudulent websites and some $51.6 billion in suspicious transactions over the previous year. Beijing has warned citizens to look out for dubious rebate offers, investment schemes and unsolicited contact from anyone claiming to represent a company or law enforcement.

The first sign of a serious cleanup came in early September, when China worked with the UWSA to orchestrate two days of raids that ended with more than 1,000 suspects being marched across the border into Chinese custody. Then China upped the ante, taking aim at the group’s leadership.

On Oct. 12, China’s Ministry of Public Security said arrest warrants had been issued for two senior Wa officials accused of leading scam networks: the state’s construction minister Chen Yanban and a mayor named Xiao Yankui. Four days later, the UWSA said both had been stripped of their roles. Their whereabouts is unknown.

The same day, Chinese authorities said they had transferred 2,349 “telecommunication fraud” suspects from Myanmar two days prior—the single largest such handover. China says 4,666 suspects have been repatriated from Myanmar since the crackdown began earlier this year.

“This is by any measure a major operation, which speaks to the impact on China and Chinese citizens, and the seriousness with which Beijing is approaching this,” said Richard Horsey, senior adviser on Myanmar for the International Crisis Group, a Brussels-based think tank specialis ing in conflict prevention.

While China may be turning up the heat on cybercriminals along its border, experts say scamming is so lucrative that the ringleaders are likely to simply look for more fertile ground—areas in weak states where law enforcement is lax.

“These groups are not going to go away easily,” said Tower, of the U.S. Institute of Peace. “They’re sitting on a massive source of capital and there are many fragile places in the world that they’ll be able to exploit.”

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CHINA’S ECONOMY SHOWS SIGNS OF STABILIZING—AND A SLOWER RECOVERY

China’s economy is showing signs of stabilising but the improvements are decelerating. That could leave it in an L-shaped recovery—where the economy doesn’t see an upturn—that is unlikely to excite investors.

The iShares MSCI China ETF (ticker: MCHI) is down 11% so far this year. China’s recovery from three years of Covid restrictions has underwhelmed, there are concerns about the country’s longer term growth prospects, and geopolitical tensions loom.

While most analysts expect China to hit its 5% economic growth target, that may keep officials from bigger stimulus efforts, resulting in a recovery that is still anemic.

Indeed, a spate of October data from independent research firm China Beige Book show areas such as the property market still struggling to find a bottom, while there has been a slowdown in consumer spending.

Housing sales have softened in October from a month earlier and commercial real estate has had its worst showing this year. Both factory production and domestic orders also slowed.

Consumer spending is cooling, with households pulling back from big-ticket items including cars and appliances. They also are reducing their revenge spending on travel and dining out in recent months, according to China Beige Book.

Still, analysts are feeling more confident Beijing will do what is needed to create some stability, especially after it approved an additional $1 trillion renminbi government bond issuance to support infrastructure investment.

The debt will be issued not by local governments but by the sovereign, pushing headline deficit to 3.8% of GDP. It is a surprise move indicating political will to put a floor under economic activity, but also the latest signal of pain in the economy, says TS Lombard’s Rory Green in a note to clients.

Central authorities are trying to put a floor on equities, with reports Central Huijin Investment Limited—which is a part of the sovereign-wealth fund—bought exchange-traded funds. And authorities are trying to limit weakness in the yuan as part of stimulus efforts, he adds.

The next guideposts are a Politburo meeting in November and a Central Economic Work Conference in December that could offer clues to next year’s growth and fiscal outlook.

Green expects more emphasis on reallocating resources to technology sectors aligned with Beijing’s efforts to become more self-reliant, and a possible plan on how officials resolve local government debt burden.

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STARBUCKS’ NEW CEO TELLS INVESTORS HE PLANS TO FOLLOW THE SCHULTZ ROADMAP

Investors got a long-awaited glimpse of Starbucks’ future under CEO Laxman Narasimhan Thursday, when the company unveiled an updated strategic plan.

The so-called “Triple-Shot Reinvention Strategy,” which the company announced at an investor event in New York, comes nearly eight months after Narasimhan took the company’s reins from former CEO Howard Schultz.

The event was the first time many investors heard from Narasimhan about his long-term vision for the company. Those who feared a drastic about-face now that Schultz has stepped away can rest easy: Narasimhan describes his new plan as relying “on the foundation” of the reinvention plan laid out by Schultz in September 2022.

“This huge focus on my part, on my team’s part, over the last year to build the foundations—that is continuing,” Narasimhan said in an interview with Barron’s. “All we’ve done here is to say ‘Hey, there’s further stuff [to do] about the store, there are things to do in innovation that we can bring in.’”

Triple-Shot will focus on three areas intended to propel the next stage of the company: improving the store experience, scaling its digital capabilities, and expanding its global footprint. The plan also seeks to increase efficiency and reinvest in its employees.

The company believes the strategy paves the way for long-term revenue growth of 10% or greater, and earnings per share growth of 15% or greater. Long-term guidance issued in 2022 called for revenue to grow between 10% to 12% annually through 2025, and earnings per share to increase between 15% and 20% in that time. Same-store sales will grow by at least 5%, Starbucks said Thursday. Last year, the company forecast they would grow between 7% and 9% annually.

Starbucks also announced a $3 billion cost savings plan, set to be implemented over the next three years.

The company’s store expansion plan is largely unchanged. Starbucks is reiterating its aim to operate 55,000 stores by 2030, an increase of 45% from its current tally of about 38,000. Most of these new store openings will be outside North America, Starbucks added.

Starbucks rewards members are expected to double from the current 79 million within the next five years.

Here are more takeaways from Thursday’s event.

Narasimhan Sees Better, More Efficient Stores.

The pandemic was hard on Starbucks stores, Narasimhan told Barron’s. The early stages of the lockdown snarled supply chains and closed off cafes. Many locations pivoted to drive-through and mobile-order only formats—and in the process, trained customers to drink their coffee on the go, analysts say.

Although grab-and-go is typically a more profitable business model than the company’s traditional sit-down cafe model, it comes with a new set of challenges. Perhaps the biggest is the impact on baristas. Some baristas told Barron’s that their jobs have gotten more stressful with the rise of mobile ordering and delivery, as they now have to juggle an onslaught of orders that, in some cafes, have turned every hour into rush hour.

“A lot of things didn’t go the way that they normally do for a company that was focused on human connection,” Narasimhan said.

Triple-Shot aims to streamline baristas’ work every step of the way—from overhauling back-end procedures, such as recording inventory, to improving daily minutiae, like the way customers pick up their orders. Part of this effort includes opening stores with new layouts, like drive-through only or delivery only, to better serve the needs of the local market. Starbucks is planning on increasing the number of take-out only or delivery-only stores, both of which comprise 1% or less of the current store portfolio. By 2025, Starbucks aims to redirect 40% of delivery orders to delivery-only stores.

Through its investment in efficiencies, the company says it can cut more than $3 billion in costs over the next three years up and down the supply chain. It plans to reinvest those funds in the business and to deliver shareholder returns.

Investments in Employees Will Continue

Starbucks announced plans to invest $1 billion in employee initiatives, including installing new technology in stores, raising wages, boosting benefits, and improving scheduling. Since 2020, hourly total cash compensation has increased by nearly 50%. By 2025, the company plans to double hourly incomes compared with 2020 through more hours and higher wages.

This is the second round of workforce investment Starbucks has rolled out since it started dealing with a rise in unionisation activity two years ago. The first billion-dollar round was announced in May 2022, and was funneled into pay raises, additional training, and better technology in stores.

Some union members and politicians have criticised the way Schultz and the company handled the company’s early stages of unionisation. They point to dozens of complaints the National Labor Relations Board has filed against the company, and Schultz’s public comments that unions were contrary to his vision for Starbucks. A month after Narasimhan took control of the company, a group of more than 40 of the union’s allies sent him a letter, urging him to “create and build a healthy working relationship with unionised partners.”

Close to half a year later, Narasimhan’s stance on unionisation is still a bit of a mystery, investors say. When Barron’s asked him how the employee investments factored into his and the company’s perspective on unionisation, he said he would only talk about the partner investments. The company has long emphasised the investments made in its workforce when asked about unionisation efforts.

“We have a holistic view of the kind of bridge that we provide our partners to a better future and it is grounded in the idea of a strong operating culture,” he told Barron’s. “It is grounded in the idea of human connection. If you look even at our mission, every word in that mission is about giving the barista agency.”

Global Expansion and China

China has become Starbucks’ second largest market after the U.S. On Thursday, the company reaffirmed its commitment to growing in the country despite rising operational challenges.

“I’m really bullish on China, in the long run,” Narasimhan said in an interview.

He added that the company was also planning on expanding even further in other international markets. Three out of four new stores over the near term will be opened in markets outside the U.S., including in Southeast Asia and Latin America.By 2030, the company plans to have 35,000 stores outside of North America. As of Oct. 1, it had a little over 21,000 international stores.

Starbucks stock closed 9.5% higher Thursday, buoyed by a stronger-than-expected fiscal fourth quarter. Shares were largely unchanged in after-hours trading, up 0.2%.

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THE HUNT FOR CRYPTO’S MOST FAMOUS FUGITIVE. ‘EVERYONE IS LOOKING FOR ME.’

Fallen crypto tycoon Do Kwon was ready to get out of Montenegro. He and his colleague arrived at the small Balkan country’s main airport, where a Bombardier business jet was waiting to take them to Dubai.

Inside the VIP terminal, Kwon handed his passport to an immigration officer, who swiped it. An alert flashed across the officer’s screen. Kwon, it said, was the target of an Interpol red notice—a request to police around the world to arrest him.

Kwon had been lying low in the Balkans for months, but his luck was running out. About two hours earlier that day, March 23, a tipster had separately warned Montenegro’s top cop, Interior Minister Filip Adžić, that Kwon was likely in the country.

The tipster sent Kwon’s passport details to the interior minister’s phone, according to Adžić, who recounted the arrest for The Wall Street Journal. When Adžić called the border police chief, officers had just detained Kwon at the airport.

“Do you know who that person is?” the interior minister said he told the chief. “He is famous and he has a lot of money.”

U.S. and South Korean authorities had been investigating Kwon over his role in one of the biggest disasters in cryptocurrency history. In May 2022, two tokens that he created, TerraUSD and Luna, crashed in value. The implosion erased $40 billion from the cryptocurrency markets and triggered a chain reaction that pushed other digital-asset firms into bankruptcy. Investors around the world lost their savings.

The investigators concluded that he lied to investors, and suspected he was secretly sitting on a crypto fortune. He now faces charges in both the U.S. and South Korea, including fraud and violations of capital-markets laws. Prosecutors in South Korea have said that if convicted there, Kwon would likely face the longest jail term for a financial crime in the country’s history.

Kwon denied committing fraud. But just before he faced potential arrest, he vanished from his home in a Singapore luxury high-rise. He taunted authorities by tweeting and giving interviews from his undisclosed location. Even after his capture, he kept stirring up drama: A letter he sent from prison to Montenegro’s prime minister unleashed a major political scandal in the tiny U.S. ally.

The 32-year-old Kwon now sits in a Montenegrin prison, where he is kept in isolation. Officials found that the Costa Rican passport he showed at the airport was a fake. The U.S. and South Korea are battling for his extradition. If sent to the U.S., he would likely end up in the same New York jail that now houses Sam Bankman-Fried—another disgraced crypto tycoon, whose companies were fatally weakened by fallout from the TerraUSD-Luna crash.

This account of Kwon’s life on the lam is based on interviews with officials in South Korea and Montenegro, current and former employees of his company, Terraform Labs, and people close to Kwon. He didn’t respond to requests for comment given to his Montenegrin lawyer.

‘Steady lads’

TerraUSD was a stablecoin, designed to maintain a price of $1. Crypto investors often use stablecoins as a haven to save profits from successful trades. TerraUSD differed from many other stablecoins because it wasn’t backed by dollars in a bank. A so-called algorithmic stablecoin, it relied on complicated financial engineering and the collective efforts of traders to keep its $1 peg.

Kwon hailed TerraUSD as the centerpiece of a new monetary system, uncontrolled by banks and governments. Some crypto observers warned it was a ticking time bomb.

On May 7, 2022, its price began to slip, spooking investors. The trigger for the decline was a few big withdrawals from Anchor Protocol, a sort of pseudo-bank that offered investors annual returns of nearly 20% for TerraUSD deposits.

“Deploying more capital – steady lads,” Kwon tweeted as TerraUSD tumbled. His team tapped a $3 billion reserve fund to bolster the stablecoin. He scrambled to arrange a bailout. Nothing worked. Within days, TerraUSD was worth pennies.

Investors were furious. They had poured billions into TerraUSD, putting most of it in Anchor, which many treated as a savings account. Others had gambled on Luna, a related coin that fell more than 99%.

While Terraform Labs was based in Singapore, Seoul was perhaps the crash’s epicenter. Kwon, a South Korean citizen who graduated from an elite foreign-language high school in Seoul and studied computer science at Stanford University in California, had been a figure of national pride. Some 100,000 South Koreans lost money on TerraUSD and Luna, officials there say. Complaints flooded into prosecutors’ offices.

It was Dan Sung-han’s job to lead the investigation. A boyish-looking 49-year-old, Dan heads the Financial Crime Investigation Bureau of the Seoul Southern District Prosecutors’ Office. Local media have dubbed the unit the Grim Reaper of Yeouido, referring to Seoul’s financial district, for its fights against stock-market fraud and manipulation.

“It took us a good amount of time to build a solid understanding of the crypto market,” Dan said.

The South Korean investigators raided Terraform’s local office. They questioned current and former employees. They seized evidence from seven South Korean crypto exchanges, hauling away blue boxes stuffed with documents, laptops, smartphones and external hard drives.

Crypto high roller

Kwon at the time was living with his wife and infant daughter in the Sculptura Ardmore, a ritzy Singapore high-rise. His duplex apartment included a 46-foot-long cantilevered outdoor swimming pool. He kept Japanese whisky and Cuban cigars on hand for guests.

The baby had been born just weeks before the crash. Kwon named her Luna, after his cryptocurrency. “My dearest creation named after my greatest invention,” he tweeted just after her birth, posting a picture of the newborn.

That summer, Kwon met friends at French and Japanese restaurants including Les Amis, with three Michelin stars. He mused to some associates about visiting Europe with his family on an extended trip, so he could be relatively anonymous in a new city.

At one party he attended in Singapore, not long after the crash, many of the attendees were crypto entrepreneurs who came to show their support for Kwon. Cristal Champagne and Martell XO cognac flowed freely, according to one person familiar with the event.

Meanwhile, Kwon’s investors were suffering.

In war-torn Ukraine, web designer Yuri Popovich said he lost $9,000 that he had stashed in TerraUSD because he didn’t trust his country’s banks. In Britain, a 36-year-old IT consultant lost more than $30,000. He said it took him two months to muster the courage to tell his wife. He took a job as a window cleaner to pay the bills.

In Taiwan, local media reported that a man fell to his death from his 13th-floor apartment in an apparent suicide, after telling friends and relatives that he had lost some $2 million on Luna.

Kwon told the Journal through a spokesman in June 2022, “I’ve been devastated by recent events and hope that all the families who’ve been impacted are taking care of themselves and those that they love.”

A Singapore law firm, Drew & Napier, prepared to sue Kwon on behalf of a group of TerraUSD investors who said they collectively lost more than $50 million.

On Sept. 6, 2022, Kwon marked his 31st birthday at home. His wife shared photos with friends of him enjoying a Korean meal with her and playing with their baby.

The next day, a representative of Drew & Napier arrived at the Sculptura Ardmore to serve him with lawsuit papers—but he was already gone.

Red notice

On Sept. 7, Kwon flew to Dubai, and then Serbia, South Korean prosecutors say. He settled in the capital, Belgrade, known for its nightlife scene and tech sector.

Days later, South Korean prosecutors obtained a warrant for Kwon’s arrest on charges that he had violated the country’s capital-markets law. They had worked long hours, feeling intense public pressure to bring Kwon to justice. Dan, their leader, sometimes napped on a black recliner in his office.

Among other alleged irregularities, Dan’s investigators zeroed in on the relationship between Terraform Labs and Chai, a South Korean payment app that at one point boasted two million users.

Before the crash, Kwon had repeatedly claimed that Chai used his firm’s Terra blockchain to move funds between users and merchants. The claim was a key selling point for investors, who saw Chai’s use of Terra as a rare real-world use of blockchain technology. Proponents see blockchain—the underlying technology behind bitcoin and other cryptocurrencies—as a way to empower individuals while cutting out banks and other traditional middlemen.

But Kwon’s claim was false, South Korean prosecutors alleged. In reality, they said, Chai used traditional payment systems to settle transactions and its use of blockchain was a sham. Lawyers for Chai founder Daniel Shin said Chai initially used the Terra blockchain to process payments, but stopped in 2020. Shin, a former business partner of Kwon’s, has denied wrongdoing. Lawyers for Kwon have defended his statements about Chai.

“I am not ‘on the run’ or anything similar,” Kwon tweeted on Sept. 17 after news of the arrest warrant. He still refused to reveal his location, citing threats to his security.

South Korean prosecutors filed a red notice through Interpol, the global policing body, effectively asking cops worldwide to capture Kwon.

From Serbia, Kwon told one crypto-industry associate that he had a deal with the local government. He told another that Serbian law enforcement allowed him to remain even after learning about the Interpol red notice.

Serbia’s Interior Ministry, Justice Ministry, Foreign Affairs Ministry and main public prosecutor’s office didn’t respond to interview requests.

Kwon continued to manage Terraform Labs from hiding, and pushed a long-shot plan to revive its Terra blockchain. He joked with colleagues in Terra Rebirth League, a group on the Telegram messaging app with over 300 members, according to messages seen by the Journal.

Early in his stay in Belgrade, Kwon lived in an apartment near Knez Mihailova, a pedestrian street in central Belgrade known for its shops, sidewalk cafes and 19th-century architecture, said Milojko “Mickey” Spajić, a politician from Montenegro who met Kwon there.

Spajić told the Journal that Kwon invited him for a visit, and the two spent about an hour chatting over coffee, including about Kwon’s ambitions to revive Terra.

The two had known each other since 2018, when Spajić—then a Singapore-based partner with venture-capital firm DAS Capital—agreed to invest $75,000 in Luna. He later returned to his homeland and entered politics, and hoped to turn Montenegro into a blockchain development hub.

Spajić said he didn’t know at the time that Kwon was a fugitive.

On Oct. 12, Kwon registered a company called Codokoj22 d.o.o. Beograd, listing himself and Chang-joon Han as directors, according to Serbia’s corporate registry.

Han was a former Terraform Labs and Chai executive who joined Kwon in the Balkans. Serbian real-estate records from December 2022 show Han owned a 4,300-square-foot apartment in an affluent neighborhood of Belgrade.

On Nov. 8, Kwon made an appearance on UpOnly, a livestreamed crypto podcast. He bantered with another guest: Martin Shkreli, the former hedge-fund manager who had been imprisoned on securities-fraud charges.

“Jail’s not that bad,” Shkreli told him. “It sucks, but it’s not the worst thing ever.”

“Good to know,” Kwon replied.

The pressure builds

Within days of Kwon’s departure from Singapore, investigators in South Korea learned through Interpol bureaus that he was in Serbia, said Dan, the head prosecutor. On Dec. 12, prosecutors in Seoul publicly confirmed his whereabouts. Kwon’s activity on Twitter dropped off sharply.

Later that month, South Korea formally asked Serbia to arrest Kwon and extradite him.

In late January, Dan and a South Korean Justice Ministry official flew to Belgrade. Over several days, they met Serbian law-enforcement officials. The Serbians shared details on the company Kwon had incorporated and his internet address, Dan recalled. They promised to hand over Kwon if he was caught.

On Feb. 16, the U.S. Securities and Exchange Commission sued Kwon for fraud, accusing him of lying about the stability of TerraUSD and Chai’s use of blockchain. The agency also said Kwon and Terraform Labs converted thousands of bitcoin into cash via a Swiss bank, and withdrew more than $100 million after the crash.

Lawyers for Kwon and Terraform Labs criticised the SEC’s lawsuit as government overreach. They denied the Swiss bank allegations, saying the money transfers were for business expenses, and disputed the SEC’s allegations about Chai.

On March 11, Kwon posted his final message in Terra Rebirth League. Replying to a message from an admirer in the private Telegram group, Kwon posted a picture of North Korean leader Kim Jong Un raising his hand in a triumphal greeting.

Two days later, the Journal reported that the U.S. Justice Department was also investigating the TerraUSD crash.

Arrest

Kwon slipped across the border into Montenegro in mid-March and hunkered down in Petrovac, a resort town on the Adriatic Sea, police say.

On March 23, he and Han took a taxi to the airport in the country’s capital of Podgorica, a drive that usually takes about an hour. They paid their driver 4,000 euros ($4,230), a huge sum for ordinary Montenegrins.

After Kwon’s passport triggered the alert, officers detained him and Han, who was also found to have a fake Costa Rican passport. Border police searched the men’s luggage and found three laptops, five phones and one more set of fake passports from Belgium.

“Everyone is looking for me,” a downcast Kwon told the officers, according to Adžić, the interior minister.

Han protested their detention, according to Adžić, saying, “We are VIPs everywhere that we go.” Han didn’t respond to requests for comment through his lawyers.

Hours later, federal prosecutors in New York filed fraud charges against Kwon. A South Korean ambassador soon showed up at Adžić’s office to discuss extradition proceedings.

A Montenegrin court convicted Kwon and Han for using forged passports. It sentenced them to four months in prison, but they can be held longer as they await extradition. Kwon has said he didn’t realise the passports were fake, and that he was swindled by the agency in Singapore that obtained them for him.

Since his arrest, Kwon has been confined to Spuž prison, a cluster of brick buildings in a valley near Podgorica. He is allowed outdoors for one hour a day in a yard surrounded by a barbed-wire fence, overgrown fields and a rock-strewn mountainside.

After being jailed, Kwon had a tearful reunion with his wife, in which he expressed regret for the trouble he had caused her and their young daughter, a person familiar with the matter said.

Kwon tried to post bail of 400,000 euros ($423,000), but prosecutors opposed his request, calling him a flight risk.

On June 5, a one-page letter from Kwon arrived at the office of Montenegrin Prime Minister Dritan Abazović. The letter, in Kwon’s tidy handwriting, described his friendly ties with Spajić, the politician who had met Kwon in Belgrade—and a rival of the incumbent prime minister. Spajić’s party was expected to win an election days away.

The letter said Spajić tried to raise funds from Kwon and other “friends in the crypto industry,” according to a copy seen by the Journal.

Spajić denied asking Kwon for money. He said the letter was a trick masterminded by his political foes and the Serbian secret police. He suggested that Kwon was duped into writing the letter with a promise that Montenegrin authorities would free him on bail and let him escape the country. Serbia’s intelligence agency didn’t respond to a request for comment.

The letter prompted an uproar. Rival politicians attacked Spajić, who had built up an image as a corruption fighter, saying he had cozied up to a crypto fugitive. Spajić’s party narrowly won the June 11 election, putting him on track to become Montenegro’s next prime minister.

Kwon hasn’t disputed that he wrote the letter. His Montenegrin lawyer, Goran Rodić, said Kwon didn’t donate to Spajić. The lawyer declined to share more details, citing an open investigation.

European officials who visited Spuž prison last year said its cells were poorly ventilated and stiflingly hot in the summertime. They also noted poor hygiene and overcrowding.

To occupy his time, Kwon watches television with a limited number of English-language channels in his cell, his lawyer said during a sweltering day this summer.

“Considering the current weather conditions, and considering the general nature of being in prison, I think he is doing OK,” Rodić said

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YES, THERE IS A BEST TIME OF YEAR TO BUY A NEW CAR

You can save thousands of dollars on a new car by buying at the right time of year.

Typically, the best time to shop for a new car is when the new version of that same vehicle is about to go on sale, so dealerships will want to clear space for the new models. The closer you get to the new model’s arrival date, the more you can save on older models, said Lori Wittman, president of retail solutions for Cox Automotive.

“Savvy buyers who time their purchases around redesign releases, year-end clearances, tax season or other demand shifts can secure substantial savings,” said Zach Klempf, chief executive of Selly Automotive, a San Francisco-based software company.

This guide explains which weeks to mark on your calendar if you’re shopping for discounts on a car, and why these strategies hold true year after year.

  • What are the best months to start car shopping?
  • When are the best times of year to get a deal on a car?
  • What are the best months for buying electric vehicles (EV)?
  • If there is one best day of the year to buy a car…

What are the best months to start car shopping?

If buying the latest model or a specific color or trim isn’t a top concern, start car shopping in August.

Car buying is not unlike buying an iPhone: When new iPhones are released, old models will drop in price. Cars take up a lot more space than an iPhone, though, so dealerships tend to start discounting in the summer—a few months before new models arrive—to clear out inventory.

“Traditionally, automakers retool their factories for the new models in the summer, so that makes August, September and October a good time to shop for an earlier model,” said Wittman.

Look for cash-back programs and other incentives as manufacturers start clearing out their inventory, said Klempf.

“We’re currently seeing incentives return with strong interest rates and deep discounts on 2023 inventory,” said Wittman.

Start paying attention in the fall, from September to December. New models are typically released in the fall of the preceding year, with 2024 models announced in the fall 2023 and start arriving in October. For new car models released in the fall, dealerships will typically have units on-hand for same-day delivery.

When are the best times of year to get a deal on a car?

Big holiday “sales” at dealerships—think Memorial Day and Labor Day—are more of a marketing gimmick than an actual chance for deep discounts, according to Nathan MacAlpine, the founder of CarMate, a Los Angeles-based car brokership.

For used cars, MacAlpine said tax season, from early April to early May, is a sweet spot for buyers. When people get their tax refund back in the spring, a lot of them go car shopping. Dealerships compete for customers by offering deals.

“Just after tax time, I always find it’s busy on my end of selling cars, which means there are more discounts,” said MacAlpine.

What are the best months for buying electric vehicles (EV)?

EV sales are seasonal, too. The months leading up to the end of the year tend to be a popular time for EV buyers who want to take advantage of tax benefits before they expire, said Klempf.

Next year, this will be less of a problem: EV buyers will get up to $7,500 off the purchase right at the dealership, rather than wait months until filing their tax return to get the credit.

If there is one best day of the year to buy a car…

To time your car purchase for maximum savings, Cox Automotive’s Wittman recommends marking some dates on your calendar.

“The end of the month, the end of a quarter or the end of the year are also good times to find deals on both new and used cars,” said Wittman. Salespeople are under pressure to hit sales quotas at those times to earn bonuses for high sales volume, and they’re more likely to offer discounts to get deals done.

“My personal favorite time to buy a car is on the last day of a calendar year, in the evening,” said Klempf of Selly Automotive.

He personally helped family members secure end-of-year deals on Toyota vehicles, such as a gold-colored Camry, a hue that wasn’t in high demand. “We managed to negotiate a discount of nearly 20% on the car,” he said of the purchase, which was made near close of business in December. The dealership explicitly told them that they were striving to hit their sales quota.

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Netflix Stock Surges on Subscriber Beat. More Price Hikes Are Here

Netflix reported solid earnings and subscriber numbers for the September quarter, sending the stock sharply higher in after-hours trading.

For the third quarter, the company reported earnings of $3.73 a share, compared with the consensus estimate of $3.49 among Wall Street analysts tracked by FactSet. Revenue came in at $8.54 billion, in line with analysts’ expectations of $8.54 billion. Paid subscription net additions were 8.8 million versus the 6.1 million estimate.

Netflix also forecast revenue of $8.7 billion for the current quarter, compared with the consensus view of $8.78 billion.

“We’re optimistic about our prospects and the future of entertainment,” management said in a letter to investors.

Regarding the current work stoppage with SAG-AFTRA, Netflix said: “We’re committed to resolving the remaining issues as quickly as possible so everyone can return to work making movies and TV shows that audiences will love.”

Netflix shares were up 12% in late trading to $389.

The company’s profitability is also improving. Netflix expects an operating profit margin of 20% for 2023, which is at the high end of its prior guidance range of 18% to 20%. Management now predicts better operating margins next year, telling investors to expect a range of 22% to 23%.

There were changes in pricing. Effective Wednesday, the streaming company said, it is raising the U.S. monthly prics of its Premium plan to $22.99 from $19.99, while its Basic plan will go to $11.99 from $9.99. In July, Netflix removed the option for new customers to subscribe to the Basic plan. The company said the prices for its ad-supported and Standard plans will remain the same.

Netflix called out the success of “One Piece,” which was a live-action adaptation of a best-selling manga series. The show generated much conversation on social media and garnered 62 million views.

As of Wednesday’s close, Netflix shares had fallen 27% over the last three months on concerns about its profitability and growth prospects. The company’s latest numbers have put some of those worries to rest.

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Tech Earnings Season Starts Soon. Warnings Are Already Piling Up

With tech earnings season about to start, investors should be aware that a flurry of the industry’s less-followed players have been warning about emerging weakness across the enterprise and telecommunications-networking landscape.

Evercore ISI hardware analyst Amit Daryanani, speaking Tuesday on Barron’s Live, noted that heading into earnings he has concerns about weakness in IT enterprise spending, continued soft demand from communications carriers, and continued caution by consumers. The primary bright spot he sees heading into earnings: spending on cloud and AI infrastructure.

The list of companies providing cautious commentary on the outlook is growing by the day.

NetScout Systems stock (ticker: NTCT) is down 17% on Tuesday after the cybersecurity software company slashed its revenue forecast for its March 2024 fiscal year to a range of $840 million to $860 million, down from a previous forecast of $915 million to $945 million. NetScout also trimmed its adjusted profit per share forecast for the year to $2 to $2.20, down from $2.20 to $2.32. The company said it is seeing “slower order conversion,” due to “industry and economic headwinds facing our customers” that began in September.

Ericsson American depositary receipts (ERIC) are 3.3% lower after the networking infrastructure company on Tuesday provided disappointing financial guidance. “We expect the underlying uncertainty impacting our Mobile Networks business to persist into 2024,” the company said.

Adtran (ADTN), which provides networking hardware, on Monday warned that it now sees third-quarter revenue of $272.3 million, below its previous guidance range of $275 million to $305 million. Adtran said that its “customers remain focused on reducing inventory levels and managing capital expenses.”

Late last week, Belden (BDC), another network infrastructure provider, said it now sees third-quarter revenue of $625 million, down from a previous forecast of $675 million to $690 million. “Demand began to weaken in the third quarter, adding to ongoing pressure from channel destocking,” Belden said in its announcement. “We believe softer demand will continue as we move into the fourth quarter, impacting both revenue and profitability.”

A10 Networks (ATEN), which also provides networking infrastructure, likewise provided September quarter preliminary results that failed to match previous estimates. “In our third quarter we experienced delays related to North American service provider customers pushing out capital expenditures,” the company said earlier this month. “Deals we expected to close at the end of the quarter were delayed into future periods.”

Cambium Networks (CMBM), which provides wireless-network infrastructure, said earlier this month that it now sees third quarter revenue of $40 million to $45 million, below previous guidance of $62 million to $70 million. The company cited a number of reasons for the big miss, including a delay in government orders due to U.S. government budgetary timing issues, and a decrease in orders from distributors in the company’s enterprise business, among other things.

Tech earnings season kicks off Wednesday with results from Netflix (NFLX), to be followed by a deluge of financial reports next week from Alphabet (GOOGL), Microsoft (MSFT), International Business Machines (IBM), Meta Platforms (META), ServiceNow (NOW), Amazon.com (AMZN), Intel (INTC), and Juniper Networks (JNPR), among others.

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How Generative AI Will Change the Way You Use the Web, From Search to Shopping

People seeking information online will increasingly go first to TikTok, ChatGPT and other applications powered by generative artificial intelligence, instead of using traditional search engines, said Michael Wolf, co-founder and chief executive of consulting firm Activate.

Today, about 13 million U.S. adults begin their web searches by using generative AI, Activate data show. Wolf predicts that will grow to more than 90 million by 2027 because generative AI is capable of providing results with far greater precision and customisation.

“Generative AI fundamentally changes the model for search because the results are no longer links,” said Wolf, who gave a presentation of Activate’s findings at The Wall Street Journal’s Tech Live conference on Tuesday. “It serves up your information totally packaged and ready to use.”

Applications rife with customer data will benefit the most from this shift, Wolf said, as they will be better equipped to serve their users with personalised information. He expects TikTok to lead in this area because Activate estimates that its users already spend an average of more than 54 minutes a day on it, compared with 49 minutes daily on YouTube, 33 on Instagram and 31 on Facebook.

Amazon and other major e-commerce platforms have also embraced generative AI to better recommend products for users based on their past behaviour, along with many music- and video-streaming apps, Wolf said.

For example, Spotify earlier this year introduced AI DJ, a feature that offers a curated lineup of music alongside commentary around the tracks and artists that the app thinks users will like. “Choices are being made for you,” Wolf said.

Google and other search engines are also taking advantage of generative AI, yet Wolf said they might not remain the first stop or default option for most people. People are devoting more of their time to social media, entertainment platforms, online videogames and other utility apps that are also embracing the technology.

According to Wolf, domination within the $100 billion search industry is “up for grabs” and large, established companies aren’t necessarily going to outmuscle startups. The rise of open-source AI models is paving a pathway for smaller entrants to potentially make a big impact, he said.

Adoption of generative AI is being driven by a significant increase in the amount of time people spend online—behavior boosted by the pandemic, Activate data show. With people spending more time online, they are becoming adept at using multiple applications at once, enabling them to accomplish more in a single day than would otherwise be possible. Today, the average U.S. adult spends 13 hours daily multitasking among video, audio, games, social media and various technology and media activities.

“AI is making everybody into a metaverse creator,” Wolf said, referring to extensive online worlds where people interact via digital avatars.

Generative AI is poised to disrupt the internet in other ways besides search, such as content creation, Wolf said. By typing simple text prompts into applications featuring the technology, anyone—not just tech-savvy folks who know how to write code—will be able to make videogames, artwork, music and even entire virtual worlds on their own.

More predictions from Wolf’s presentation:

  • Nearly all U.S. households, more than 120 million, will be able to access the internet through their television sets by 2027. Whether people own a smart TV or have a device like Roku, the TV screen will play a bigger role than ever, driving subscriptions for streaming services and capturing valuable viewing data.
  • By 2027, the average video-streaming subscriber will have 5.8 subscriptions, up from 4.9 today. With many such applications now offering the option to see ads in exchange for lower monthly fees, Activate predicts ad revenues across the major video streaming services will grow 25% annually through 2027.
  • Spatial computing—the ability to interact with virtual imagery displayed without obstructing a user’s view of the real world—won’t be limited to pricey virtual- and augmented-reality headsets. The technology will be prevalent on almost any internet-connected device with a screen, from car navigation systems and kitchen appliances to digital door locks and mall kiosks.
  • Online sports betting will continue to grow and evolve. The activity became legal five years ago, and it is now available in 35 states. Activate forecasts that U.S. adults will collectively wager $186 billion annually by 2027, up from about $123 billion today. Another change: Sportsbooks today rely on extensive sign-up and referral bonuses to attract new customers, but going forward retention will be driven by improved betting options and user experiences.
  • While the average U.S. adult will spend 13 hours a day multitasking by 2027, the majority of the time will entail watching video, followed by listening to music, podcasts and other audio, and playing videogames. How consumers will spend this time with technology and media will differ across generations. For example, YouTube and other social-media platforms will become the top destinations for younger adults looking to discover new music, while those over the age of 35 will still rely on the radio.
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STEP ASIDE, BANKS. TESLA AND NETFLIX EARNINGS ARE THE REAL TESTS

Forget banks—third-quarter earnings season doesn’t start until Wednesday, when Netflix and Tesla report.

Since Alcoa’s (ticker: AA) abdication, the kickoff of earnings season has been assigned to the U.S.’s big banks, including JPMorgan Chase (JPM) and Citigroup (C), which reported earnings on Friday. This despite the fact that some large, prominent companies, including PepsiCo (PEP) and Delta Air Lines (DAL), disclosed their results earlier in the week.

Don’t expect the overall market to care too much about how the banks do. The S&P 500 financials sector, which includes banks and insurers but also Visa (V) and Mastercard (MA), totals 12.7% of the index’s market value. Its earnings contribution is expected to be larger, at 17.4% of third-quarter earnings, according to data from Refinitiv. But these days, the banks are less a reflection of the U.S. economy than they are of monetary and regulatory policy, which take up a good portion of their earnings calls.

No, earnings season doesn’t really get started until Wednesday, when the first of the large technology-oriented stocks that have driven the S&P 500 this year are set to report. That would be Tesla (TSLA) and Netflix (NFLX), followed by Alphabet (GOOGL), Microsoft (MSFT), Meta Platforms (META), Amazon.com (AMZN) next week, and then Apple (AAPL) on Nov. 2. Nvidia’s (NVDA) fiscal third quarter doesn’t end until Oct. 31, and it will report in late November.

The Magnificent Eight punch well above their fundamental weight, thanks to premium valuation multiples. The group makes up roughly 30% of the S&P 500’s market capitalisation but is expected to contribute just 10% of the index’s third-quarter sales and 16% of earnings, according to Refinitiv. Hits and misses from their results will prompt outsize moves in the index.

Take Meta, which Wall Street analysts expect to report $8.0 billion in earnings for the third quarter, up 120% from the same period last year. That’s nearly a full percentage-point contribution to the S&P 500’s overall expected earnings growth in the quarter.

Nvidia is responsible for another 1.5 percentage point of expected growth, Amazon for 0.6 point, and Alphabet and Microsoft for 0.5 point each. With growth rates like those, how well the biggest companies on the market do could meaningfully swing overall S&P 500’s earnings growth one way or another.

There’s a slim margin for error: Analysts are predicting 1.3% year-over-year earnings growth from the S&P 500 in the third quarter, per Refinitiv. The biggest expected individual detractors from the index’s year-over-year earnings growth are Exxon Mobil (XOM)—a 1.9-percentage-point drag—and Pfizer (PFE), a 1.5-point drag.

That’s before considering the potential impact to investor sentiment from Big Tech’s results. In a year dominated by macro themes, the enthusiasm around artificial intelligence has been one of the greatest bullish drivers of the stock market. Nvidia’s results are showing the benefit already, while other companies are more likely to be merely talking up the technology’s transformative potential.

Hype can only go so far—eventually even Microsoft, Meta, and Alphabet will need to show that their AI investments are yielding a positive return. The third quarter of 2023 is still early innings in the AI revolution, but signs of progress will be cheered by investors, and may be necessary to justify many of the Magnificent Eight’s huge rallies this year.

Third-quarter earnings season may have officially kicked off, but the real action has yet to begin.

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Disney Goes All In on Sports Betting

In early 2019, an analyst asked Disney Chief Executive Bob Iger if sports betting could coexist with the House of Mouse’s brand. He said he didn’t see the company facilitating gambling in any way.

Just four years later, the world’s most beloved name in family entertainment is going all-in on sports betting.

In August, the company struck a 10-year deal with sports-betting company Penn Entertainment to bring gambling to Disney’s ESPN sports network. Sports fans will be able to wager on games on their phones through a new app called ESPN Bet that accepts bets through Penn’s sportsbook.

The idea of gambling under the same roof as Disney has roiled some company executives and employees who feel it will damage the brand that is synonymous with princesses and talking cartoon ducks. In the last year, at least one large investor warned Disney that it might have to sell some of its Disney stake if the company embraced betting.

But for ESPN President Jimmy Pitaro and Iger, who saw his two adult sons glued to gambling apps on their smartphones, the chance to engage a younger male audience, and the money, were eventually too good to pass up. Penn will pay Disney $1.5 billion in cash while ESPN will receive warrants worth about $500 million to purchase shares in the gambling company. Penn will operate the app and Disney will help market it.

This is how sports in America works. Fans watch and they bet—particularly young men between the ages of 18 and 34—often making multiple complicated bets during a live sporting event. They can wager on how many 3-pointers a basketball player will sink or who will catch the final fly ball in a baseball game. It is huge on college campuses.

Wagering on games ballooned after a 2018 Supreme Court ruling cleared the way for states to adopt it. It is legal in 38 states and the District of Columbia. Last year, online sports gambling generated $7.6 billion in revenue—the amount companies received after paying out winning bets. Next year, revenue is expected to grow to $11.8 billion, according to Eilers & Krejcik Gaming, an industry consulting firm.

ESPN, like more traditional TV networks, is struggling with the decline in cable TV subscribers and the rising cost of sports-broadcasting rights. Sports leagues and legions of startups have embraced gambling, while large media companies have homed in on betting as one of the best ways to expand.

But Disney employees, more than most other workers, feel that their company stands for a set of wholesome ideals—something more than making money.

In mid-2022, Jenny Cohen, a Disney veteran who had been promoted to head of corporate social responsibility a year earlier, raised concerns about a potential foray into sports betting to top executives at Disney’s Burbank, Calif., headquarters and leaders at ESPN, urging them to reconsider their plan to strike a deal with a sports-betting operator.

She told her colleagues, and Disney’s CEO at the time, Bob Chapek, that sports betting would tarnish the Disney brand, according to people familiar with the discussions. Consumers could start associating Disney with gambling addiction, she argued. As this discussion brewed, Disney was already managing a crisis with many employees who felt their employer didn’t take enough of a stand against a Florida bill that prohibits instruction on sexual orientation or gender identity for young students, known by its opponents as the “Don’t Say Gay” legislation.

Around the same time, BlackRock, the investment giant which uses socially-conscious environmental, social and governance—or ESG—criteria to guide some of its investing decisions, contacted Disney’s investor relations staff. It warned Disney that if the company did a deal with a sportsbook, ESG rules may require some of its European funds to reduce their Disney stakes, people familiar with the matter said.

Disney is also contending with a fresh push by activist investor Nelson Peltz’s Trian Fund Management to secure multiple board seats, The Journal reported this week. Trian thinks Disney’s stock is undervalued and that Disney needs a board that is more focused and accountable. It is unclear what other changes the hedge fund plans to seek. Peltz and Trian haven’t publicly taken a position on ESPN and gambling.

There are Disney fans, Disney+ subscribers and theme park visitors that likely have no idea that ESPN is part of Disney, but internally, Disney’s businesses are perceived as interconnected parts of one overarching corporate brand: a place where dreams come true. The ESPN+ streaming service is offered as part of Disney’s streaming bundle, and ESPN promotes shows from other Disney-owned networks during its broadcasts, and vice versa. This week, for example, ABC late-night host Jimmy Kimmel appeared on ESPN2’s football show the “Manningcast.”

“My job is to protect the brand at all costs,” said Pitaro, in an interview. “I am the custodian of the ESPN brand, and we needed to make sure that whoever we went with on this journey was someone that we could trust.”

Disney first began flirting with sports betting in March 2019, when it completed its $71.3 billion acquisition of Fox’s major entertainment assets, which included a 6% stake in sports betting company DraftKings.

At the time, some of Iger’s top lieutenants urged him to take a bigger ownership stake in the gambling company, but Iger resisted, arguing that betting wasn’t on-brand for Disney.

Without his blessing, sports-betting discussions stalled until Iger stepped down as CEO in February of 2020, and the board named his veteran head of parks, Chapek, to replace him.

Chapek had a much different view of gambling. He told associates that he was “not that precious about the Disney brand,” compared with his predecessor when it came to sports betting.

He began exploring a potential partnership with a sportsbook, and Disney started up talks with DraftKings, which now has more than 30% share of the sports-betting market. At the time, DraftKings had a marketing arrangement with ESPN, by which it would link ESPN.com readers to make online bets through DraftKings.

Despite Cohen’s objections, Disney signaled that it was seeking a new deal worth around $3 billion over a decade, and Chapek and Pitaro gave news interviews, saying that ESPN customers wanted a “seamless” betting option as part of the sports-viewing experience. ESPN had already embraced sports betting within its programming, including in its “Daily Wager” show, which analyzes odds for sports matchups.

Pitaro intensified his matchmaking efforts with DraftKings, but from the outset, the two companies were far apart. Disney asked for tens of millions of dollars a year more than DraftKings was willing to pay, according to a person familiar with the matter.

Eventually, DraftKings offered around $100 million a year for ESPN to use its sportsbook, but DraftKings wanted its brand included on any app or marketing as part of the deal. That was a nonstarter for Pitaro. He wanted solo ESPN branding.

His team began negotiating with Rush Street Interactive, a smaller, Chicago-based gambling company. RSI offered ESPN more than $100 million a year, but a deal never came together.

Pitaro felt pressure to secure ESPN’s future, particularly among young male fans who increasingly expect betting to be a seamlessly-integrated part of the sports-watching experience. By this time, Iger had returned to Disney as its CEO after the board ousted Chapek in November of last year, and the company was hard at work on plans to remake ESPN as a streaming-focused platform. Iger had told interviewers that he had seen the writing on the wall for the traditional TV business, which was showing signs of being on its deathbed.

Overall, Disney was struggling. Its foundering share price had drawn attacks from activist investors including both Peltz and Dan Loeb’s Third Point, its streaming business was bleeding cash and its whole traditional television business, more than just ESPN, was suffering as more people dropped their cable TV subscriptions in favor of streaming. Disney is currently exploring potential strategic partners for ESPN and has had talks with major sports leagues about it.

Iger quickly set about trimming fat, announcing $5.5 billion in budget cuts and the elimination of 7,000 positions, around 3% of Disney’s total global workforce.

Soon, Iger warmed up to sports betting. His adult sons’ use of sports-betting apps opened his eyes to its popularity with a younger audience, he told associates. He said that it is “inevitable” that sports-watching and sports-betting will go hand-in-hand, and he blessed Pitaro’s efforts to find Disney a partner. Getting involved with gambling was the only way to ensure that ESPN is able to continue to attract younger audiences, he reasoned.

Along came Penn, the Wyomissing, Pa.-based casino operator turned sports-betting company that also needed a makeover after it got into regulatory and reputational trouble over its ownership of sports-media company Barstool Sports, founded by Dave Portnoy. Several women have accused Portnoy of sexual misconduct—allegations he has denied.

Penn runs casinos and racetracks in smaller regional markets like Lake Charles, La., Biloxi, Miss., and York, Pa., and its CEO Jay Snowden wanted to remake the company into a digital gambling powerhouse.

Snowden first met Pitaro in his office for about a 90-minute meeting earlier this year. Pitaro left thinking Snowden was “a straight shooter” who knew what he was doing, the ESPN executive said.

Pitaro quickly deployed teams working on ESPN’s sports-betting, tech, strategy and marketing into parallel talks with Penn to flesh out what a potential partnership could look like. He said Penn’s technology, including the functionality and design of the app, stood out. In addition, Disney views Penn’s tiny market share as an advantage because ESPN can have more control over branding the app and not have to share the spotlight with a better-established player, according to people familiar with Disney’s stance.

There was a key requirement to move forward with a Disney deal. Penn had to dump Barstool.

When Penn began acquiring Barstool in a series of transactions starting in 2020, the gambling company hoped it would help it build a young customer base. Barstool runs an extensive sports-content operation that has drawn criticism for sexism and some of its employees’ crude behaviour. Gambling regulators ultimately fined Penn for violating rules about marketing to people under the age of 21 and scrutinised advertisements that appeared to promise financial success. Barstool said it was being sarcastic.

Pitaro informed Iger of the talks in an early June meeting, and the CEO liked the idea of a partnership with Penn. Pitaro had long held out hope that Disney could fashion a deal with DraftKings, a market-leading online gambling company that was seen by some inside Disney as a natural fit, but the negotiations had become bogged down.

Pitaro suggested that they end talks with DraftKings. Iger, who felt that the negotiations had gone on too long and DraftKings’ demands weren’t reasonable, agreed. Besides, Penn was offering a better price. It was time to move on.

In June, Pitaro presented the Penn deal to Disney’s board at a meeting in Anaheim, Calif., and in early August, the day before Disney was set to announce third-quarter financial results, Disney announced the $2 billion deal.

Penn needed to rebrand the Barstool Sportsbook app into ESPN Bet under the new deal. To quickly make room for Disney, the company sold Barstool back to Portnoy for $1, just six months after fully acquiring the company. Penn kept the database of 1.5 million online betting customers it has accrued, which the company aims to retain under the ESPN name.

ESPN and Penn have the option to walk away from the partnership in three years if the venture hasn’t captured a minimum market share target. Snowden declined to say the exact target, but said it was around 10%.

“There’s only one ESPN,” Snowden said. “If we were going to make a pivot, there was really one option to do that, and that was with what is the only name that is truly synonymous with sports in the United States.”

ESPN sports programming won’t be pushed into the betting app when it launches in November so as not to slow down the betting experience, Snowden said. Instead, the goal is for ESPN viewers and readers to easily switch back and forth between sports and the betting app.

Pitaro said that many on-air stars are eager to get involved with ESPN Bet, and the company plans to announce an expanded talent lineup to host and promote its gambling-related products and shows. ESPN forged a partnership with former NFL punter and foul-mouthed YouTube star Pat McAfee, who is known for hosting broadcasts in sleeveless T-shirts and making occasional off-colour jokes. He will promote ESPN Bet to his audience.

ESPN is also considering alternative broadcasts of games focused on betting, similar to the popular version of Monday Night Football hosted by former NFL stars and brothers Eli and Peyton Manning that airs on ESPN2 and ESPN+, and plans to promote betting to its growing fantasy-sports audience. Pitaro said its fantasy platform is expected to reach more than 12 million users this year, a 10% increase from the previous year.

“Getting into sports betting is a perceived business necessity for ESPN,” said John Kosner, a former ESPN executive who now runs Kosner Media. “I think this decision has to do more with ESPN’s manifest destiny than Disney’s position on branding.”