Chit Chat Stocks - Investing Power Hour #66: Is Twitter Dead? Alcohol trends in America; Investing in CPG Brands

Episode Date: July 9, 2023

The CCM Investing Power Hour is a live-streamed show every Thursday. On the show, Ryan, Brett, and a rotating list of guests have an unscripted discussion on a variety of investing topics. You can watch the show on our YouTube channel here: https://www.youtube.com/c/ChitChatMoney Follow the show on Twitter: https://twitter.com/chitchatmoney Subscribe to our newsletter: https://chitchatmoney.substack.com/ ****************************** Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. My name is Brett Schaefer. I am joined as always by Ryan Henderson, and this is the Chitchat Money Investing Power Hour, although it is alcohol-free. So we may be misleading people with the name

there. But on these episodes, we talk about really whatever we want in investing. Could be investing related, could be philosophy related, could be earnings related, although we're not in earnings season right now. Really anything. Today, we got Monster Energy trying to buy Bang Energy out of bankruptcy. Kind of a savvy move there. I think the big topic is going to be the shakeup in the social media landscape with Instagram launching a competitor to Twitter. I have some stuff on Amazon, cost cutting on Prime, a Toyota potential electric battery breakthrough, and some other things that we might get to if we have time. But Ryan, how are we feeling today? We're in the lull before the storm of earnings season.

And maybe when we resume the banking panic, but TBD on that front. I know. I feel like we've said that for the last month here. So we got to energize, listeners but you can't keep saying it's a lull well uh this is the this is the most i will say this is the most boring time of the year end of june for investing beginning of july no one there's nothing no one's doing anything but i think we have some fun topics today try to keep the people entertained yeah we do it is kind of i haven't even checked the portfolio this morning but it feels a little like everyone's just gotten bored for a little bit 100 i mean we've read this Throughout history, when we read about kind of the Great Depression or the Roaring Twenties, remember when they would basically go from like 4th of July to Labor Day, the market would just be almost paused, but it would still be open.

And then they'd be like, oh, actually, let's start the panic after Labor Day when everyone gets back from summer. Yeah, I mean, people, you know, people go outside still, which is good. Yeah, I don't know. It's been it's been OK. I've been less like, we've been swamped with more podcast stuff than like investing stuff, I guess, lately. So a little update on us personally, which has made it so I guess I haven't been as tied into the world of investing, but still keeping eyes on it. And there was something that was pretty interesting this week, I guess it was last week, around Monster potentially buying Bang. um so i'll launch right into that unless you have anything else you want to say well the biggest

news of the week is that i changed my setup again oh gosh we're about 80 there i don't know i need i need a light i need a light that's better and then i think we'll be good but i've changed to the standing desk so huge update i think that's what everyone needs to know about yeah i'm sure the listeners clamor for that update every week um so monster which for those that don't know is the best performing stock since the year 2000 in the us like and it is not close so um they have just done a phenomenal job and it's really one where i think reading studying that business even if it doesn't provide monster-like returns from here on out is a really good case study for how a simple business can just have remarkable returns on capital

um we did a show on them a couple months ago so go check that out and it's also one that maybe i think demonstrates how tough it is or how tough it can be to be a buy and hold type investor for there were some the guy that had won the value investors club best write-up of the year or whatever which is i think was a little more prestigious back then maybe it's still pretty prestigious um wrote a short report on monster in 2006 and it was pretty convincing and if you read it you're like it makes a lot of sense it worked right in the short run at least for a year or so i think it was i don't know i'll look up the stock chart to see if he actually made good returns well i'm not i don't want to check double check the date too on that

write up because it might not have been exactly 2006, but it's easy to look back on that and say like, oh, what a fool. But he was a really good investor and he had a lot of winners other than that. So I don't know. I guess it's really kind of mind boggling how big Monster has gotten during this time. Anyway, so last week they announced that they might be buying Bang Energy and And for reference, 10 months ago, Monster sued the owners of Bang Energy, which is the parent company is called Vital Pharmaceuticals. By the way, I recommend looking up a picture of the Bang Energy CEO. It's exactly what you think you'd look like. I heard that he also wouldn't give up ownership to the Instagram.

Did you see that? No. He apparently will not give up the login account to the Bang Instagram. him i think uh he he used to enjoy putting photos on there with certain individuals with he was an interesting guy let's just put it like that yeah anyway so they oh they sued vital pharmaceuticals owner of bang energy over false advertising claims and they won monster was awarded 293 million dollars shortly after vital pharmaceuticals parent company bang energy filed for Chapter 11 bankruptcy. I thought that was the end of Bank Energy. Last week, however,

it was announced that Monster is now trying to buy Bank Energy out of bankruptcy for $362 million. Originally, they were waiting for approval from the FTC. But three days ago, the FTC announced that they were terminating their merger review process early, basically saying, you know, we don't see any problems here. So it looks like the deal is going to go through. for reference bang has an estimated market share still of about three percent anywhere from three to five percent monster has north of 30 so and red bull is still technically the largest i believe in the u.s and so if you combine bang plus monster plus what's the other one they have under their of rain i think rain and one other no i can't remember nas yeah i think they they become the

largest they become the market leader after this um for reference so they they they're buying them for 362 million dollars bang energy had an estimated private market valuation of now this is estimated based on i think some i think it was like axios or someone just basically took their market share versus Celsius's and said, if you apply the same multiple, that kind of thing, it would be a private market valuation of $10 billion last year. So they

have Monsters buying bang for pennies on the dollar, really. If you believe that, no, I mean, it could be poorly run or whatever, but if you just lock it into Monsters distribution system, I think you've

probably got a really well-run business. And And it's still 3% to 5% market share. I mean, that in the energy drink category, that run properly can be worth well north of $360 million. Yeah. Might not be $10 billion, or at least not anytime soon, because Celsius, there's some ardent fans, I guess, of the stock. It's at a premium valuation, and really that's because it's done so well. but yeah i mean it's earned it for sure i'm a celsius i'm a celsius fan now i'm i'm an addict

oh boy how many a day one day uh it depends on my coffee intake i'm still a coffee first but if i like limit my coffee you know if i don't have that much i'll take a i'll drink a celsius before a workout later in the day we gotta check your heart rate during the show ryan that's a lot of coffee and Celsius. That's a lot of right here. I know I should probably limit my caffeine intake, but here we are. So these, these shows they're, they're tiresome, you know, it's can't be going all day without the caffeine. Yeah. Recording a podcast. Well, I mean, I'm standing up now, so it's basically a workout. The yeah. I mean, monster energy look time and time again, they're just run really well. There's not really much to discuss with them because

they buy assets in the energy drink space or anything kind of adjacent that they try to explore sometimes when the price is right they have a good model you know for like they just run a very simple marketing playbook and they put it into the distribution which again is actually i think a lot of the times coca-cola's distribution if i'm remembering our research correctly And then the energy drink category grows, they adapt to new things with sugar-free and stuff like that, and they raise prices along with inflation, and they print money. It's a pretty simple model. It's very similar to soda, as people probably well aware.

I think the CPG food space, especially, along with tobacco, tobacco plus food, or let's widen it out, nicotine plus food in the CPG space is a very attractive place to hunt for stocks. A lot of these stocks typically trade at like 30 times earnings, but I think they're ones you want to keep on the watch list. And when, depending on each situation is different, when it gets to an attractive price, then yeah. It's one of those where it's really, really hard to lose money if you buy at the right price. Yeah. I look at Monster and every time I think, wow, that's a really good case study of how you could have gotten good returns, but that's all in the past now. I wonder if I would have said that

in 2012, 10 years ago, and the returns have been great. And I mean, I think they still have room to expand the product. They have room to add new products and really expand the category as a whole i'm wondering if i'm going to be kicking myself in 2030 for saying the same thing where it's like oh yeah it's run its course it's it's at saturation because i mean they still grow volumes deals like this it might not seem that big initially but if they can sort of reinvigorate the bang crowd because bang was in some ways it kind of felt like celsius before celsius without the health stuff yeah but it was exciting a little viral they had some like i said before interesting social media posting strategies to attract the target demographic of these drinks

which is young males yeah and there was and it worked it worked really well yeah it wasn't quite as i guess health-centric as celsius tries to advertise but the whole like creatine label which was ended up being false i think ended up making people think it was like healthy or like a good workout drink even though it's just pure caffeine um i don't know i mean i wonder if monster is kind of one where you just stick in your coffee can portfolio and don't look for a while yeah i mean we go back and forth on this right i think from our point of view at least our strategy and again strategies evolve it's one where you put on the watch list and you wait for that small moment where either the overall market's crashing or whatever where it actually starts trading at

a cheap price because again all we learn if you didn't learn this over the last three years you need to have a margin of safety on price all right we have some comments here firm return says evening gentleman he's in the uk uh i should note that we went on his podcast which is very fun uh it's called firm returns he does a great newsletter as well it's free covering some really niche stuff if anyone likes enjoys that we cover nintendo on that podcast go check it out then we have a fun question from this is a good name mr Dapper Capper. Great name. So I read that. What are your thoughts on consolidation in the media industry? What are your thoughts on the risk return of Paramount Global as it is selling

off non-core assets potentially in preparation for a sale? Yeah, I mean, that one's interesting. It seems like someone will buy it out for a higher price maybe than today. Buffett was in this one. i think he might still be so it's it's interesting for sure but the risk is that left on its own paramount probably dies right ryan like it's it's it they're not in a good i haven't really looked at it enough to be honest but i just don't like i don't like anyone that's having to kind of reinvent themselves in the streaming world or like 100 i'm not a fan of companies that have to make the transition from linear to streaming because the subscribers are fickle and churn is substantially higher than you got with the

cable operators so and apple and amazon don't care about economics yeah and you're competing with a totally different uh like set of competitors and youtube grows share every year. So your pie is shrinking versus competitors like YouTube, the only one I would buy at the right price. And I came to this conclusion now, which unfortunately, which we came to this, we both have basically come to this conclusion, I think, which we came to this conclusion a year ago is Netflix is just better than everyone at executing, at their strategy, at understanding how this business works. And the price probably doesn't make much sense to me today from a buying perspective but look how are you gonna i that's the only one i would buy but obviously at the

right price it don't bang your head against the wall with these things i know like i mean you you can see like the kind of impact it has on a company like disney 100 it's really i don't know it's just for when looking there's easier there are easier investments to make yeah okay for example uh we don't own it anymore we have followed very close and we have owned it for a long time um the one i compare and we do this comparison when looking at any media type thing is would i rather own this stock say this like paramount global or would i rather own electronic arts which is not high growth we don't own it anymore that's what i said yeah we don't own anymore um but we still like the business uh i would love to own it at the right price

if like the moat there is so much better than a lot of these companies, they generate cash every year and I don't like, that's my hurdle right for those businesses, like I would much

rather go hunting in the video game space than these media companies or than, you know, the video entertainment companies, what do you think? I mean, I don't love anyone that's trying to compete on streaming that's kind of subscale basically anything other than netflix youtube's different but anything other than netflix i don't really want to try to figure that out because like i said it feels like uncertain there's investments where i think

you can get a similar return but there's not as much risk of the you know failing to adopt users With video games, I used to think, yeah, I just want to own the great publishers. But I'm starting to feel over the last few years that we've been investing in video games, the one thing I've learned is it's hard to invest in video games because they're very unpredictable. And maybe not on necessarily the- Except EA. Well, I don't know. If I told you in 2019 that FIFA, their largest franchise, is going to grow 10% at least every year for the next four years, and in the final year, it's going to grow 30% bookings, and cash flow is going to be down for the overall business, I would have been

very surprised. But those AAA titles, talent is so expensive, it's becoming more competitive because there are i think the building blocks for indie developers are making it so that you know other companies can compete for time spent you don't need the big you know huge developer teams now if you want to build a huge title like you know battlefield or call of duty or fifa yeah you're gonna i mean it's gonna be costly but you're competing for time spent not necessarily on a single game so i don't i mean and maybe that's just been bad management from ea or bad cost management but it feels like it's becoming more and more costly to maintain your position in the video game space

yeah but i also say that you could flip that and say it insulates people from the competition where none of the big tech companies have had they've all tried to make games and none of them have had success organically which i think is a great sign that there are moats here but yes it does come down to well the moat can be strong but at what price of the future cash flow are we paying it might have been lower than we thought i guess my forex my point is like yes okay forex could be affecting that in a short run but it is obviously a concern a lot of the cash flow these businesses haven't compounded at the rate that the same rate as bookings there has been some march and compression the other thing is okay you're yes it's really hard to compete with fifa

for the fifi users or all these games i mean no none none we're not talking sports titles that these people but yeah sure yeah but you're still competing with mobile titles you're still competing with anywhere else that people spend their time really if you know if there's less even on a lot especially in a live services world if they're spending less time on your game you're probably going to have less bookings so and i think i think even though it takes tons and tons of talent to build a game that's comparable to any of those huge titles you can build a fall guys quickly or you can build a i mean fortnight probably took some complexly uh what's the other one with like the cars and the soccer ball rocket league rocket

league these are like i think that was epic games but there's indie titles there's indie developers that can now compete a lot more effectively for time spent where they maybe wouldn't have been able to 10 years ago yeah yeah somewhat but i mean time spent on across all the publishers seems to be growing at least over the long term maybe not activision blizzard as they've had some struggles but ea always highlights that time spent is growing well it's a bummer that cash flow isn't ryan hates that so ryan is so peeved at ea management i mean it's insane it's it's honestly insane cash flows down over the last five years four years and

their major titles are much bigger like yeah and it's not they're not their CEO gets paid 30 million a year to do that yeah and they're not investing that much more into R&D R&D which again R&D is just game development R&D is up

but a lot of it is these SG&A expenses which probably can be or they or it's acquired like the acquired r&d headcount through the mobile acquisitions or random acquisitions but yeah i i don't know they started doing layoffs six percent layoff in march maybe there's something yeah i think they maybe realized that i think it was classic i mean we've talked about it constantly for the last year a lot of these companies realized that they overhired and

they didn't realize it until they overhired for her maybe like a full year and that really hurt margins across the board and speaking of which overhiring that happened at meta as well so why don't you talk about this next topic brian yeah this is fun i i titled it zuck versus musk cage match heating up but it's not the actual cage match so there was there was some talk i guess about them having a wrestling match, which I thought was kind of hilarious, but I don't think anything's come of it yet. However, the real cage match is Facebook versus Twitter. So for those that don't know, last week, Twitter, more likely Elon Musk, introduced some new rules that non-verified users can only look at 600 tweets a day. Verified users can look at 6,000.

600 tweets, if you spend a lot of time on Twitter, you can pile through 600 tweets pretty quick. I'm going to say, bragging, haven't hit my threshold. I haven't, but I imagine there are some days when I would have. When you would have, yeah, me too. It was apparently meant to prevent data scraping. So I guess something, and I'm not as familiar with this side of things, but apparently they have some API that they tried to raise prices on. And then to avoid some of the companies that were using the API to avoid it or the generative AI companies that were trying to scrape data off Twitter by just looking over a bunch of

different tweets, that's kind of the data scraping process. And they wanted to limit that or they wanted to push people to use the API or whatever, um which they raise the price on by limiting the amount of tweets someone can like look at in a day however it kind of in my opinion ruins the experience a little bit for like just the normal user what are your thoughts people get upset yeah yeah for sure what are your thoughts when you saw this announcement well i gotta be honest it was fourth of july weekend and uh what was this on saturday and i was prepping something uh i honestly didn't see it until like monday so but when i saw it yeah i mean it's a poor business decision for sure

they mentioned that it wouldn't affect the financials that much or like advertisers wouldn't there wouldn't be that many less advertising impressions but you're really angering your users which i don't think is smart right and especially right when as you're about to lead into instagram's going to launch a competitor right when your core power users are getting angry at you well something i found is all the other changes that have been made to twitter since elon stepped in haven't really affected me that much like it hasn't really changed my habits on twitter this one actually did because now i'm kind of spending i'm spending a little less time because i don't want to go on there and like you're worried about hitting the

threshold yeah hit my threshold then a whole bunch of stuff comes up later on i can't look at it or i gotta subscribe or whatever and it just feels like i you know like i don't want to waste it right now and so it's actually like it's limited the time that i've been on there now and i i think maybe that's so it's actually changed my actions and i'm just like a normal user i imagine some other people are in a similar boat where it's like they don't really want to hit the threshold maybe it's prohibiting them from wanting to hop on and spend as much time on there facebook comes out this week and says they've announced a new product called threads it says Threads offers a new separate space for real-time updates and public conversations.

Posts can be up to 500 characters long and include links, photos, and videos up to five minutes in length. Basically, it's very much a direct competitor to Twitter. Now, the bummer here is that you have to sign in with an Instagram account, which I kind of wish they didn't do that. So if you don't have an Instagram, you have to make one. Oh, we hate that. we hate you know yeah let's get those let's get those uh mau numbers up right that's literally

only reason i did this is to get juice juice user numbers yeah it's honestly a little frustrating just as someone that like if you're trying to capture the twitter audience you probably want to pick the people that aren't that you probably want to make it accessible to the people that aren't on instagram 100 and yeah twitter and reddit are kind of in a similar boat where there's of anonymous accounts and i i made the again we talk about this all the time for social stuff and any sort of media stuff where the relationship george thing from seinfeld explains so much of it you have to separate your you know your social whatever social george which is twitter and reddit and a lot of these anonymous accounts versus the relationship george which would be instagram the

thing you put on for your family friends apparently facebook was planning to launch this later but because of twitter's recent move they expedited that process and shipped the product a little earlier it's only a mobile app right now um really do you think yeah i looked online i kind of all it is just a qr code to download it on your phone um they know how to choose engagement cat these guys are good they're good do you think that moving this process forward speeding it up and i guess launching this product was a good move for facebook i think so for sure they're really they're good they're good at getting people to engage with these things they know how to diabolically get you stuck on these things so yes i would

look this is okay two things i think i was thinking about as i saw your notes here maybe we'll hit this one first okay twitter has never been run optimally i read the by the business biography on twitter up until i think it was published like 2014 2015 it was run terribly up until then and it's still got a bunch of users dorsey ran it while he was high on okay we don't need to say anything he was he was high on life uh obviously it's you know he's an interesting guy and he didn't seem to be really focused on improving things that mattered he was just focused on bitcoin musk buys it and we've all seen what happens in the last couple of months here obviously not optimal although the notes feature seems great unless they jam unless he makes his

notes about tesla products which i find frustrating um so i think this type of app which is the global communications written communications as its base easily has a chance to be much bigger why is it in as big as an instagram you know with over a billion users i don't understand why and it seems like it's because the ownership of twitter has been so poor the app doesn't work very well i mean it constantly doesn't work as well as any of the other big tech stuff so yeah i think that what do you think of that and i have another question uh or a topic i'd want to discuss regarding twitter's moat yeah i mean i've i've thought kind of all along like how do you get how do you monetize it properly it's not really a great

platform for ads in my opinion so i don't think you can that's a suck's gonna take that challenge and shove it right down your throat though probably maybe that's why they're trying to integrated with instagram which feels like a really good platform for it and it's frankly a threads is like kind of weirdly intermingled with instagram in some ways um but yeah we gotta we gotta stop that we gotta we gotta stop that i've always thought there was room for a subscription if you were able to add value in some ways maybe it's like a news bundle for twitter or something I mean, and, and he's been, he's been trying that with the subscription products. That's a good, we did it for the, the CCM account.

But with verification, you don't really get that much like added functionality. You get the ability to edit tweets. You can put some stuff in bold font. Apparently you get promoted to more people to follow you, which I guess technically we've seen an uptick. So, but that's something that's very hard to quantify. i mean you get to edit tweets for like 30 seconds and then come back and maybe do it but that's really not that useful i don't i find it annoying honestly that it waits 30 seconds to publish i just hit the send now thing i mean yeah the value there is not very strong but there could

be a subscription offering for sure but i doubt meta will do that yeah i don't know i mean i think twitter's botched it i don't think elon's really done that well i'm pretty sure the business is smaller than it was before he was there so on a revenue basis yeah what it feels like everything he's done has been to basically reduce costs restructure the cost the cost base and a lot of that was i think it was like 70 of the staff was laid off um they're not paying their google cloud bills well i think they weren't paying rent for a while google came in and kind of said hey uh they brought their they're paying now apparently oh all right um and now they've apparently this was to prevent having to pay for server space for a bunch of generative ai companies

i get that i don't i get that part that makes sense but i don't know it's like it kind of ruins the experience for normal users so yeah we'll do it it's a tough business to run probably shouldn't have acquired it i think he's got a whole bunch of debt holders that may end up on owning the company here at some point yeah you have a question here that says could this be the final nail in the coffin on twitter that comes up with my second discussion question here which is i would actually flip that around And if Twitter, as mismanaged as it is, survives this moat test from the best social media company in the world, then I think this thing is never going to die unless it literally

gets run so poorly that it just actually dies. Yeah. I mean, I still go to Twitter. It's still got to, I think the one reason I keep going back the most is it's got the network effect. There's so many users that are already there that it's the place I want to be. it's where we kind of have a literal network there where that's where we find guests and when we use it all the time i keep coming back even if the platform gets worse and worse i i have to keep

coming back so i think yeah they do still have a mo maybe there's the chance that honestly this incentivizes me to pay and i've always like i think just because it was free and now twitter's charging potentially to essentially use the app a lot people are going to be upset but it's no different than like old school media publications which is functionally what twitter kind of is today it's just real-time news should you i'm not opposed to having to pay for that kind of thing i was even thinking of paying for our personal accounts like pitching that i mean head on the backburner. It seems like it provides enough value for us. We're in a little bit

of a unique situation because it is one of our biggest distribution areas, the biggest distribution area for our top of funnel. It'll be interesting to see what happens. I think we need to revisit this in a couple of months because there's always the Twitter competitors that hop on. We talked about Substack Notes. I got caught in the

hype there. Nah, not going to do it. Let's see how big Twitter or Instagram threads are. Maybe Elon knows what he's doing. maybe this is a business that's impossible to kill i think it might be it just here's the thing they would be generating good amount of cash if he didn't alienate all the advertisers with this weird conspiracy theory stuff that he does right am i crazy no i think you're right we do have an interesting question here in the chat you see that one okay yeah yeah i was gonna hit that uh it says

do you still feel confident in your investment in spotify over the major music labels after your discussion with Sleepwell Capital. How do you think through that analysis? You want to take this? Sure. Yeah. I mean, it's a complicated industry. There's a lot of variables that are at play, but I say nothing has changed. And in fact, this is one where Spotify's, let's say, leverage as it grows is only going to grow over the labels each year. So as its users grow, as its engagement grows, it's only going to grow each year. And the relationship with labels is is much much better than it has been in the past they are currently i can say this with confidence just reading through the tea leaves of what ecco said on conference calls and on twitter

they are negotiating for better um take rates on their price increases which is why they hadn't raised prices yet as they're kind of probably finalizing those negotiations with all the labels they're adding on a ton of new valuable stuff i mean that you've probably seen this ryan as a spotify user as well they keep putting those concert stuff the tickets stuff the merch stuff in much more better places which is a way for these artists to earn a lot more money i mean they're providing way way more value to the artists these days than well maybe not more than the labels but the value spotify provides to the artists compared to five years ago is much higher and should grow over the next five years so that part of the uh dynamic of the spotify

business is not a concern for me i'm curious to hear your thoughts that there are concerns which is basically wasting money on uh on deals with megan markle but what are your thoughts um i do still feel confident that spotify will be a more important business in the music industry over the next five to ten years and i think it'll actually expand the music industry the way it has been over the last five to 10 years. I would also say that I don't really think about the investment in Spotify as should I own Spotify or the labels? Spotify is going to grow the entire music pie and streaming generally is going to grow the entire music pie. They finally surpassed their 2001 highs, I believe, in terms of industry music revenue. Not inflation adjusted, but yeah,

not only so yes i'm still confident that the business is sound and that the platform will be more important in five to ten years however i mean i'm a little i'm a little less excited on the investment side than i was maybe three or four months ago just because the stock's up a hundred percent in like the last year to date so although the business has shown they've had some really strong quarterly performance but obviously you know 100 There is some stuff, don't get me wrong, there's some stuff that pisses me off about the management team. They don't, maybe they just saw it as an investment period. They went full force into it and burned a lot of, wasted a lot of money.

But I guess that one of the things that irritates me is they always brag about, or one of the recent quarterly letters, they're like, we've been, we've generated cashflow for each of the last three years. it's negligible and yeah i mean at least they're not it's down if you include stock-based compensation yeah like sbc is just growing and they're like yeah right right cash flow has been flat for the last three years i'm like that's awesome okay also they have a working capital advantage now i think the working capital advantage is not something to scoff at but that is a reason they generate cashes and it's also a reason probably my biggest low life for for the labels well maybe not the biggest because there is that existential risk of the democratization of music distribution but the yeah the labels don't have they have a working

capital disadvantage because spotify holds the funds for 90 days i i do like that because it gives spotify a lot more optionality to invest um it's not a huge part of the business but yeah that cash flow stuff that brag about is annoying um but yeah the music stuff i don't think anything has really changed and in fact it should steadily rule in spotify's favor as they continue growing especially here here's what's interesting they're not going to make that much money on these emerging markets compared to north america um say like in india you know they get 200 million users or 300 million users if they really execute well over the next five years something like that i mean they're not going to be worth nearly as much as the 50 to 70 million users that are in

the united states but to the artists who are going to do a tour in india and get three or four live shows i mean that's an incredible amount of value for growing your global brand so i think the value they provide artists is only going to grow and really the way to track that is just are they continuing to grow subscribers and are they continuing to grow their total user base um yeah another comment basically around spotify's place in the competitive landscape it says kids use youtube not spotify kids have youtube accounts free spotify is horrible there are a lot of people that don't like spotify i get that but they've said that phil has five years and they just grow so i mean it's it's been apple's given away apple music basically for free

youtube basically giving away youtube music free amazon music basically giving away amazon music for free or at least a huge discount to what spotify offers and now spotify is over half a billion users versus like 150 million users four or five years ago so the business just continues to grow i don't i used to care a lot more about the competitive set but spotify they have a playbook for attracting users and converting them to subscribers and it works really well so no i'm not i'm not too concerned about that he also youtube is a big i mean youtube is the one competitor to watch though yeah i guess own own google too uh do you think nintendo is trading at or below fair value uh i would say yeah um i would reference you to one either that episode

we did with firm returns so again if you're still on thanks for joining uh we did we cover nintendo there we also did if you look back through our feed um we did a show on nintendo what was it three months ago maybe two months ago i would really talk about that we do stallone at full disclosure like we can't just say buy something because it's undervalued now i'd really look at our analysis on that we have a write-up again on the sub stack as well so look at that and we give all the risks in that as well because i i really hate saying look i think it's undervalued for blank blank blank because there are risks to these things and we always want to cover those as well but yeah i mean look at the show look at our holdings page yeah we own it i guess yeah i

mean there is and the stock i guess is up a little bit so yeah and i said on google too not actually i mean we own it so not investment advice but i will say i mean youtube youtube probably not going to have the hugest like the biggest impact on google's stock overall um a lot of a lot of good comments in here people saying they love the podcast yeah i love that episode i think spotify has a lot of leverage to pull and it's not necessarily winner take all if you're on spotify i've been on spotify for five years churns just continued to shrink and shrink for spotify i the pie is growing overall youtube can continue to expand and and i mean it's not explicitly a music offering youtube premium also provides the ad-free videos which i think is a really

compelling value and they provide youtube music for free basically on top of youtube premium and so i mean that i i think that is a pretty formidable competitor if you want to call them that but spotify has grown in the face of that since youtube premium has been offered so we got to concern me we got a comment from firm returns still use spotify for podcasts which i think does help when they consolidated that it really helps for the distribution perspective because youtube is still more of like a discovery thing which is great but for your actual feed of shows you follow spotify is a lot more helpful and cleaner he says still use spotify for podcasts just not sure they've made any money from me. Well, I know you listen to our show, so you made a tiny bit

amount, but on their automated ad network, just for full disclosure, for anyone that wants some anecdotal evidence from us, we use them on some of our episodes. We'll probably use it for this one. It's a great little backup plan. But if you look at the rates they pay us and the impressions they get versus our listens and versus how many ads we put per episode, which I think is four, it's only we only get ads on about what 10 to 20 percent of the actual slots that we have so there's a ton of room for improvement there and they need to make more progress yeah i don't think a lot of people understand necessarily the creator tools that spotify provides it's kind of especially i mean most people look at it as the consumer facing product

but they do really provide a lot of value to both podcast creators and and even artists as well as 100 yeah that's the only gripe i really i would really have right is that like look versus the ad slots that we give them they don't fill it nearly as much as we would like but they're still doing a hell of a lot better than apple podcasts though because that is 100 because the podcast hasn't changed in 10 years so yeah yeah that is that is 100 yeah i mean it's really a youtube versus Spotify racing the people that started in podcast maybe if you started listening to podcast you know seven years ago you probably used Apple because Spotify didn't have podcasts at that point but anyone knew I is anyone new to listening to podcasts gonna go to Spotify or gonna go to Apple

I doubt it and what's funny is that so many people use Apple devices so it's interesting how YouTube and Spotify just totally out executed them I mean Apple podcast still gets their fair share of listens just because of the valuable real estate says i've never heard an ad listening to your podcast that is yeah i don't think it's rolled out though to the uk or yeah only maybe a couple european markets so yeah see look there's yeah yeah there's a lot so let's hit let's hit another topic we can't talk about this all day we got 15 minutes left i'm sure people get bored of this i i know it's interesting but why don't we hit what about this amazon cost cutting okay you want to do that yeah good news yeah if anyone is interested in following the media stuff

which i know one of the people listening right now is i would definitely follow you don't need a bloomberg subscription for this a little little hack is that a lot of their newsletters are actually free um follow lucas shaw on twitter he's their media guy uh look at the screen time newsletter, get it every Sunday, or this week, I think it was after the fourth of July. But this week, he had a tweet, let me maybe I don't need to share it. He said, basically, Amazon CEO, which is Andy Jassy asked the Hollywood studio to provide detailed analysis of budgets for some of the most expensive

projects. In the newsletter here, it's about growing scrutiny on this stuff. Let's see if there's any fun fact here um okay so look here's kind of the thing he says that basically amazon spends a lot on shows similar to how someone might spend at a netflix or a hbo but they do not get nearly the engagement as netflix so for example the peripheral daisy jones and six dead ringers and the power which have you heard of any of these right no i haven't heard of them either they all cost each over 100 million dollars to produce and they only collectively charted in the nielsen top 10 in the united states for two weeks and essentially the nielsen top 10 is dominated by netflix so it seems like

amazon needs to realize that their strategy cannot just be to copy netflix and hbo here they need to go a different route maybe more sports maybe more you know live stuff cheaper stuff someone said they just need to turn themselves into the cbs of uh streaming you know a lot of football some some filler shows and realize they're that and they're not hbo it is a little concerning honestly that jesse's like hey looks like you're losing those hundreds of millions of dollars uh just checked do you mind explaining why like yeah were you unaware here to be fair when he took over there was there's a lot of divisions so still i mean come on like i if you if you've got a hundred million dollar cash

incinerator i know amazon's big but you might want to take a look at it and be like well is it worth the spend right yeah 100 and i get that it's a you know a very complicated job and you know you a lot of departments but it is your job and i don't know this kind of doesn't the headline does not uh put jessie in a great light yeah i mean it's better that he's doing this than not doing it but look i think it puts him in a good light because no one has talked about this until he got there because he was the he ran the only division at amazon that's consistently profitable amazon web services i think he's looking at these other divisions like hey like i ran this thing with a lot of employees and still made money why can't we make money at these other places oh wait we're

wasting a bunch of money on this astro robot like come on but it's it's hard uh the thing is they've talked a lot of big game on that but the the actual it's been a lot of bark no bite on the cost-cutting right i mean they have done a number of layoffs it just i wonder if there's anything here where it's like bezos's baby he wanted the influence he wanted to be a part of that kind of group of people of hollywood stars and jesse feels like he can't necessarily just like cut it off yeah they explicitly mentioned that in the second uh amazon business biography that covers like the 2013 to 20 say kind of middle of the pandemic period they explicitly said that people worried that that's all that bezos was looking for so maybe they do get worried about

that but i would hope eventually jassy will you know back up all this talk about rationalizing costs there's always these quotes in these articles about the the vp of the studio praised the teams for a good job and it's like well you're you're no you that's just a lie this is frankly a lie it's it's strange yeah i don't know if it's a distribution problem or a content problem my thought is it is not a distribution issue because prime video has tons of people that watch it or app so i think of it as free because i'm not i'm not really i'm paying for delivery everyone knew what the rings of power was yeah i just ran a bazillion ads but it was not very good i think was yeah i think it was a content issue i i think the i think you're right that the right decision

to move this studio forward is to go cbs of smart tvs see yeah you know content sports rights stuff like that i mean they do a good job of thursday night football yeah people don't like that because it's like at the bars and stuff they got to really figure that out for the the live audiences but yeah all right mls is a nightmare with apple tv i don't know if it's a single bar that has it that's right like you can't watch it anywhere except your actual house right yeah it's miserable but whatever yeah well that happens with friday night baseball for the local team when it's on apple tv plus people are like yeah baseball's all time bad yeah uh okay what about we got a couple minutes left do you want to hit

here's one that a chart let me just share it with you so you can see these charts it's about the booze economy it's quite interesting okay sharing is loading first one we got here america's brewery boom this is from derek thompson great follow on twitter maybe we'll be saying threads soon. The number of breweries in the US from 1976 to 2021, this is a chart. 1976, there was only 103. Then there was a boom in the 90s. I find it funny that these both booms coincide with stock market bubbles. And then there's a kind of flatlined. And then the last few years, it's boomed to over 9,000. Here's another chart. Total number of distilleries, basically the same thing.

Since 2001, it's boomed to over close to 1,500. Employment in all these is up a lot. Employment in distilleries. So, okay, the big takeaway is that there are more niche things out there or basically more investment in premium beer, wine, spirits in general. And that means like drinking is actually going down. so it seems like the premiumization of alcohol is going up i think that's actually bodes well as that being another investment category to target what do you think kind of toss it into

the cpg brands because those can be very very i mean i'm guessing you earn fantastic margins on these things if it's if it's sold at the right it's sold at the right price i mean not the wineries people that's different but like a good a good brand and spirits can be extremely profitable yeah but i also worry that this makes the alcohol category kind of uninvestable for public investors because most of the companies that are available are big beer manufacturers oh yeah you know the sam adams the anheuser-busch they i mean they own a lot of think they've started to buy up craft breweries and i bet the economics on a single craft brewer if it's successful is probably pretty good but it means less people are probably attracted to the

light beers right the what beers the light beers the i mean like the no the this shows that the it's i mean there wouldn't be tenfold in distilleries and breweries if it was just going to more lighter beers. Yeah. I'm saying like more people are moving towards these like craft brewers. Oh, okay. Okay. I thought you said the opposite. Okay. Yeah. Yeah. Yeah. So I don't know. Doesn't it kind of make it harder to invest in this as a public market investor? Well, I would guess, yeah, not for those ones, but these premium brands that could be compounders and see steady growth and have really strong pricing power, especially in the spirits category i guess maybe they're not actually too many that are public but

seems like an interesting investment idea no it feels like if craft brewery is becoming more and more competitive every year we've seen the growth in the different craft brewers we're in seattle and there isn't like an absurd amount of just i think that's everywhere i mean it's everywhere yeah i mean look at that chart um wouldn't it doesn't Doesn't it kind of drive you away from this area? Doesn't it kind of make you not want to be there as an investor? Well, maybe not the breweries, but I'm saying that, like, if you have a good brand in spirits, spirits is probably number one.

Wine's tough because a lot of people just do it as pet projects. But beer is probably in the middle there. If you have a good brand, I mean, it's no different than the monster energy space. I mean, energy drinks are hyper competitive, but when that good brand takes hold and has a good marketing strategy and has good pricing power because people attach to it. then I think there's opportunity. And there's been some really, really good growth in spirits from some certain brands,

which I think is super interesting. Now, Diageo, or however you pronounce that. Diageo. Diageo, yeah. I never could say that right. Seems to buy up a lot of these things and maybe that's the way to invest in it. But I think spirits is quite interesting

because again, it's not winner takes all, but there's lots of pricing power in premium spirits. Yeah, I guess it could be. off here my thought here is the overall alcohol number of people consuming alcohol or alcohol consumption is declining yeah but the premiumization that's what these charts show premiumization is going up so people are willing to they're drinking less but they're willing to pay more for what when they actually have them because there's no way that employment would fourfold all because of that bud light ad i mean that just helped medello but that's

interesting medello's yeah i guess number one if anyone doesn't know we have a final question here thoughts on alibaba and china overall i can answer those quickly we don't invest in china uh we play now yeah i mean it gets worse every every year i mean we play we like to play we hope simpler games doesn't mean we're going to make money than harder games i think investing in china is just bashing your head against the wall there's a hundred other countries i can invest in that have better rules of law the yeah i mean that was i think one of our early investing takes that ended up aging well we had maybe a few but we had a lot that aged poorly but that one aged well we we thought it was too complicated we thought there were some rules that made it

tough to be an investor we avoided it and i think we've been better off because of it yeah it's just it's like they're gonna look cheap just the china discount doesn't turn into a china premium that's not like it's not a discount if it always trades at a discount do you think they're going to be more favorable to businesses in what world does that remember that dcf we saw where it was like i did my new alibaba dcf and it like cash flow every single year and then it was like fee paid to china government all their cash flow yeah oh yeah you can just get fined or just pay it all back because it's you know everything you earn is for the government makes it kind of tough yeah or they have the right to do whatever

they want um but yeah it's okay here's the best stat that i think just shows it the stock market returns for the shanghai index have been basically like really bad it's like up 50 since the 90s versus the s p 500 total return of like a thousand percent cumulative but china's gdp has grown at a much better rate than their stock market returns that either tells you one that they're lying about their gdp numbers which there's a lot of evidence they are or two two, the domestic product, the production of society is not going to the business owners. Why would I invest in a society where as a stockholder, you want a place where that favors business owners and rightly or wrongly, the US favors business owners.

Preston Pyshko, It may have benefited society. That's more of like a political question. Luke Gromen, That's personal. Preston Pyshko, Yeah, but as an investor. Luke Gromen, But we are investing. We are public company investors who have not been rewarded. Why should that change? All right.

Well, that's a great way to end it. Thank you, everyone, for tuning in. Some fantastic questions today. And you can listen to these, basically, the few people that tune in live, you can watch the replays on YouTube or listen on Sunday mornings on your favorite podcast player of choice. We are not financial advisors. Anything we say on the show is not formal advice or recommendation.

where general partners at Arch Capital and clients may hold securities discussed in this podcast. Thank you, everyone, again, and we'll see you next week.