Lost In Spaces
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+ Transcript
Bill: Ladies and gentlemen, welcome to The Business Brew. I'm your host, Bill Brewster. This episode is The Business Brew Spaces edition. I have long said that I Netflix' strategy of spending as much as humanly possible to chase scale. I am unsure of whether or not that was wrong or correct of me. This is a discussion, where I signed on to Twitter to have a Space to discuss some thoughts and try to find some people bounce some ideas off of. I think it's fairly clear that I have bias in this conversation. So, don't let that impact you. Remember that I am in your ears so you probably have some sort of bias towards me and just assume I don't know what I'm talking about when you're doing your own work.
As always, none of this is financial advice. All of the information contained in this program is for entertainment purposes only. Please consult your financial advisor before making any investment decisions and do your own due diligence.
Nick, how are you doing, sir?
Nick: I'm doing well, Bill. How was your week?
Bill: My week was okay. The last three days have been pretty consumed by thinking about Netflix. But I doubt that I have anything that's unique to say on that that other people aren't smarter than me on.
Nick: I think that's probably the conclusion of most people at this point.
Bill: Yeah, I don't know. I have some thoughts. I'll tell you what, I'm really grateful to Andrew Freedman. I had a call with him and after that call, I said, his arguments are better than mine and he saved me some money. So, he will be getting a nice bottle of wine from me.
Nick: Was that after the earnings?
Bill: No, it was before.
Nick: Oh, that's awesome.
Bill: Yeah, well, I don't know. Look, there's a part of me that hates that I have some trader in me and I've taken on water from many other places. This is not a comment of I'm a genius here. If anything, it's a comment that I had a conversation and thought that I was under research to hold the position. But I thought his arguments were better than mine and I also thought that if somebody missed in this environment, it was going to be ugly and I did still think that. I also had macro concerns and I was like, "I don't want to hold this risk." But I have other risks that's getting washed. So, it's not as if I sold. I don't know, but now, it's different.
Nick: Yeah, I agree. I think it's interesting. There's really no place across the whole market that's safe and I think that makes sense.
Bill: Dude, for the first time in a very, very long time, there is actual true opportunity cost to-- You can actually--
Nick: Yeah. You can buy [crosstalk] at 6%.
Bill: Yeah, that's right. You can actually get yield on cash.
Nick: Yeah, I get it. It makes sense to me. I think it's interesting, though. You have companies Cleveland-Cliffs reported today.
Bill: Oh, how'd they do?
Nick: Crushed it.
Bill: Ah, mess. He upsets some people, but I just love that guy.
Nick: I love Lourenco. Cliffs is our largest position.
Bill: I wish he didn't make the suicide comment that obviously strikes close to my heart. I did not like that.
Nick: No, it wasn't appropriate. Yeah, he's been a lot more reserved in the last couple of calls. This call and then the last one, he's hasn't said anything crazy-- [crosstalk]
Bill: What do you see going on there?
Nick: Well, I don't know. I'm not very bullish on it right now. But I was really bullish on a company for the last couple months just because analysts really don't work modeling cost structure very well and miss lot of the operating leverage with having a super fixed cost model. I thought, "Oh, you get all this incremental margin expansion that allows you leveraging." Then the other thing that I thought was super interesting was, for the most part all contracted pricing that really limited downside.
But now, at this point, where all the contracts are already in place, the incremental upside really comes from spot changing for that portion of the portfolio. I think there's a lot less levers that make the position really interesting. When you're now being exposed to commodities, and if you have a really great view on steel, and maybe this is a good position for you, I'm not that person, and I don't really have a huge variance to anybody there. So, this is my time to look other places.
Bill: Yeah, that makes sense. So, are you guys considering exiting or is it--? Don't disclose where you're at, but I'm just curious.
Nick: That's not my decision on this one.
Bill: Yeah, interesting. The commodities thing is, I don't know, man. We'll see. I hope that people that were as nimble getting in or nimble getting out, and the other thing that I know is, I know that I don't know enough to know when the time is, and it may have. A couple of commodities guys have pinged me and they're like, "Look, man, this is just the first inning or second inning." I get it, I think. But I also know, I don't, if that makes any sense.
Nick: Yeah.
Will: I have to throw that pun out there. So, you're telling me that it's not a steal?
Nick: Oh, that's good. That was so good.
Bill: Did you come up just for that? [laughs]
Will: Yeah, pretty much.
Bill: I it. All right, good for you.
Nick: I think the way I look at it is, if you look at a business-- I'm trying to think of the most stable business on Earth right now, where you don't have a lot to worry about. Okay, let's say, VeriSign. If you know that business, they get paid a royalty on every website that exist and there's a 2% degree of uncertainty, maybe a 1% degree of uncertainty on what the revenue will be next year, and you can be, "Oh, 20 times earnings is cheaper, expensive, or whatever." Well, it's something like Cliffs, you're, eight times free cash was really cheap, but not if I'm completely wrong on price and it trades at two times free cashflow or I'm wrong the other way and it trades at 900 times free cashflow. Probably, that's an exaggeration.
Bill: No, no, I understand what you're saying exactly. Did you listen to The Investors Podcast with-- What's his name? He was on last week. Shoot, let me pull up this episode. I thought it was a fantastic episode. The guy that was on it, there was basically a pitch for Charter. I apologize if I liked it and I'm biased. But his comment was that he focuses on quality businesses and the reason that he does so is that it's much easier-- Ah, it's Bryan Lawrence. It's much easier to model and have a view of price and it's-- The way that I was DM-ing with somebody, I think, Wall Street Gunslingers, what he goes by. But I told him-- I listened to a podcast randomly that he did and he was talking about being a little gun or trigger happy. I told him, I said, "I think that it's important to take Buffett's idea of investing in a business manner, really seriously." And he said, "What do you mean by that?" I said, "If you view your allocation of businesses as inventory, you've got to be able to tell me that you're buying it cheap in order to make money later." I think there're two ways to get there. You can have a screamingly cheap price on a volatile business that it's so cheap, you can't deny it. Or, you can focus on easier to model businesses and pay a more full value of fare, because you have more confidence in the future.
Nick: Yeah, I think that's just 100% true. I think the risk is, when you think you have one of the second businesses or second category businesses and it's really one of the first ones.
Bill: Yeah, no doubt, no doubt, which Netflix arguably maybe. But the other side of Netflix, not to-- I'm not trying to bring it back there, I think it's a relevant example, is you still have $30 billion of subscription revenue.
Nick: Yeah.
Bill: Basically, they remind me of somebody who got-- This is probably not okay to say in 2022, but I'm going to say it. Super fat eating a ton of cake and now, they got to figure out how to-- They can still eat a lot. They just can't only eat sugar. If they can figure out how to make that spend a little more efficient, I guarantee you there's 20% of efficiency in that spend. I just don't think anybody has had that conversation in that organization ever.
Nick: Well, I think the problem is-- I covered Netflix for four years. The fund I worked at was one of the largest owners of Netflix for a long time. I think the first [unintelligible [00:10:41] that bought Netflix, actually, and now I own Netflix in a pretty small size and totally whiffed and exited. I'm very aware the bull case was, the revenue growth is very uncorrelated with the cost structure. You make your content investments ahead of time and revenue grows, and your content investments don't necessarily need to scale. The problem is because you're making them ahead of time, you can't actually dial them back that fast.
Bill: Yeah, that's right.
Nick: If revenue is not going to grow to where you thought it was going to be a year ago, that content's still happening.
Bill: Yeah, no doubt. They're screwed for 18 months.
Nick: Yeah. I don't even think I read the whole quarterly letter. I exited. After market, I was like, "Oh, shit."
Bill: [laughs] So, is Bill Ackman.
Nick: Yeah. Ah.
Bill: Which I actually thought his letter that he wrote was quite good. I think it's very hard to be that loud and I think to flip within a quarter and be him shows an amount of discipline. I think people can take shots at him for buying, but I think it's smart.
Nick: My favorite part, though, people taking shots at Bill Ackman is, "If you go through these people's Twitter feed and you see what they own, you can see that they're not up 2% on the year like Bill Ackman is."
Bill: Yeah, well, he's had a crazy run. The thing is when you do stuff loudly and I know this from a very, very small perspective. Sometimes, you look like a fucking idiot and there're people out there that really it. The difference between him and I is, I don't think most people think I'm an asshole and he doesn't have the most love on the street.
Nick: Yeah. I will say, I think Bill Ackman is maybe hated way too much and I'll give you some personal anecdotes. I've never met Bill Ackman, but one of my really close friends that I work with has. When he was in college, before he ended up going to the buyside, he was 18. He did a lot of work on a business that was very similar to-- I'm forgetting that REIT that he owned that did really well. It was something growth properties.
Bill: Yeah. Well, he spun Howard Hughes out of general growth, right?
Nick: Yeah, exactly. My friend was looking at a very similar thing. It was six years ago and he had called Bill Ackman and got Bill Ackman's assistant just to pitch him the idea, just something the college kids always try to call these people and you never hear back. I guess, within two days, Bill Ackman called him, and talked to him for an hour and a half, and walked through the idea and said, "I think you got provenance" and gave him feedback, and helped him out. I just think, if we really get focused on what you hear in the news, I think it really divorces ourselves from how someone might be as a person. I know, it's just one example. But I think he's probably not as bad as people think. I think he's probably a good guy.
Bill: It's objectively true. First of all, when people want to shit on him for crying at the bottom, they really need to go watch the entire interview. I do not believe the narrative of the interview. Secondly, I'm not going to sit here and defend him to the nth degree, because there're people out there that know way more about his history than I do, and I don't really care to get into it. I have met him twice. He was nice to me both times. I have heard a similar anecdote of him picking up the phone and calling somebody. So, until he gives me a personal reason not to like him, I like him.
Nick: Dude, the guy's a silver fox. You can't hate him, right?
Bill: Well, I think that's part of why people don't like him.
Nick: Yeah, I know. Yeah. I respect that guy. He puts out a lot of educational resources. I remember when I was learning how to invest, I used to all of that. It was super helpful.
Bill: Let me ask you something. If you covered Netflix, this is not a unique thought. I've always thought this, though. I'm not a Johnny-come-lately to this. NBCU and Netflix, there is a marriage there. Brian Roberts, I don't know how the fuck to pitch this, because I'm not an investment banker. But Brian Roberts, I legitimately think has the chance to buy NBCU out of GE in the financial crisis and then figure out a way to flip it to Netflix at what I think is probably close to the peak value that NBCU will ever see. Because if they go down this $5 billion to grow Peacock, they are fucked. But he's got assets there that Netflix needs badly.
Nick: I don't know. It seems to me the way they've handled Peacock and the fact that they haven't really put the foot on the gas, it just makes them look a lot better right now.
Bill: Yeah.
Nick: The people who've done the best in the streaming business, I think by far is Sony.
Bill: Yeah.
Nick: I just don't know how anyone gets really excited. I covered Disney for a while, and got involved in COVID, and then, exited after the investor day. I just remember sitting there, staring at my model after they guided to 235 to 245, or 245 to 260, or something that like, subs in five years and I was like, "How the hell is that going to happen?" I just remember trying to input the numbers into my model and not being able to figure out how to get there. These economics aren't that great and to me, I don't know. It just seems hard for anyone to win and I was like, "Netflix is the only one that could," and now, it seems maybe that's not as true to that. I just don't think the advantages that linear companies have in linear are really worth of streaming, because their content doesn't need to be actually that good to sell, because you have captive buyers in cable. So, I don't know. [crosstalk]
Bill: I don't think you're necessarily wrong. I do think that there are creative things that can be done with release cadences. The MTV challenge, there's assets in Paramount that would be really good on-- Right now, I'm talking Netflix, but Warner Brothers Discovery could do this, too. I think Zaslav's entire pitch of Warner Brothers Discovery is look, we have the stuff that's cheap to make that women and men love to watch, and we have HBO for that, the stuff that's going to make you come in. I've always discounted him, because I've thought of him a little bit as a financial engineer and not really invest in the business as opposed to just get dragged along by the bundle.
But I did an interview recently with an expert, who is actually an expert. I think she was in charge of EMEA for Discovery. I asked her, I said, "Do you think that Zaslav is a builder or do you think--?" I think I actually said, "My bias is to think that Zaslav is an acquirer and not a builder and do you think that I'm wrong and my perception of how I'm viewing the world?" What she said is, she described in two ways. She said, "He's a walking relationship. So, that stuff that you read about picking up the phone and wanting to talk to somebody is very true." She said, "I don't know if he personally knows how to build, but I am certain that he knows how to put a team of builders around him." I thought that was pretty interesting.
Nick: Yeah, I also think the point that is made on the content working well together, I think that just generally makes sense. I think the reason I'm not involved is, I don't know. I just think traditional Hollywood or traditional media businesses have this really big problem, which is, there's a whole lot of wealthy people in Hollywood and there's not a whole lot of value that's been created in the last 10 years.
Bill: Yep.
Nick: I just think there's a sink in cashflows that goes to people who are not the shareholder. I think the problem is everyone's still really applying, like unit economics that probably don't exist to out your number. So, it's just not a place I want to be involved.
Bill: Let me ask you something, because I think that I'm exactly where you are and shame on me for not seeing the entire sector as a structural short on a capital cycle theory there's just too much money entering. When Disney went to DTC and everybody was doing a sum of the parts, do you think I'm accurate in saying that they were doing so looking at Netflix's multiple and applying that to Disney+?
Nick: I can tell you, you were not.
Bill: Okay.
Nick: Because it was actually more extreme than that. People didn't take the Netflix multiple. people took the Netflix value per sub.
Bill: Okay. All right.
Nick: Yeah, every single person I knew, that's what they did. But there's a big problem with that, right?
Bill: Well, yeah, especially when Netflix' valuation gets destroyed. But yes, other than that.
Nick: But there's big problem back then, which is 1/3rd of your Disney+ subs are paying $1 and it costs $2.50 to serve them, which are the India Hotstar ones with the IPL. Ultimately, back in December 2020, I was like, "Okay, the Disney has had an awesome run, but IPL rights," I don't know if they get those again and I was like, "Okay, I think this is the time where I don't want to own this." But that was it. I don't know. I don't think the whole space was a secular short. I obviously didn't make money on the calls. I'm about to say right now, but-- [crosstalk]
Bill: Yeah, I guess, Paramount wasn't. Paramount did well.
Nick: I think almost everyone recognized that owners of content were going to do really well, Formula One and Worldwide Wrestling. But very few people actually I think made that call and put on the position. And the people who did, did very well. It was very good ideas and they're the clear undeniable winners, because it doesn't matter what the economics look, if everyone needs to buy that content, which is why I think Sony has done so well in terms of their participation in the streaming, because they just give or sell content to the people. But I don't know. I think it's a very challenging space. I think the reason is so challenging is, if you go back 15 years ago, it's really hard to think of a better business model than what legacy media was.
Bill: Yeah. It was pretty decent for the consumer too, even though, people don't like it. But I'm an old man, I don't mind the bundle, I still sub to the bundle. So, that's how old I am.
Nick: Yeah. If you watch a lot of sports, right?
Bill: Yeah, well, that's the thing. I've got three kids. They're watching something different. No, they usually watch something on a streaming service. And then, my wife likes stuff. I'm still watching The Challenge whenever it comes out every single season like a fiend, and I would maybe even watch the retired version and then we got sports. So, it just like it serves the need.
Nick: Yeah. I definitely see that. So, who do you get your bundle from?
Bill: Oh, Xfinity. But they don't give me-- I don't want to pay the rental fees on the box. I'm willing to put up with how frustrated I get with their-- They have this Beta App. This is what I don't understand about Comcast strategy. I think that their box is the best thing. I really, really like their box a lot. And then they won't give it to you. They try to get you to do rentals. Now, they've got this Beta product that they give you, which is awful. If it's live, you can't fast forward through commercials, you can't rewind, you can't catch up. Instead, you have to record and then start it on delay. And then when you're fast forwarding through commercials, you can't see anything. You're just randomly pressing play and it's not easy to rewind. It's the shittiest experience ever, but it's really cheap, so I say whatever.
And then also they have the Peacock and it's, "What are you guys trying to do?" I just don't understand their distribution strategy.
Nick: It's quite confusing. I only have Peacock to watch the new episodes of, shit, I just forgot the show. It's Yellowstone. Yeah, Yellowstone. But I don't know. The thing that frustrates me about cable is the geographies don't make sense. I'm literally staring at the headquarters of Charter right now outside my window and I have optimum from Altice. They don't cover this-- It's two blocks away, they don't cover it.
Bill: Well, it's nice that you're close to the train.
Nick: Yeah.
Bill: I like that Charter building.
Nick: Yes. It's nice. We're just finished moving into the two new ones ago.
Bill: Yeah.
Nick: It's very nice.
Bill: You live around there, too?
Nick: Yeah, I live in Harbor Point. That's right next to the buildings.
Bill: Nice area.
Nick: Yes, thanks.
Bill: I pulled up Disney, Netflix, and Paramount from December 31st 2020 to today. And Paramount is the best performing at negative 17%.
Nick: The thing is that was a hard short, if you wanted to short it, because you got to [unintelligible [00:25:06] in March of 2021.
Bill: Yeah. Well, dude, that's the thing that's so hard about shorting generally. I've been singing Andrew Freedman's praises this week a little bit, but I respect what he does. Once I understood how he looked at the world, I respected it more. I can have a conversation with him and get to the point of the conversation where I can be, "Okay, well, now, we agree on the facts and then now we're looking at him is different." I to be able to do that with people.
Nick: I just like how nice he is. He is a nice guy.
Bill: He's a great guy, he's a great guy, and he's trying to build a business and he's got a kid, "I will do anything that I can to support him."
Nick: Yeah.
Bill: What was I thinking? Oh, anyway, the problem with his Netflix short is, then COVID comes in, you get run over. I'm barely smart enough. I don't even know if I'm smart enough to run a long book. I think long-short would drive me insane.
Nick: But the thing is, Netflix ran up at the same time, most of your shorts would have run up. It's not a big deal. if you're long Netflix, short Disney, that kind of I'm working at the same time.
Bill: Yeah. I guess, you got to put a short on in the same sector.
Nick: Yeah. If you're a long Netflix, short Disney through 2021, that was awesome. And then 2022, it's definitely not.
Bill: Yeah.
Nick: That's what the problem are. There's a pretty if you're but-- Yeah, I think that's the thing. If you were, you could have been short Netflix and probably long Facebook or Google, that's probably where you would have been. I don't know.
Bill: Yeah.
Nick: I wasn't looking at doing anything that. We were long Netflix and short Fubo for 2021. [crosstalk] Obviously not anywhere close in size to them being neutral, obviously. Because Fubo is so tiny. It was so liquid. Literally, it didn't matter, but that was the only media short we had.
Bill: Fubo was a real piece of trash, huh?
Nick: Yeah. I remember, we put that short on at the end of 2020. I remember I had to go to work on December 23rd, 24th, and 25th to work on that and try it. We were calling up everybody to get liquidity, it was really hard and then I really spoke with David Gandler on the 23rd of December and after meeting with him, we're, "Holy shit. This guy's a snake oil salesman."
Bill: [laughs]
Nick: I don’t know.
Bill: Well, that's how you talk to management.
Nick: Yeah, no, I remember we asked him was-- We asked about the content lineup and I was like, "Aren't you worried about not having a TNT and TBS for March Madness." He's, "No, I was fine. I said, "Okay." Every bull we could find and we're, "Where do you guys think of them spending all this money on--?" I think it was USA. A bunch of new channels, they don't have those channels and we're, "Well, we're on the website and it has it," get it wrong," I was like, "Okay." It was very crazy because I don't know. It ended up being a very consensus short. But the first month and a half was really scary, because you're stuck in the meme trade and everything.
Bill: Those meme trades are wild. I don't know that they're over, but I do think that the-- I don't know. It seems as though we're probably settling into maybe a less aggressive underwriting environment in not-too-distant future. I don't know how short people's memories are.
Nick: I think the problem is now, you have a different problem where you have people having to unwind physicians, maybe inopportune time. So, that's a completely different buyer. I have no idea where people are on a gross level. That's a different issue, but--
Bill: I think it's going to be really interesting to see these travel names. Every single travel company is about to talk about how good their business is and how it's never been as good. I'm certain of it. Disney's parks are just going to crush. I don't know. There's all these wonky, there was the COVID pull forward, now, there's the COVID hangover, do you end up with a travel or people going to over extrapolate these current results, are they going to learn the lesson? I don't know. There's a lot of weird stuff going on out there.
Nick: That's why I'm just very nervous to be anywhere that's attached to consumer. Outside of, I guess, Google and I do have a tiny bit of Peloton. But outside of those two businesses, everything I have is B2B. Oh, I guess Amazon's consumer, I was thinking only AWS. I don’t know. I'm trying to stay away from consumer.
Bill: Consumer's in pretty good shape, though, man.
Nick: Well, consumer is in very good shape. But I have no idea how the demand shapes out. I own Fair Isaac and that has attachments to consumer, but it's business is B2B.
Bill: Yeah. No doubt. Yeah.
Nick: I think you got to keep in mind-- [crosstalk]
Bill: Hey, guys, I'm on the phone. Sorry, if you heard that.
Nick: They sound they are really cute kids.
Bill: They are relatively cute kids, but not when they're screaming.
Nick: We all did it.
Bill: Yes, this is true.
Nick: I don't know. Every business has an attachment to consumer in some way. It's just a matter of how is it going to be talked about in a quarterly call and where are things on the resumption curve, business like Avalara, I don't own it, but it's e-commerce or this not e-commerce, but it's sales tax automation, it heavily related to e-commerce, but it doesn't get paid on volume of e-commerce. That seems relatively safer than going long Etsy or something, but we're big commerce or something. It's just more of the thinking through like, "I don't want to take that kind of bet on something." I don't know. And you can pay similar valuations. So, that's my thought process.
Bill: Yeah. Well, that makes sense, especially similar valuations. I've looked at Avalara. I probably need to spend more time doing it and less time thinking about media, but unfortunately, I'm like a fiend.
Nick: I can send you my writeup.
Bill: Ah, that'd be awesome. Yeah, I'd like to see it. BlackLine is also something that I find interesting. I like those businesses.
Nick: I never looked at that one before.
Bill: Yeah. you're looking at basically B2B software and accountants. That's the high pitch, right? There's a ton of stuff between now and then, but foundationally, I like where your starting point is there.
Nick: Yeah, I think it's safer and I'm personally, I don't do a lot in software, but the two software businesses I have are CrowdStrike and ZoomInfo. It's more like if you're going to be in software, I want it to be free cashflow [unintelligible [00:32:56]. Secondly, it needs to be something where you buy it and it's either super important and it's impossible to leave, or you buy it and you never think about it again, I'm guessing BlackLine's in the same position. But Avalara, you buy it and you never think about it again, because it's not part of your business.
Bill: Yeah. I think it's the old niche thing.
Nick: Yeah. CrowdStrike is an awesome product, but no one's business ever was competitively better than their competitor, because they had better cybersecurity. It's not something you fuck around with.
Bill: Yeah. Well, it's interesting. My buddy, that was in cybersecurity, he recently just had a successful exit.
Nick: Oh, that's awesome.
Bill: But I asked him about CrowdStrike and he was like, yeah, I wouldn't touch it. He's like, "No, cybersecurity actually works." I don't know. He was so negative and then another person that I know that was close, missed it, too and later I was talking to them and one of them was like, "I think that the people that were closest might have missed it because of the history of the industry and they just didn't quite see what it might become," which is interesting how that happened.
Nick: I missed it very early on and I did not get there. People were telling me about all the time, and I was like, "I don't know, man. None of these cybersecurity companies ever seem durable." You always got to be mad at yourself for making these quick judgments and not reading the S1. And I think a default until like, maybe you should just read the S1, and read the filing, and then make a decision. There're some businesses where I pause it, where I'm never going to look at them, because my gut check will always tell me that's a bad idea. But I think you have to be a little bit more open. But some of these things, I don't know what the thought process is to buy--
Bill: I wonder what Expensify has done. Did you ever look at Expensify as S1?
Nick: I did. There was a one line in Expensify that made me not want to buy Expensify, I passed on that one.
Bill: Yeah, I haven't watched the stock. I just thought that it's funny that they have as the one of their core qualities get shit done or whatever.
Nick: Oh, yeah.
Bill: I think that's interesting.
Nick: I think there's a line, I think that's on page 174 of the S1 that I was like, "Oh, I don't think that management team cares about shareholders as much as they should."
Bill: Nice.
Nick: -and I passed.
Bill: There you go.
Nick: I think it's 174. I'm not going to say the line.
Bill: Yeah. I didn't even get that far. I was like, "I think I get this," but I also don't get it. I do like the idea of bottoms up growing like a weed. That makes sense to me. Data dogs like that from what I understand. But now, I'm talking about things that I don't really know.
Nick: I don't know that business either. That's one I probably should have known. Yeah, I think it's a rough environment, because so much can change so quickly. I think right now, maybe it's a good time to be exposed to businesses where the value is almost binary, which I know that sounds really stupid. But if the value is already two years out, then it's a lot less impacted on what's going to happen in the next two years. So, hypothetically, if you're a business that's launching a satellite or something and that satellite launches in two years, maybe that's a good place to be not going to be super impacted by quarterly numbers and recession.
Bill: Yeah. Man, I don't know. I'm probably such an idiot. I'm just not sure I see the recession coming. That said-- [crosstalk]
Nick: See, the real thing is, I don't either. I don't know. FICO is my largest position, and I thought I was a genius on that one, and then now I'm like, "Oh, well, that hasn't been as good as I thought." Things all reversed in four weeks, but mortgages are obviously, originations are going to be down. Equifax said they're going to be down 40% year over year and that'll be 25% below the 10-year average before COVID. GFC levels is what they're predicting.
Bill: Yeah.
Nick: If you model that through to FICO, that's a 3% hit for revenue, so it's not a huge deal. The consumer in auto loans look really good, American Express, I think it was yesterday, was like consumers are super healthy.
Bill: Oh, credit books are going to look insanely strong.
Nick: Yeah. It's hard for me to see what people are pricing in and that's totally fine with me. I think you get in this position like, if you run money for someone else or you are like, "Shit." It's one thing to be wrong on a name that you obviously couldn't have seen something happening. It's another thing to be wrong on something, where it's super tied to the macro environment or credit cycles, and you should have not had that risk. So, I think a lot of people just like, "You can't be here." That's totally fine and that's I guess, where your advantage can be if you have a longer time horizon but yeah.
Bill: That said, you got to be willing to live through the volatility if what was obvious actually occurs. I've often been like, "Oh, it's priced in" and it's not. Certainly, when the tape comes out, it doesn't feel it.
Nick: I have this thing on my desk that says, "Just because it's priced in, it doesn't mean it won't get priced in again."
Bill: Yeah, that's right. That's exactly right. Yeah, so, mentally prepared.
Nick: Yeah, when the companies issue a press release, and then a month later, just issue the same press release and the stock goes up again or down again, it's crazy. So, yeah, you just got be aware, but that's--
Bill: I don't know if this guy, Bill is in this space or not. But he always sends me or he's got me looking at tax receipt data. It's insane, the inflows. Now, something interesting that he's really into the plumbing of the market, if he wants to come up and talk about it he can if he's here. But he walked me through this yesterday. Who got sent what? I'm going to mess this up, I think. Reserve balances with Federal Reserve Banks decreased. I don't know. Something about the plumbing of the market sent a ton of capital out of fiscal. Basically, it took it out of the system.
Nick: Right.
Bill: It's like phantom tightening, which is-- Mike Green has referred to inflation as tightening. I think that's one way to think of it and then you've got rates like-- I do understand why people are nervous for sure. But Darden Restaurants, read that earnings call and read what they were saying about. Lower income people and where they thought raises were going and they basically said, "What's different this time is, labor has a real strong bargaining position."
Nick: Yeah.
Bill: It's everywhere. Now, is that how tops look, probably? Constructions high, that's got huge multiplier effects, what happens if that slows? But then I get into the housing data and it's like, "Well, tell me how the tightness in house supply goes away other than everyone that's got an Airbnb floods the system with houses."
Nick: Right.
Bill: And I don't even know how to quantify Airbnbs as a percentage of total homes to own, but that's probably I guess, a data point, that would be interesting.
Nick: Yeah. I think, well, also a lot of Airbnbs are apartment units, technically.
Bill: Yeah, and a lot of two are something that-- I've stayed in one in Denver, where it was a family and they put a price tag on it, and if somebody hit the bid, they were going to go on vacation. If they didn't, they'd stay. So, it's not actually a vacant home that can just be sold.
Nick: Yeah. I also just think the number of homes for sale is so low. I think there's 5x more realtors in the United States than homes for sale. That was some stat I saw. I don't know if that's accurate. Obviously, I would verify that, if you're planning on using it as part of an investment process, but I heard that somewhere. I don't know. The way I think about it is, I feel if there is a recession, it's going to be a really, really weird one, where I feel very confident that auto sales will go up just because supply is so suppressed and there's probably demand for 18, 19 million cars and 14 million are being produced. I think, obviously, used car prices will go way down because of that. And then, I think housing [unintelligible [00:42:18] were so low and now they're close to all-time highs. So, that fixes that supply-demand problem. [crosstalk]
Bill: Well, you got to get completions. The problem is there're no completions.
Nick: Right?
Bill: But like, "Okay. So, if you can't complete, how do you get--?" That seems to be a supply issue, not a demand issue. I know, they're trying to throttle demand through rates, but I may have this wrong in my head, but it's like, "Okay, well, if rates go up, then people already owning homes are less likely to move. How does that not exacerbate the supply-demand problem?"
Nick: Yeah, that's exactly what I thought. Business like Fair Isaac, the risk I don't think is, people don't want to apply for mortgages. It is people don't apply for refinancing, which is arguably, it's just as important for the business. I don't think it's the same thing is in 2007, 2008. I think you can make the argument that housing prices are going to go down, but I feel units sold probably go up, if that makes sense.
Bill: Ah, say that, again.
Nick: I feel the value of homes likely go down just from interest rates, but I feel the volume of sales probably go up, because supply has been constrained.
Bill: I don't know if I could buy that.
Nick: I don't cover housing either.
Bill: I don't think I buy that. I think I would buy, if you said the volume of new home sales go up.
Nick: Right. That's what I mean.
Bill: Yeah. But new and existing, I don't think go up.
Nick: Right. No, no, no. I mean, new homes.
Bill: Yeah. I mean, new homes have a multiplier effect attached to them. There's a lot of jobs that creates. I don't know.
Nick: Yeah,
Bill: Other than, how can we possibly not have a recession given rates going up, commodities going up, you're an idiot. I don't know how to tell myself that there's a recession coming.
Nick: I think it's at the point, where I have no idea.
Bill: Yeah, that's where I get to. [laughs]
Nick: Yeah, I think I'm limiting myself to only owning one shitty business in a very small, small portion, small sizing and have 90% of my capital in businesses that I think are super high-quality and are pretty resistant. Other than that, I'm not trying to make any decisions on how exposed I am or anything.
Bill: Yeah.
Nick: Just making the same decisions as always and trying to limit the number of decisions I make every day is I think the way to go.
Bill: Yeah. I think that makes sense. I've been looking at builders for a source for a while. I continue to look. I've been looking at, I don't know, some cyclical names, but I'm just not doing anything, which has been a terrible decision. I should have just sold everything and set out Occam's razor set.
Nick: Yeah. Well, I'm looking for the people who on a dime went short in November and [laughs] There's some, but-- [crosstalk]
Bill: You'll find out later. Once we rebound, you'll find out that they covered on the shorts.
Nick: Yes. I covered my shorts at the bottom and I went 300% long, you know?
Bill: Yeah.
Nick: Lots of [unintelligible [00:45:43] I do know someone who went 200% net long, though, at the bottom of COVID, which was my mom, but she did it on accident, not knowing that what margin was.
Bill: [laughs]
Nick: She's like, "I'm going to start one of these Interactive brokers account." She's like, "Oh, I have extra." She didn't know where to put it in and she killed it.
Bill: Yeah, but that's scary.
Nick: Yeah. I explained that to her. Two months later, when I found out, obviously, sure, let her keep being leveraged for a couple more months in her mind, but long like Tesla, and Disney, and all that stuff. So, she did really great.
Bill: Well, good for her. Better lucky than good.
Nick: Yeah. I know. My boss was like, "Maybe I should fire you and hire her." I was like, "Oh, yeah. Probably good."
Bill: [laughs] Good luck selling your risk management practices.
Nick: Yeah. I don't know. I think you'd be surprised. Most hedge funds don't really have a risk management team/
Bill: Well, I have no idea. I just know The Brewster Risk Management sometimes feels frazzled and I'm just trying to figure my way out.
Nick: Yeah.
Bill: But as you said, I think doing less is probably doing more.
Nick: Yeah. I think it's boring to know that there are some people, who just could figure this stuff out. I know you say all the time that reading the Warren Buffett stuff or Ben Graham stuff hurt your development. I'm going to say right now reading the George Soros stuff was what hurt me.
Bill: I don't know that it hurt me. I owe everything of my foundation to that stuff. I think what hurt me was when Buffett would say stuff like, "Tech is too hard" and I went to Buffett as if I was a pupil in a church that didn't need to think for myself, because I was an idiot.
Nick: I did that, too.
Bill: Yeah, and because I was listening to someone smart, I thought I was smart. But I was a moron. That's what hurt me. But their foundation now that I understand it.
Nick: That is much better though than if you read like, "Oh, The Alchemy of Finance and all the George Soros stuff," and you read, and you're like, "Oh, wow, he did so well." The takeaway should be like, George Soros is another level thinker another level just understanding the market and don't try to replicate him.
Bill: Yeah.
Nick: It's impossible. That was my approach. I think George Soros, his track record is the most insane track record, because there're so many decisions that were made and so frequently. Warren Buffett's amazing and I don't think you could ever argue that. It's just the number of decisions he made wasn't as many. The probability of things being extreme is lower than George Soros because he'd be right so many more times. I think it's impossible to replicate that kind of strategy unless you are someone like him and I concluded I'm not.
Bill: Or, you have to be-- I don't actually know Soros that well, but I'm thinking if you have that many bets, you've got to be really, really quick to pull them off.
Nick: Yeah. It's not he's placing tons of bets at once. He invests on-- [crosstalk]
Bill: No, I know. But you got to shift quick.
Nick: Yeah. I think George Soros said, "I'm wrong more often than I'm right." I think he said you'll only be right 33% of the time to make money as long as you left-- [crosstalk]
Bill: Yeah. He's like Adam [unintelligible [00:49:18]
Nick: Yeah, and that's hard to have that mentality.
Bill: Yeah. You know what's tough about that, too, if you truly have that kind of setup in your strategy is like, man, you are taking a lot of cuts and to see to not have that affect you mentally.
Nick: It's insane.
Bill: Yeah, it is and inevitably, you're going to go through a cold streak that taking that many cuts feels even worse.
Nick: Yeah, I think his background, he grew up in Soviet Republics. He just come from a harder life than me. He can handle the things I can't. I just think it's part of his mental capacity and his background to be a lot better at things that than the most. I think you got to figure out like, there's so many ways to make money in the market, and you got to find the one that matches up with your mindset and your emotions, and that's the only thing you can do [crosstalk] decisions.
Bill: I'll tell you what's funny, man. One of the ways that I do it and everybody that loves to hate on Berkshire when it's not doing well, how can you own Berkshire? I missed a lot of stuff and Buffett crushed it while I was missing it. It's nice to have him doing something on my behalf. How it works from here maybe a different story, but I don't know. It's interesting to see what he's bet on recently and we'll see if it works. I obviously hope it does. but for him I hope it does, too. It'd be really funny if he came out with a massive media bet here just like a cross the board.
Nick: I always sit back and try to guess what Warren Buffett would buy. I thought during COVID, he was going to buy all of Boeing. That was my thought process. Obviously, that didn't happen. So, I'm wondering what he'll do if he does anything.
Bill: I had a buddy that worked at Boeing and he said that, "It is so hard." He managed building the planes or whatever and he was like, "You'll have a guy who's trained to drill in a specific rivet, and he will just go on a bender for five days, and he won't come into work." And because of the union contract, there's nothing you can do and no one else can drill the rivet. You're producing these planes and you have to have contingency plans around random guys getting drunk for five days. It was interesting. He's a very smart guy. He was fun to talk to about that.
Nick: My grandpa worked at McDonnell Douglas and then at Boeing, after the acquisition, and he's McDonnell Douglas had such a terrible culture, and they got to Boeing, and they are like, "These people are great." You could slowly watch the culture of McDonnell Douglas diffuse throughout Boeing.
Bill: Interesting.
Nick: It was so sad. Yeah, but I think Boeing, I've never covered it in detail. That just seems like a Warren Buffetty business. I thought that would be a place for him to go and I think in COVID, it was worth $80m, $90 billion. So, if you pay a premium, he had the ability to buy it at the time and obviously, that didn't happen. So, I was trying to guess what he would do. I have no idea. Do you see him buying a whole media business?
Bill: Oh, I could see him doing. [crosstalk] Look, I think everybody right now, well, not everybody, but I think a predominant narrative, at least around big media is, is this just going to be a bloodbath, where people--? It's basically capital cycle theory. I think the smart shorts had this a year ago, capital cycle theory, all this competition coming, let's get short. I think now, people are starting to wonder what's going to happen with all this spend? I think the more interesting question to ask is, "What does the valuation implosion of Netflix actually do to people's willingness to spend in 18 months on content? Do people start talking about getting really rational on spend? If that's the case, what environment are we looking at two years from now? That is a more interesting question to me.
Nick: I think I don't have a position here, and I haven't thought in detail, and I don't follow any of the legacy media businesses anymore. Probably, I could be wrong here. But my thought process would be these environments are changing and looking at things is probably worse for legacy media businesses, because really, most of the value you're subscribing five years from now in a legacy media business is this streaming shift. And if you look at the shareholder basis in a lot of these businesses, they've shifted a little bit where you don't have the same people owning them that you did five years ago. If you change your model now, you're not spending nearly as much on content. They don't ramp nearly as fast and the economics are a lot worse. The value in five years shifts a lot more to being the traditional legacy media business that's in secular decline with declining margins.
Bill: Yeah. That's right.
Nick: Yeah. And remember, most of them are all still levered.
Bill: Yes, and they're all ramped. They've all committed at least to ramp spend into subscale streaming products believing that that's going to get them a higher multiple. But the person that has the highest multiple just collapsed. So, now, what the fuck do you do?
Nick: I think the other problem is, you could say, maybe rebasing thing differently or whatever, but he's obviously an executor, and he's done really well, and he had awesome vision. We'll still go down. It's like one of the better CEOs. It's really hard to say that about anyone running a legacy media business these days.
Bill: Dude, Reed Hastings, they have $30 billion of direct-to-consumer subscription revenue. He built out an asset base and no one-
Nick: Yeah, he is awesome.
Bill: -gave a shit while he did it. Today's stock doesn't care what the stock did before, so, I just think it's important to be rational about what the playing field really looks like and let's see what cord cutting looks like this upcoming quarter. If that accelerated, I don't know, it's going to be tough for people. You're basically trying to get on a hamster wheel to outrun a melting ice cube to chase a prize that may not even exist. That's not a fun hand.
Nick: Well, if you keep in mind there're spikes on the hamster wheel, because you believe in cash to do it.
Bill: [laughs] Yeah. So, it's even more fun than I described.
Nick: Yeah, it's hard. It's really tough. The thing is that media is still-- there are good businesses in media, like Universal Music, Warner Music, those are really good businesses. I have no idea what the short-term dynamic look like, because I haven't followed them in a while, but those are really good businesses. There's definitely places that could be long. I don't really know how you make money in a legacy media business five years from now, because when I talk to people, they're like, "Oh, I pay 10 times earnings." I was like, "Okay, well, if we just look at the trend line for earnings, and assume that gets better, and we apply 20 times multiple five years from now, you're still down 30%."
Bill: Yeah. And not to mention, your earnings is understating your cash cost, which is now going to reinvest in a different distribution medium that you're probably going to lose in.
Nick: Yeah.
Bill: That's tough.
Nick: And your CEO still gets paid $400 million a year whether you make money or not. [laughs]
Bill: Yeah. That's what I've been trying to get myself to get rational and think about is like, "Okay, from a capital cycle theory, where are we in two years? What's the conversation?" As my head has come back and forth to Netflix, I've thought, "Okay, well, is it possible that they're able to hack cheap shitty programming that people love like reality TV, the entire linear system has already hacked that and is it possible that they start releasing these seasons in breaks of three per season rather than just showering people in content that they forget about tomorrow."
The ironic thing about their model, and I think I understand why they did it, and I have said, and I will continue to say that I never would have generated any cash if I were them. But the faster they put out content, the faster they depreciated their own content. But that doesn't have to be your perpetual state. That could have been the strategy to build out the asset base that exists today. I think Ron Baron was on Invest Like the Best. I think it was Invest Like the Best. It was definitely a podcast and I just listened to him talk about what he saw in Vail and how he thought through, "Well, if we flex these assets in this way, look at what could happen here."
I'm just really trying to think he thought. When I see all the asset bases immediately, the only one that I-- Well, Disney I like, but Netflix, I also like. I don't own either stock right now, at least not in size. I can't think of any exposure. It's interesting because I feel I'm quasi rational on it, but I've had a bias to them in the past, so I'm probably committed to that.
Nick: I think that's the cruel trick of investing.
Bill: Yeah.
Nick: Yeah. I think Netflix is probably still the best position. It's just more of a question of, as we were saying earlier like, "Are you best positioned in something worth winning?"
Bill: Yeah, that's right. That is right there. The Roku bulls that I've talked to are arguing to me that Roku is very well positioned and I need to try to open my mind up enough to actually understand what they're saying. I'm open to the argument. I just don't understand it yet.
Nick: I put a lot of work into Roku over the last four years. I owned it in college, but never in a professional investing way and it was this thing that I spent a ton of time on and never pulled the trigger. But the thing I just can't wrap my head around is, you're pretty penetrated inside the United States. I don't know. It just seems it's hard to make money. I never understood the bull case and how it plays out. I don't think it's a name everyone understands.
Bill: Well, the problem that I have had with it is, I turned on the Roku channel and the Arrested Development season that I started to watch was truncated. It wasn't all the episodes. The ad insertion was absolutely terrible and that show actually had breaks for ads.
Nick: I know.
Bill: They missed the breaks. I was like, "What? This doesn't make sense." And then I was always worried that you end up with a scenario, where you've got at the end of all this-- Right now, I consider us in the fog of war and media, you end up with call it three big players, and how do you extract fees from them?
Nick: Yeah, I don't think you do. That's the thing I never understood. Every time I talk to someone about Avon, they're always like, "YouTube, YouTube, YouTube." So, awesome. I'm long Roku and I was like, "But Roku doesn't make money on YouTube."
Bill: Yeah.
Nick: It doesn't scale well for me. The more consolidate things are the harder it works like, Roku, to my mind was like, "If you're long complexity, if things are actually getting harder, they're not going to actually get more complex." They're going to consolidate. The thing is for the stock to work in my mind and maybe it's different now that the stock is so much cheaper, so I haven't looked at the valuation in detail to see what you need to believe. But back when it was 200 plus, my thought process was you need to grow internationally in size for this to work and you're competing against Amazon and Google, who have failed in the United States, I guess, you could say, but have much better distribution outside the United States.
I though the whole Roku model really relied on the fact that you were inside a TV that someone else paid you to be in and now that there's other options like, "Why would they continue to pay you?" That part never made sense to me. I just really don't think people buy TVs, because there's Roku in it as much as people think. I really think it has to do with, you buy a TV, and it happens to have Roku, and you bought it because it was cheap. If you look at Vizio's S-1, Vizio has arguably a really bad OS for TVs. There's no way that thing is comparable to Roku. But if you look at the hours spent on a Vizio TV, only 8% of them in 2019 were using a stick, and 6% in 2020 were using a stick. So, not only are people choosing to use the Vizio OS, because it came with it, they're increasingly doing that, and if people are willing to stick with that crappy OS, it makes me think no one's making the decision on a TV based on the OS. They're making the decision based on the TV,
Bill: Ha. It's funny. I have LG, that's new and it's 4K and I run it through Roku. But I wonder if I wasn't interested in Roku as an investment, would I do that? I bet the answer is no.
Nick: Yeah, because I don't man.
Bill: I actually think the real truth of this is that, I'm on Roku because Comcast shitty Beta App gets distributed through Roku.
Nick: I use Amazon Prime just because I don't know, my family gave me a stick. I use it. And my TV doesn't have a smart OS, I think. That's my thought process. I have a stick, but you're just clicking the Netflix app or you're clicking the HBO app, you're clicking these apps,, I don't know, I never understood the thought process, but I have no idea. Maybe it works for me. I don't follow the business in detail anymore. There's a lot of other factors at play that I don't know. I don't really get the business case and I never really thought Anthony was super committed to shareholders in the same way that you would expect that another company like a Google or Amazon.
Bill: Will, did you have something to say?
Will: Yeah, I was just curious. This is so far. This conversation is so far outside my wheelhouse. [laughs]
Bill: We can start talking about how much tin or something you need to put in a Roku device and what the supply demand dynamics of that are, if you'd to be-- [crosstalk]
Nick: That'd be cool. I don't know how to be-- [crosstalk]
Will: That'd a little easier. I do have a personal account, though, and I do try to do stuff in that account outside of the world of energy and commodities. I have looked at a couple of media companies. The one that I'm curious and you guys have mentioned it quite frequently, I'm curious if there's a bull case for it is Paramount. Because I'm sitting here listening to you guys discuss it when you think about, "Okay, who's got a backlog of material, who's already got an app?" Okay, everyone, I guess, has got those things. But Paramount strikes me as the company most similar to Disney in terms of the quality of the back catalogue what they've got, and they also have some ability to produce that trashy TV that's relatively cheap, and you can turn out in high volume. So, is there a bull case for Paramount, and what is it, and I guess what's the bear case also?
Bill: I mean, my two cents and I've just started to do calls on Paramount and study it. I'm not 100% sure of what I'm about to say. But my gut reaction is that, I totally agree with you. I think that the bear case is that, they try to become they really try to invest in the streaming wars and incinerate capital, because their content doesn't stick for whatever reason. Namely, they have an incentive to put their best content or maybe not an incentive, but I think that their current agreements mandate that some of the content goes to linear first. So, it's not as clean as--
I always talk about it, but I love it. The challenge can't go directly to Paramount+. If they could take the next season of the challenge and put it on Paramount+, I'm 100% a subscriber. If they can do two seasons a year, I'll never turn. But what they've done instead is, they've got the old man's challenges on Paramount+, which I have considered actually subscribing to. But I agree with you. I think they have assets that could have a ton of value. I don't know about the valuation and I haven't done the numbers in the math I need to, but strategically, I think I used to overly discount them and that's a shame, because I was wrong.
Nick: I really like the Yellowstone shows. 1883 is also really good on Paramount+. But I don't know, I haven't looked at it in a year. But my thought process is, scenario A, you dive into streaming and you continue to incinerate cash. They burn, I think, $700, $800 million with free cashflow last quarter. I think that was the number. That's just not a great situation with a levered balance sheet. And then secondly, the second scenario, you decide like, "Okay, I'm not going to do that." We're going to be a content arms dealer, but that's still deteriorating the linear business that you have. I think the problem is either scenario that you look at is not as good as what it was five years ago, where you were making money on linear, you were selling the same content to Netflix or someone else, and you're double dipping the whole time, and making tons of cash. I don't know.
I think it's fine as long as you can underwrite your base case, where the economics are a lot worse from what they were and the margins aren't going to go back to historical levels. But when I see people's bull cases or investment cases in Paramount and all the other ones, they assume that they get back to those margins that they had a couple of years ago, which I don't think is possible. But at this valuation, maybe it works. I don't know. [crosstalk]
Bill: They do have great content, though.
Nick: They do.
Bill: Yeah.
Will: I guess, from a strategic perspective do you guys think that having both linear and this is more broad question, I guess, actually, because there are several people in this boat. Having both the linear TV platform that you don't want to rode while also trying to spin up a streaming content platform is that a lot--
Bill: That's terrifies-- [crosstalk]
Will: That's a confusing paradigm that no management team is going to figure their way out of that hole?
Bill: This is what Zaslav has a little bit with Warner Brothers Discovery. But yeah, that's what makes me nervous. I just don't know how you straddle the incentives of, I am getting a lot of cashflow from this. I need to build that and I am going to be putting my lesser-- I don't know. Maybe you just have duplicative effort, but it just seems a tough line to toe. And then, if you add some leverage on top of that, you got other concerns.
Will: It reminds me a bit of the situation that large integrated oil companies trying to get into renewables, RN, where they've got the oil business that's high return. So, they've got to figure out how they go green in a lower return renewable business.
Bill: Yeah.
Nick: But I think it's actually more extreme than that. You know way more about this than me and tell me if I'm wrong on this analogy, but even though, we're shifting from fossil fuels, isn't the total amount of kilowatts being consumed from fossil fuels, still growing each year?
Will: Yeah, in general, I'd have to look at what the actual marginal consumption is. But yeah, oil consumption is still growing in general and could grow quite dramatically in the right situation for emerging markets.
Nick: Yeah, right. My thought process is that, in that scenario, you have still a slightly growing business that almost no one wants to put capital into. So, if you're already there, your advantage versus and this one, a lot of people have their capital in it and it's a deteriorating business.
Will: That's interesting. Yeah. That's a pretty stark difference, actually.
Nick: I think one thing to keep in mind is, so much of linear relies on sports. That's a huge part of the business. If you look at every single streaming service, people are making slight concessions, have moving certain games, or maybe entire leagues in some cases from their linear networks to their streaming services. Look at how much stuff is on ESPN+ that used to be on linear. As that continues to go through the motions, you're going to be in a position where people are like, "Wait, I don't need cable subscription at all to watch the sports channels." And then someone who might not even have sports, but it's really relying on the bundle is now in this position where like, no one's subscribed, because no one wants their channel in the first place.
Bill: Yeah.
Nick: That's a big deal. The NFL is talking about doing their own app. So, their own streaming NFL+. Maybe that doesn't happen.
Bill: Yeah. I bet they won't. They want the reach. But I don't disagree with what you're saying. It reminds me of Ben Thompson's article when he used to say that, "The bundle is--" I forget what he referred to it as but he said, "It's a tree that can wave back and forth and then he switch to the bundles in oak, which basically, once you push it too far, it just snaps."
Nick: Yeah.
Bill: If you get into a scenario, where the bundle actually does snap and I'm not convinced at will, because maybe you floor out around 50 million subs, and maybe that supports the economics. But if it does happen, that's tough. I don't know how you navigate that scenario because that's your cash cow.
Nick: Yeah.
Bill: Hang on, Keith. Hang on. I got to ask a little while he's here. I don't know how long he's going to be here. Will, what do you do as a commodities analyst when everything is mooning? I heard the pitch for tin. How do you think through something like tin?
Will: Sorry, do you hear a pitch for tin from me-
Bill: No, no, not from you.
Will: -two years ago?
Bill: Yeah. Well, probably, two years ago, I should have. This is why I should outsource all these thoughts to you. But no, they like things bubble up when the stocks go up. So, that's what happens.
Will: Well, so, don't touch tin now.
Bill: Yeah, which is not an investment advice.
Will: You've got three options. One of which is Alphamin, which probably a bunch of people on Twitter know about. We've been in Alphamin for two years. They're going to sell it now at the peak, it's great. Good, but you've missed the boat already. I think that with commodities and with equities unless you're capable of playing the entire lifecycle of the asset, you have to recognize when your time has come and when it hasn't.
Bill: Yeah.
Will: If you can't play the entire cycle, by which right now, we just move from having been invested in some mix of development opportunities and producers to just pure development opportunities.
Bill: Hmm. Interesting.
Will: Because what you get, of course, with wasting assets is a cycle. A new mine is found, or a new oil discovery, or someone's building a new process something. Those new things are going to trade at much lower multiples and are going to be much for your eyes on them. Those are the opportunities we gravitate towards. What you can't do or what is likely to lead to an issue is saying, tin is at 40,000, I got to go buy a tin producer. Well, at 40,000, which is if the tin is now in the longest backwardation period of any commodity in the last 40 years or something, it's just too late. Your margin of safety is way too thin. We always miss the top of everything.
Tin and everything will go much higher, some of the tin companies will go much higher, but there's a point at which the fundamentals completely divorce themselves from the underlying, and trend, and momentum takes over. You guys know that. It happens in the media space, it happens in tech space, too. But it's pretty nasty in the commodity space.
Bill: Yeah, well, it's why these commodity stocks are so interesting to watch.
Will: You certainly get a lot of volatility, there's certainly a lot of excitement, there's certainly always something to do. But you can't allow yourself to be sucked into just thinking of the space as say, Exxon Mobil's and the Rio Tinto's of the world. Our universe, when we actually do-- We don't invest in anything less than $200 million, but we do invest globally. Even with that $200 million market cap line, there's something, I don't know, I think we've got 2,000 mining firms to look at.
Nick: Whoa.
Bill: [laughs]
Will: People don't realize there are that many names. If I said name all the mining firms, I bet this call could only come up with hundreds of them or something.
Bill: Yeah.
Keith: Do you like the specific mining firms, or do you the streaming firms, or what's your view on the difference between a streamer and a miner per se?
Will: Well, question gets out a little bit of whether you're placing a commodity bet on an equity or you're making an equity bet in a company that happens to produce a commodity. Those two things are actually very different. We place equity bets on companies that happen to be commodity producers. The commodity directionality is always secondary to some fundamental factors that we think will actually outweigh the commodity price movement in the valuation of the company. Streaming firms, they mostly trade with a commodity. They're a derivative of a derivative of a straight commodity bet. So, we don't actually invest in that many streaming firms, although, a couple years ago, we invested in one in the gold space, that was just because they themselves were undervalued in our opinion. I don't know if that answers your question, Keith.
Keith: No, it did. [audio cut].
Bill: I think the answer is, Will's real deep in the weeds. My commodity strategy is--
Nick: Nobody is thinking interesting here.
Will: Sorry, was that for me?
Nick: Oh, yeah. I'd love to hear your answer to you. You've covered the Space-- This was very interesting and I know very little about. So, it'd be awesome to learn something.
Will: Yeah, what's interesting here-- [crosstalk]
Nick: Do you cover any of the steel names?
Will: Yeah, we've looked at steel from time to time. Let's see. We looked at US steel last year. We looked at it early in the year, thought it was expensive, we're wrong-- or at least we're wrong about the directionality of the stocks, they got more expensive. I think European steel is of more interest to me just because they're further along the path of figuring out how to decarbonize the business that they're in. And from a long-term ownership perspective, that's critical. The US guys are just paying lip service to it, and it's going to be very expensive, and it's going to get increasingly expensive to transition if you're slow. That's a bit concerning.
But there are definitely people on Twitter, who know steel much better than I do. So, I probably shouldn't comment that much. We're mostly mining firms, energy companies, industrial businesses, other than steel. I think right now, there're still lithium names out there that I like. Lithium has gone crazy, but there's so little supply relative to demand and that's not even theoretical demand. That's present demand or reasonable expectations based on what car companies say they're going to produce. There are a couple of lithium names that are still of interest. Nickel, put aside all that stuff that happened in LME. That's in the physical commodity. Nickel markets got almost nothing to do with nickel companies, but nickel is an interesting metal. So, we like European utilities quite a bit, although, a couple of them were short on--
Nick: Why European utilities?
Will: European utilities have already made huge switch over to renewables and they've done so on the basis of a lot of very high-priced power purchase agreements. Their margins have expanded fairly dramatically over the last couple of years. And some of them have expanded fairly dramatically, while still being producers of electricity via coal and things like that. Those guys have trailed. That's company like RWE, those guys have trailed behind some of the industry leaders in those transitions. And now, they are in the process of finishing exiting the coal businesses and should see some fairly significant multiple expansion as they have the same high margin renewable businesses backed by PPAs and government financing, if that make sense.
Nick: That makes a lot of sense, that does make a lot of sense.
Will: RWE is the one we'd like the best. We have a position and there's a report on our website somewhere.
Nick: I'm going to check it out.
Will: I don't know. Now, it is very tricky, though. Most of what we're looking at is pretty niche stuff like plastics producers out of Asia or shorting-- We really like the idea, although, we haven't found a name yet. Shorting some of the renewable power equipment manufacturers, so they've all gotten hammered. This applies to solar or wind. Solar has already played out a little bit. But if you look at say, the profit pool of the renewable energy equipment manufacturers, it's minuscule. These guys make no money. If you look at something like the value chain for solar panels, all the money's made by a couple of guys, who make polysilicon in China and everybody else is losing money.
Nick: Like silicon carbide for the inverter.
Will: Ooh, that's hyper-specific also. [crosstalk] partner.
Nick: All right. Okay. I used to cover semiconductors as [crosstalk] industry. Yeah, STM, which is ST Macro and you've Cree which is now Wolfspeed. I guess, you could also-- There're some other small businesses.
Will: The only guys that are making money in the solar space are on that very early [crosstalk] polysilicon or the manufacturing of the components that go into the components, that go into the solar panel, if you will. Everybody else is losing money. Yet, a lot of them are trading at reasonable multiples. We think there's an opportunity there on the short side. It's tough now though. A lot of things have moved. For us, we're circling or cycling out of a lot of juniors, miners that have moved from development to production and into new development plays, holding onto our European natural gas and searching around in odd little industrial places.
Nick: It's very interesting. You always like, "I had no idea how large the universe was."
Will: The full universe, we do anything in energy, anything in materials, and select industries in industrials that are nowhere close to the consumer, basically. That's one way of thinking about what we do. Put that $200 million market cap line on there, subtract China and India out of it, and we're looking at something 6,000 companies with a market cap well north of $15 trillion. So, it's actually a massive universe. But people just don't really think about it.
Nick: Correct me if I'm wrong. But I feel it'd be a lot easier to be long short in that space, because there's so many companies that are tied to maybe similar themes, but they have their own variations, rather than in tech, there's not perfect substitutes for really anything.
Will: Yeah. 90% of my net worth, if you will, in our fund, we have to be long short. There's no other way to only be in this space. Unless you end up-- If you don't, you end up for all intents and purposes being some long commodity bet that works out once every 10 years or something and you make 400%, and then you struggle the rest of the time. If that's what you're going to do, you might as well just buy an ETF or be an ETF. So, yeah.
Nick: Right. Very, very interesting.
Will: Now, that I've hijack the call. Sorry, Bill.
Bill: No, I like it, man.
Will: I liked it a lot.
Bill: I'm glad you came on, because I hear, there's people ping me with commodity ideas and stuff and I'm like, "I'm not trying to be closed minded to this, but I'm just not that interested." I'm trying to be focused on stuff I can understand. So, it's reassuring when you come on and tell me, "Yeah, it was a good idea two years ago." That confirms my priors and I appreciate it.
Nick: [laughs] Well, I don't know. But that's one of the great thing-- At least from my perspective, one of the great things about the market is that, we can all have a conversation.
Bill: Yeah.
Nick: Because we all talk the same language. But everything is new that you guys are talking about media to me. So, it's quite and not everything-- I'm going back. Commodity is new to you, but we can still communicate, because we've got some of the same kernels there.
Bill: Yeah.
Will: Yeah. We're all still trying to find free cashflow.
Bill: And short turds.
Will: Yeah.
Bill: If you do that kind of thing.
Will: Okay. Well, I appreciate you guys taking the time answering my questions. I do have to run. It's good talking with you all out, though.
Bill: All right, man. Have a good one. Thanks for popping up.
Will: I look forward to reading your research on your website.
Nick: Yeah, absolutely. Feel free to shoot me an email anytime.
Will: I will. Thank you.
Bill: All right, Will. Have a good weekend, man.
Will: Good job.
Bill: What's up, Keith?
Keith: Yeah, I guess, the question I had is, you guys were talking about how content-- I guess the conflict between putting content on different channels. My thoughts on that historically, "Isn't that how content's been distributed?" You originally had your way back when it was in the theaters, then it went to some kind of movie, and there's some kind of a transition from starts out at really, I guess, unique channels eventually makes itself to network TV, and then syndication in the end. I think that process you're talking about is already happening, maybe just not in the streaming world.
Bill: Yeah.
Keith: I guess, my real question from streaming, if it's costing so much money, could there be a possibility that the whole thing could, if there's other technologies that can provide the same capability? Is there a possibility of this all-streaming stuff just turning out to be a red herring like Betamax or something, just expensive way to distribute content that eventually just goes away?
Bill: Well, yeah, I think that there's a possibility of that. I think the probability of that is fairly low. I agree with everything that you said. I think that one of the things that is different and this is probably because I under appreciate history or something like that. But what feels different to me about this time is, the association with linear, it has created this situation where the consumer, whether or not Netflix is lighting money on fire, you can assume they are for purposes of this conversation. Consumers happen to like all that consumer surplus. Because of that, they're not on the bundle. And if everybody is now starting up streaming services to chase whatever, some of the parts valuation they think they can get in the market, I fear, they're not incentivized to make the bundle good, and the bundle numbers are already indicating that people are leaving it.
Keith: Part of the thing, when you sit down you think about the bundle, if you try to reassemble that by buying all the pieces, it can be more expensive than the bundle. So, I think for some people, there is economies of scale, I would say for that.
Bill: Yeah. I think we're going to re-bundle, Keith.
Keith: Yeah.
Bill: I said like a week ago, we're all going to miss the bundle one day.
Nick: I think, oh, sorry. Go ahead.
Keith: Go ahead, go ahead.
Nick: First of all, I think the point you make is really interesting on the windowing and distributing different ways. I think the distinction is, before, there was a clear window of who gets what and when. Now, you're having to prioritize one over the other on what business you want to grow. I think it's a different situation. But I think regardless of how we view Netflix is probability now or not, I think it's really hard to say streaming dies. Because streaming is just by far better for the consumer as a way of consuming things. It's on your own time, it's wherever you want, you can cancel whenever you want.
I think more of the question is like, "Will you be paying more and will the amount of content be different?" I think that's probably true. I think it's undeniable that Netflix is super profitable in United States. If they only had a US business, it's very profitable, just because you're investing all this content to grow internationally and that's diluted. They're definitely producing free cash for the United States and probably have for a long time, if you're only looking at that business. But I think-- Oh, yeah, go ahead.
Keith: Yeah. No, I guess, my question would be is, is there another way to provide the streaming functionality that isn't quite as expensive as streaming? For example, could you do something from-- You take a look at what Roku has done in terms of basically being able to do ad insertions of different people within so. A lot of the capability can be done with other platforms, Roku or possibly ATSC 3.0 for the broadcaster's going forward. I think there's a lot of fluidity in terms of what's really going to happen here and in the end they all play out. I'm just wondering if right now the way that streaming is configured in terms of the cost, is there potentially a lower cost option out there that people are experimenting with now that could work?
Bill: Let me ask you a completely different question. I'm trying to understand where we are in this conversation. What is your definition of high cost of streaming?
Keith: Well, I could be totally misunderstanding this, but people are talking about people spending all this money on streaming. Are they spending it on the tech platform, are they spending it on just aggregating content?
Bill: It's crazy.
Keith: Or, maybe it's a combination of both?
Bill: I can talk to Netflix, specifically. It's insane content spend. I think Comcast, NBC, or Comcast, I think they said they're going to put into Peacock or their streaming efforts. I don't know how they're exactly defining it. I think they're calling it $5 billion. I'm pretty sure that Paramount guided to $6 billion in spend. Netflix is guiding the $18 billion and spend. I can't do the rest of the top my head. But the question that I have been pondering is, can you spend $18 billion smarter?
Keith: Yeah. I think historically if you look at the way that Hollywood and content has been created, the answer probably is no. There's a certain amount you guys spend to get a good return. But if you keep on throwing more money at it, I think there's a certain amount, probably fixed return that may be growing. But someone's going to win that game and no one's come up with an algorithm to say, "Maybe Netflix has an algorithm that better does it more efficiently."
Bill: Oh, I don’t know, they do.
Keith: They may be able to get slightly better than someone else. But if they really haven't figured it out, then in essence, it's the historical crapshoot. People have lost tons and tons of money investing in content over the past hundred years. It's the way their business has always been, where the companies have made money is in the distribution. The key to do it is to basically have enough content to make sure through your distribution channel, people don't turn. Just throwing more money at it in my mind is the bad way to do it, because you're throwing up your hands and just saying, "Okay, I'm just going to throw tons of money and this as opposed to do the historical model," which is trying to figure out, "Okay, what's the minimum amount I can spend to prevent my customers from churning and keep the customers there, so I can get advertisers on my network?"
Bill: Yeah. So, Keith, I agree with you. I don't disagree. I think your comments are exactly why the Space is scary today. The question I've been trying to get myself to at least contemplate is, now, as the facts exist today, Netflix has a $30 billion recurring revenue installed base. That's your asset. How efficiently can you keep them there? I think the numbers a lot lower than $18 billion. I think the reason they are really, really shitty at doing it efficiently is, they have never, ever had one incentive for the last 10 years to sit around a table and have that discussion. Not one--
Nick: You know those 400 people at Netflix, who have the right to greenlight a TV show or movie? At Disney, there's 10.
Bill: Yeah.
Nick: Yeah--
Bill: Their incentives have been spend money, stock go burr, get rich.
Nick: Yeah.
Keith: Yeah.
Bill: They responded to the incentives. So, why can't they now not respond to the incentive to get efficient?
Keith: No, I think they can. If you think about companies that have had long-term content, it hasn't happened by spending a lot of money. Take a look at Disney, for example. Disney has spent focused on a niche for what has it been hundred-- I don't know if it's been hundred years now. But it's about a really long time.
Bill: There are a rare bird though.
Keith: Well, but that's how you can do well in content, is if you focus on a niche and spend a long period of time. These things can't be built up by throwing money at it. Because the way people-- Think about the shows you love, the shows that everyone loves. It's not all of them come out all at once. It's just over time. You happen to like this thing and it's-- I think the missing piece in a lot of this stuff is spending money doesn't give you hits. There's something that's undefined. Part of its time and having a good library over time is worthwhile and Disney has that.
The other issue is, you guys are brought up, which is very-- This whole business is just fragmenting and it's getting smaller and smaller. I think you had a really good point, Nick, is looking at the past profitability, I don't think anyone's ever going to go back to that. Because before everybody basically-- When you had just the few networks, they were just minting money. But the market just continues to segment and so you're going to get smaller and smaller pieces. The profit pool may grow a little bit, but it's going to get sliced up into smaller pieces.
Bill: For now?
Keith: Well, how would that change going forward?
Bill: People run out of money. Keith, if I was at Netflix, this is what I would be saying for the last 10 years. We're growing crazy, our US business is, if they're not lying in their disclosures, their US business is running at 50% margins or whatever. Yes, you've got more problems and there's a self-fulfilling problem of the more content you release, the more you're drowning people, the quicker your amort is, the more you're ruining it. But they changed the way that everybody consumed content for at least a while and they did so by dropping 8 episodes at a piece that people just binged, and then went away, and it just disappeared to the ether.
The question I would be asking now is I'd say, "Okay, we have a massive relative scale advantage. Maybe TAM is smaller than we thought of. Maybe we shouldn't be completely global and maybe we should just look at local, regional competitive zones that we have places to win and what can we borrow from what cable TV did in the past and how can we keep an installed base of $30 billion?" $30 billion of subscription revenue is a fuck ton of money.
Keith: Yeah. No, that makes a lot of sense. They just focus on that. They should-- [crosstalk]
Bill: Can you be below the line growth story? Can you do $10 billion of true cashflow off of $30 billion of recurring revenue?
Nick: Well, technically, you could say, it's higher than $30 billion, because they've had so many problems with FX and the dollar has been so strong. If that was to normalize it's a lot higher, like 32, 33.
Bill: I don't know what the answer is. It's just that I've been trying to think of it. What I do know and what I think that has been clear is that, the current model and the current way of doing things is not actually sustainable business model. I fully agree with that. But can you get creative? I think buying Paramount's assets would have been a good idea. It would have been nice if they did it in stock and I don't know that there would have been a willing seller. They clearly need some franchises there. I don't know why there's not a new Floor Is Lava every single week. It costs $15,000 to put on that show. It's garbage. The same with Is This Cake? My kids are watching that nonstop.
Nick: They should have given MrBeast a show. That's what should have happened, Bill.
Bill: Yeah. But he wants to own his own stuff.
Nick: No, he's like, "I want a Netflix show. It's a continuous thing."
Bill: Did he honestly say that?
Nick: He says that, "Maybe every third episode."
Bill: Oh, yeah. Well, they should totally give him a Netflix show. That's insane if they don't give him one.
Nick: I know. That would have been amazing. The guy's got 250 million subscribers. If you go across the channels, that was then the easiest thing ever.
Bill: Yeah, that's crazy.
Nick: The guy might spend $50 million a year on content. That's what he's probably spending right now. On a Netflix level, for the amount of subs, that's not that much.
Bill: Well, and they'll light $100 million on fire on a movie that does nothing. So, why not get that guy something?
Nick: Yeah. Awesome.
Keith: Yeah, it's going to be interesting if Netflix gets into AVOD game, because that'll probably make it a little bit more competitive than what it already is. But I'm just--
Bill: I got to understand Roku. I know really smart people that are really bulled up on Roku and I got to understand it. Whatever, I need to do to open my brain, I need to do it.
Keith: I've looked a little bit at Roku and the one I guess thing I've struggled a little bit with is, part of their models, I understand it is to get into the TV sets. But at this point, they've got somewhat of a share there, but to me it just seems they're going to compete against the giants, the Apple and the Google. In that game, I'm not sure, if they would win a game against Google and Apple for the TV, I'm not sure. There're probably other ways that they can make money outside of that and that's maybe what I'm totally missing. But I think that's what's going on in my mind about Roku in regards to that.
Bill: Prepare for me to shut up and let a smarter person speak.
Keith: Okay, go ahead.
Bill: Yeah, Will, would you like to go?
Keith: Yeah, you probably--
Will: Did someone say Roku?
Bill: Someone did say Roku, sir.
Will: Someone said Roku. Yeah, first of all, Bill, the comment, I'm not sure if you've made it or somebody else made it, but the thought of Netflix buying Paramount is actually not a terrible idea. At least from a content side, it does make sense and that it would give them sports rights, we give them a great library. Of course, everything has a price and maybe if they were going to do it, they should have done it when their currency was a little bit more valuable than it is today. But I thought that comment was very intriguing and one that I've thought about a lot.
Bill: NBCU man. Imagine if Brian Roberts bought NBCU out of the global financial crisis out of GE and flipped it to Netflix at basically the top, that would be so gangster.
Nick: Thinking back Netflix at 550 a share could have bought what is now paramount for $17 or something?
Will: I know. You know what guys? What kills me so much about it is that and correct me if I'm wrong. And this is part of their problem. At $550 a share, investors are happy, no one's asking any questions. You just got to keep going on with the current strategy. So, how could they buy Paramount at whatever price at that-- at $550 a share, you know?
Nick: Oh, yeah. [crosstalk] down on that news because-- [crosstalk]
Will: Well, it would have been down, but it's down anyway. But I guess my point is, it's almost easier for them to justify buying Paramount today with the stock where it is than it was at $550, even though, strategically, it would have been a better decision to do so at $550. But anyway, in terms of Roku, it is an interesting admission by Netflix for sure. It's not clear 100% that it's a direct-- Roku is a direct beneficiary of that, because we-- Let's be real. And compounds on here, he had some really great insights and points on this. But we don't even know if they're even going to pursue an AVOD solution. It seemed it was very haphazard in the way that they communicated it. If they do launch an AVOD solution, unless if Roku gets a share of inventory or some type of content in kind to resell, we really don't know, if they're going to be able to monetize that.
But the way I look at it is that, it's an opportunity where the bear case on Roku for a long time was so much of streaming consumption is Netflix, and YouTube, and all these content partners that they can't really monetize, because they're the original content players. Now, this is an opportunity for Roku-- or yeah, for Roku potentially monetize that relationship. But just on the shared point, they have significant share. One in three smart TVs today are sold in the US are smart, Roku TVs. I think people are still sleeping on the player part of the business where, yeah, it's easy to say the future smart TVs, its operating system built in sure. But they still sell a lot of players and people still buy those devices. I wouldn't be sleeping 100% on that side of the business either, even though, obviously, the features going to be these Roku TVs, and the smart TVs, and operating system, and licensing. But they have really good share.
Keith: But wouldn't you think that once Apple or Google gets into the market that would be total--?
Will: No. No, no, no, no, no, no, no, no, no, no, no, no, no, no.
Keith: Okay.
Will: A few things and I'm very confident on this. First of all, Apple has been out there with Apple TV forever in a day. The reality is that, it's an expensive device. They've already passed on this market opportunity. What sells in terms of these devices and the OS is price. Apple is too expensive. It caters to a very premium user. Don't get me wrong. Apple TV is a great product. But it's not going to cater to the masses, which, if you're looking to maximize your just market, especially in a market like AVOD where already you're looking at maybe your median to lower end consumer, that's going to be in Roku's favor, not necessarily Apple's. And then Google and has already been dominant, especially internationally for a very long time. Android, they have the most market share ex-US. In the US, they've been competing against them with Android TV for a very long time as well. It is a funny dynamic, because you can say that they're competing against giants and there's all this competition. But yet, they have 50 plus million active accounts. Yes, a lot of those are in the US. But wouldn't the threat of competition be greater when they were only four million accounts, five, six years ago?
They've done a very good job of growing their brand with minimal marketing dollars, paid marketing dollars that is in the US and I don't think Google Offers anything or Apple offers necessarily anything that's incremental that would justify them to gain significant market share against Roku, especially as long as Roku maintains their distribution agreements with the Chinese OEMs, TCL, Hisense. Not to dismiss competition outright, because it's always something you have to watch. Everyone dismissed competition with Netflix and we all saw what happened. Just little things on the margin matter a lot. So, you always have to pay attention to it. But I think Roku has a much stronger position competitively than a lot of people appreciate and that's still true today.
Keith: I guess, the question would be, in longer term, are there other solutions that could go around Roku? The operating systems of the TVs, once you get ATSC 3.0 in these TVs, you got some back channel for the broadcasters to go forward with ATSC 3.0. It sounds there's a number of different potential options that could happen here. The Roku is in a great position now, but how do you look at the future in terms of these other potential solutions that could be cheaper competitors than Roku?
Will: ATSC 3.0, I don't think that's that big a risk. Really it comes down to how the OEMs are going to be building. It just comes down to what the OEMs are going to do. The model and the way that we've built it out, and thought about the [unintelligible [01:50:06] market is basically, all right, let's look at every single TV manufacturer in the world. Let's look at every single country in the world. How many TVs are sold in market every single year in terms of share shipments? And then look at what their software relationships are? Do they build it themselves? Is it a Samsung, is it a Tizen with their operating system? What's LG doing, what's TCL doing, and then you look at who they're licensing that against and that's really what you have to look at, because they're just selling in.
The customer acquisition cost for a Roku in this situation is very, very low. You also have to keep in mind that the lifetime of a TV, at least in the United States is somewhere between five to seven years and potentially going longer. I think competitively are the biggest risks that I can think of for Roku is OLED, potentially, because LG controls that market. But you do have to think about the broader addressable market for TVs, where a lot of the TVs sold in terms of volume are the lower end TVs, the 30, 40, 50-inch models that sell for well under $500 and Roku has a large share of that. I'm less concerned about ATSC 3.0 and what the broadcasters are going to think that's actually more of a risk for Fubo quite honestly, even though Fubo is sub five. So, it's probably not even interesting for everybody.
Nick: I agree with that one, for sure.
Will: But I think that it's been interesting just to speak with clients, and see what's going on in Twitter, and just the broad dialogue because everyone's-- If Netflix is serious about getting to AVOD, I think it's a very meaningful admission that this is a real market opportunity that there's a premium video ad supported opportunity globally. That's not just going to be YouTube, [laughs] which is not necessarily premium video, but you get the point that there's this market opportunity that actually Comcast with Peacock has tried to exploit with their four-quadrant framework. I know a lot of people hate on Peacock and it's whatever. But I actually think for what they're doing and the amount of capital that they invested, they're actually doing a better job than I think people are giving them credit for. But I don't want to get too off topic.
Bill: No, that's fine. I like that topic, because I like to crap all over Peacock, because I think it has no share of mind. But I have learned to appreciate what Brian does. He's very, very smart and I am not.
Will: But here's the thing, Bill. You know what? Look when you're doing an AVOD-based approach, share of mind is always going to be important and drive engagement is always going to be important. Don't get me wrong. But it's more about reach when it comes to selling ads on TV. To the extent that, they pump this thing during the Superbowl, and they get a bunch of users even if it is ad supported. Everything I'm hearing quite honestly from some of the largest agencies and brand advertisers out there is compared to all the other AVOD models that have been launched, HBO Max, Paramount+ Discovery+, Paramount's actually performing the best for them, both in terms of price and reach. I think that's partially because of the way that they structured and they position the product in the marketplace as more of an AVOD first approach versus subscription.
Bill: I don't want to miss frame exactly what I've heard, but I've been doing calls now for a couple of weeks on this and I have been very surprised to hear how consistently, AVOD is a very good offering, has come up and I've been very surprised to hear people's bullishness on Paramount+. It has opened my eyes to a previous blind spot.
Will: Yeah, my take there is, if only I had conviction that they could scale the business for Paramount and that the unit economics would be better going forward than where they are today and that maybe five years down the road, we could talk about a business that's equally profitable, if not more than it is today. I would be very positive on Paramount just generally, that's my hurdle. Because actually, everything that they're doing, I think they're executing at a very high level and they're being very smart in terms of how they're negotiating wholesale distribution agreements with other carriers across the globe for Paramount+. It makes all the sense.
I think Pluto is a very interesting asset and I think that they're leveraging it very well in terms of using it as a freemium model to drive more acquisition for Paramount+. They're doing, in my opinion, a very good job. I don't think I critique them in any sense. I think they're being very smart in terms of leveraging the IP, and investing in the type of content that really maximizes awareness, and drives acquisition. They're focusing on getting that higher ROI, which is everything that Netflix really hasn't done or at least they haven't been as focused as I think they should have been.
The problem is, at the end of the day, does it drive more profitability through the business? That's something that's yet to have been seen, which is why I always said, "Shaming is a terrible business model." If you really think about it, it doesn't mean it's not a great product and you can't love it as a consumer. But if all that value is accruing somewhere else and it's not accruing to the company or the shareholders, that's always going to be an issue for your valuation at the end of the day.
Bill: Yeah, I guess, I'm sure you heard me say it. But the question that I'm just trying to ask is, is it inherently a bad model or is it a bad model as has been approached thus far? The reason it's been approached thus far this way is because of all the incentives were never for Netflix specifically to slow down and think, "Do we need a return on this," because it just wasn't what anyone cared about?
Will: Yeah, I think so. Look, if you think about markets, and industries, and what's sustainable, and what's not sustainable, anything can be sustainable, if the number of players that are involved and the amount of capital that's being invested at the right price is appropriate. The issue with streaming is that you just and we talked about this on the Spaces, I don't know, it was yesterday, the day before, and Akram's on here, and he can speak to it, too. But the theme and what we've always talked about in my view is that, the industry economics were just totally unsustainable in media with respect to streaming.
Bill: Yeah.
Will: To read that information article and see that Netflix is finally paring it back, and consider it, and focusing on quality, and ROI, and all these things, these are all things that they-- In theory, should have done from the get go, albeit I admit that they probably wouldn't be able to get to the place that they are today in terms of number of subscribers, if that was their approach from the get go. Because they were the new entrant right there. They were the disrupter. In order to get this market share, they had to do that.
Now, we're in a point of rationalization. Disney-- everybody, Disney, Paramount, they've all increased their content spend significantly to try to take share of engagement. But there will have to be some type of rationalization, because they're not making any money. Maybe this was really the point here, where Netflix pulls back and then you can have some type of profitability at scale. Maybe it's not going to always be a terrible business. But in terms of the way that where we were, it really has been. So, that's the big thing.
Bill: Yeah. That makes a lot of sense to me. Yeah. I think this is going to be a really interesting point, because I've said it now a couple of times. I'm sorry for repeating myself. But you see like Comcast spend, Paramount spending $6 billion, these are real numbers and it feels to me and I may be wrong that they're out there chasing the multiple that Netflix got. Well, that just went away. So, now, what are we all doing?
Will: [chuckles] I know. It's amazing, right?
Bill: Yeah.
Will: [chuckles] Go all in on streaming. You have to do it, guys. Just spend as much as you can. Oh, wait. That's a bad idea? You're not making any money? [laughs] Your stocks down 50% in six months? Oh, gosh, it's only something Wall Street could cook up in terms of incentivizing people to do a certain thing that's not sustainable. It's just amazing to watch it all happen. But look, it will always rationalize. Media and streaming, it's not the first time in history or case study of an industry, where you have a lot of players, a lot of capital chasing a certain type of market opportunity that turns out to not be as large as people think and then you have a rationalization in spending after.
Bill: Yeah.
Will: And usually, the hangover is pretty painful, but those that can survive on the backside actually end up emerging as those that are very, very profitable. I would not be surprised, let's assume that Reed Hastings and Ted Sarandos and team are really good operators, and they can execute in this more mature environment. Then Netflix should emerge given their share of engagement as a relative winner. But they're going to have to execute. They're going to have to be very, very deliberate in terms of what they're spending their capital on. We'll see who wins at the end of the day.
I think Disney is going to win just given their strength of their IP and the assets that they have. They have the parks. Thank God, they have the parks. If it wasn't for the parks, the stock would be, God knows what. But it's hard and that's the problem being a mini-investor these days is that, the industry is in flux and return on invested capital across the industry is going down. But this might be the bottom. This might be the worst. So, you have to tread carefully, but it's a tough environment as of right now.
Bill: Do you ever listen to the podcast, The Town With-- I think it's Matthew Bologna.
Will: I actually subscribe to their newsletter. I had not listened to the podcast.
Bill: Listen to the podcast with Rich. It dropped Wednesday.
Will: Oh, Rich.
Bill: Yeah, you got to listen to it.
Will: [crosstalk] Rich. I can't. Yeah
Bill: If you want to try to figure out whether or not we're at a bottom in sentiment for streaming, I would listen to that podcast. I think you will pour yourself a glass of wine and take a listen.
Will: All right, I will definitely do that.
Bill: I think you might get a kick out of it.
Keith: All right. Do you guys think that Netflix can be a profitable business without AVOD, without advertising base type of a system, it can completely do relatively well just on a subscription base?
Bill: I personally think it's possible. I just think it requires totally reorienting how you release content and what you're focused on. I find it hard to believe that they can't figure out how to make more Lion Kings, I find it hard to believe that they can invest in Floor is Lava, Is This Cake? People are willing to watch complete trash. I just don't think they've ever-- They haven't thought that way. They've just been spending money like drunken sales-- [crosstalk]
Will: Bill, Is This cake? That's not trash.
Bill: That's true. It's fantastic. It's fantastic.
Will: It's fantastic. That's what they need to do. And I think the lack of content strategy, lack clarity, and we talked about this a couple of days ago, and I thought this for a long time. They need to figure out what their brand is around the content that they produce and they need to focus their content dollars around that. Can it be a sustainable business over the long term and profitable as a subscription only business? Absolutely. The question is, it becomes what's baked into the stock price and then what do you think your TAM assumptions are? Because if you're banking on 500, 600 million subscribers sometime in the future, I'm pretty-- I can say with a lot of confidence that that's not going to happen without AVOD, without an ad supported model. But if you're looking at a more conservative, careful approach to capital allocation and content budgets, then yeah, maybe they can do what they can do today. Because I do think that there's more pricing power.
The last thing I'll say is that, the issue this last quarter was really just around the basic plan price. They have a lot of pricing power I think on the on the premium side. It's really the basic plan that always gets them whenever they try to raise price. Akram, what's up, man?
Akram: Happy Friday, Mr. Happy Friday. I just wanted to say, every business on Earth can be profitable.
Will: Exactly.
Akram: Because WeWork was profitable for the first two years. Yes, if you want to grow and you want hypergrowth, it's a different ballgame. It's just at what scale can you be profitable [unintelligible [02:04:48]?
Nick: Netflix is free cashflow, profitable right now.
Will: No.
Akram: They are a self-sustaining business. They consumed 11 and a half billion in capital to get to 220 million subscribers over 10 years.
Will: No, I understand that. But the question becomes is-- Yeah, you can look at this last quarter. But the really question becomes, can they sustain that? They're losing subscribers this last quarter. They're not growing. So, can they--?
Akram: I know. I think that's a good problem to have if you're at 75% market share.
Will: Well, they don't have 75% market share. You have to think about all of TV consumption broadly. You could look at share of subs, you could look at share of revenue, but you also have to consider sports, news, everything else that people spend--
Akram: In terms of penetration into households, let's just say, the 300 million addressable market of potential subscribers really--
Will: Yeah. In my mind, the question regarding free cash flow and scale and profitability, it's just around with any business, what is your level of maintenance CapEx essentially or content spend versus growth CapEx? How much do they have to spend every single year in order to sustain the business? And so, you can say that, "Oh, look, they're free cash flow positive, but they're also losing subs." Okay, well, how much should each spend per year in order to [crosstalk] that?
Akram: [crosstalk] they lost and I don't want to bust balls here. But they've given guidance to, what's what is it? 1%? Less than 1 or 0.9% in a quarter in the six-month window of-- [crosstalk] after a price like--
Will: No. That's totally fair. Yeah. I will never sit here and say, "Look, we're talking--"
Akram: Everybody is up their ass on this. By the way, they deserve it. They really fucked this up from a communication standpoint.
Will: Yeah, but at the end of the day, I get it. We're talking a fraction of percentage points on a very, very large base. So, the stock price reaction a lot of it just comes down to, what are you paying for the future growth, what the price into the stock?
Akram: Yeah, it's [crosstalk] all the same names.
Will: Yeah.
Akram: There's been nothing like fucking 2000 crash wasn't like this. What's happening right now, if you're an e-commerce company, a social media company, or a streaming company, that's unprecedented.
Will: [chuckles] Tell me about it. I feel I'm going to be out of a job in six months, the way that XLC's going. The fucking communication space is just fucking on fire.
Nick: I feel you would be one of the quickest people picked up by a fund if you were to lose your job based on this.
Will: Oh, I appreciate that. Anyone that's listening, anyone that's listening, if I'm on the market in six months, because the XLC goes to zero.
Bill: Dude, I'll do a podcast every single day until you get a job.
Will: All right, thanks, Bill. I love you, man. I love you, man.
Bill: Yeah, I got your back. I think you are good dude.
Will: Yeah. I don’t think that's going to happen. But the point is, Arkam, you are right. There's a market dynamic here, but there's also a competitive dynamic. I think the reality with Netflix is that, look, the bull case just got way out of hand, people were banking on way too much for future growth. All things, [audio cut] things shoot to the upside, they shoot to the downside and you know going forward will they be able to figure it out? Probably. There'll be a price and we talked about the other day. If Netflix, the stock gets to 150, then yeah, that's like you're basically assuming that they're never going to grow at any subscribers ever again in the future. So, your risk reward and taking the shot on the long side on any type of turnaround is pretty attractive, at least, in terms of probabilities. But yeah, they haven't executed as well. In my opinion is, I think they could have.
Akram: I think that the biggest issue here is that, they're at a point in their lifecycle where things were turning and it seemed-- When your thesis is essentially the opposite of what management is thinking, you do actually have to sit there and think about it. When we got really into this last year, I was just like, "Look, they're going to grow subs like 4% or 5%" and that's just reality. They must know that. But ARPU is going to grow probably 8%, 9%. Clearly, this management team took 2020 as whatever this COVID outperformance, 2021 as pull forward, and then 2022, it looks like the way they're looking to spend on content for 2022 to 2023 was assuming that they would go back to adding subscribers at the rate that they were adding in 2019, right?
Will: Mm-hmm.
Akram: If they have that assumption, then they actually think that the market was bigger. Take a look at Russia. You have 700,000 subs, there's 150 million people, there's nothing you're going to do whether it's AVOD or make sexier content that's going to change the fact that everybody there pirates and you should have already had [crosstalk] subscribers in Russia-- [crosstalk]
Will: Yeah. Look, I don't mean to cut you off, but my thinking and I could be completely wrong in this view. But I think that, if you're a management team and you're thinking strategically, you need to be doubling down. If you're Netflix, you shouldn't be reacting to the current environment. That's probably a mistake, because we talked about yesterday regarding where we are in the adoption cycle. They're reacting to a slowdown the business post COVID, post a massive pull forward in the net, which may or may not be. Actually, true adoption curve that there aren't, they could be overshooting to the downside. The best management teams with the best vision, and the most confidence in their forward outlook will be saying like, "Look, we're going through a tough time right now. But we're really confident that we're going to get back to trend, and that this market opportunity exists," and then they're going to continue to invest for the future growth of the business.
The thing is that, I don't think Netflix is doing that. They seem to be very reactive, especially how they talked about this last quarter. Yes, the narrative got out of control. Maybe this is just opportunistic in that sense. But I think about a Roku, where if I was Anthony Wood and that team and what they've communicated and they report earnings next week. This could be absolutely wrong. But they should absolutely be taking this opportunity to double down and triple down on investing in growing their business in the long term because it's all cyclical. You should be investing when things look terrible, because things will stop looking as terrible in the future and vice versa. Maybe that's a little contrarian on my part and I get capital markets don't necessarily always work that way. But zigging when somebody else's zags is typically the right approach, whether it's respect to making investment decisions as we all do or as a capital allocator. So, that's my take. I think they should be really-- [crosstalk]
Akram: They should have handed of-- If you look at what they've communicated between the report last quarter and the report this quarter, again, to someone like me watching this, it's really with what's going on in the macro, and the fact that they just did take a price hike, and you put all these things together. You're just like, "Why didn't you guys think that there was potentially a possibility here that you can have a negative print where you're at in the US and Europe?" And the fact that even last quarter, you didn't really add anyone in Latin America?
Will: I blame, no offense to anyone. Listening to this, I absolutely blame Netflix investors.
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