Chit Chat Stocks - Netflix Stock and The End of The Streaming Wars (Ticker: NFLX)

Episode Date: January 31, 2024

On this episode of Chit Chat Stocks, we welcome on Alex Morris from the TSOH Investing Research Service and Francisco Olivera from Arevilo Capital Management to discuss: - Netflix's Q4 earnings - It's foray into sports entertainment with the WWE deal - The financial implications of the password-sharing crackdown and the new advertising tier - The company's goals in video games - The stock's valuation today + more You can find more of their work here: - https://twitter.com/TSOH_Investing - https://twitter.com/FrancoOlivera ***************************************************** Subscribe to our YouTube channel: https://www.youtube.com/@ChitChatMoney/featured  Follow us on Twitter/X: https://twitter.com/chitchatmoney  Follow us on Substack: https://chitchatmoney.substack.com/  ********************************************************************* Chit Chat Money is brought to you by Public.com*. Sign up for a high-yield cash account today: ⁠https://public.com/chitchatmoney⁠ *A High-Yield Cash Account is a secondary brokerage account with Public Investing. Funds from this account are automatically deposited into partner banks where they earn a variable interest and are eligible for FDIC insurance. Neither Public Investing nor any of its affiliates is a bank. US only. Learn more at ⁠https://public.com/disclosures/high-yield-account⁠ ********************************************************************* Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

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found in the podcast description. High yield cash accounts are available for U.S. members only. Okay. Welcome in everyone. This is Chit Chat Money, soon to be Chit Chat Stocks. We recorded this and I think we said Chit Chat Money previously as we're recording the intro later as we're changing the name right around the time this comes out. So next episode, it's definitely going to be called Chit Chat Stocks, but either way, my name is Brett Schaefer. I'm joined as always, by Ryan Henderson. And today we have a fantastic long-form discussion with Alex Morris from the TSOH Investing Research Service and Francisco Oliveira from Arvillo Capital Management talking Netflix and the state of the streaming wars. So essentially, this is what we did.

We waited until Netflix released their Q4 earnings. Luckily, it was a pretty notable one. very good report by them and then we talked about the report we talked about their long-term plans and we talked about how they're going to affect potentially everything within the streaming market and the entertainment and media industry we talked advertising tiers we talked sports we talked even a little bit on their video game ambitions and then we talked about a lot of the stuff and how they've expanded their competitive advantage over the last few years we're going to get right into it ryan anything to add there what was your favorite part of this netflix discussion i think my favorite part is the first question we ask which is are the streaming wars over has netflix

won and uh don't spoil it i won't spoil it make everyone listen i appreciated the answer and i think it's uh it's it's timely considering that we have had this discussion with them in the past during the streaming wars and over the last three years we've talked about it a lot with them and kind of how it's going to shake out and it feels like we're getting kind of through the other side so uh it's a fun discussion for sure uh but with that anything else to add there nope i think that's a great way to tease this episode without further ado here's our discussion on netflix 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 anything discussed on chit chat money by ryan brett or any other podcast guest is not formal advice or recommendation now please enjoy this episode okay welcome in everyone today we have two recurring guests on the show it is francisco olivera from our velo capital management and alex morris from tsoh investing research go check out either of those uh websites or find them on twitter if you want more you know information on the stuff that they do professionally but today we were talking i think it's been a couple weeks now we were messaging back and forth on what to do on a show for media because you guys follow the space very well you're probably i would say one of the foremost experts the analysts in

the space and we kind of honed in on focusing on netflix and i think it was a good choice because this was a very interesting report uh for all i think the consensus was or is that they absolutely crushed it and they are continuing to separate themselves from the competition. So we're going to, for context for the listeners, focus on the Netflix earnings report, focus on their broad strategy, and then how it relates to the streaming wars and the media industry in general. So my first question, and I can direct it at either one of you guys. I think you guys can choose who goes first has netflix won the streaming wars are there any competitors left go ahead francisco you know this better than i do

no uh i mean the obvious answer is yes um i think there was a period of time late 2019 apple tv plus launch disney plus launch you know espn plus maybe not in the same war as netflix but that launched a year before you know you get you got hbo got more aggressive you had to launch a peacock paramount plus um probably a couple other small ones um hulu got more aggressive bundle with disney plus and content budgets for across the board went through the roof and at the same time they stopped licensing for the most part uh original content and library to to netflix and that also happened at the same time that right before that pandemic accelerated with the pandemic you know cost of capital was lower

you know the the prospects of us staying at at home for extended periods of time or or these are perceptions very very high um the traditional studios also you know there's no hardly any movie theater attendance in 2020 and 2021 wasn't dramatically better um so many of that product went straight to to streaming or very very very quickly to streaming so you had the the biggest face-off that you've had in this industry ever when netflix mostly had it for themselves and that kind of culminated in in early 2022 when they had two earnings reports that were horrific um from a guidance perspective or from a growth prospect perspective and subscriber growth prospect perspective and you know netflix had to pivot strongly and and they've had they you know

started an ad tier cracked down on password sharing um they cut costs they they basically froze content costs and kind of hung in there and executed and now everybody else uh is realizing that this business is a lot tougher um that they can't lose money forever um and you know many of these streamers have begun to cut costs themselves and start licensing to netflix and you're seeing their their strength and power coming through so i think what's you know the reaction has been positive but i think it's it's been almost two years of that netflix had to kind of you know start to execute and focus and and move in the period that they themselves called a crisis uh two years ago yeah and we for context for the listeners or just a little tease we will be

talking the foray into sports or as the ceo calls it sports entertainment as he was trying to be very clear on on the call we're going to talk the advertising tier and we are going to talk the gaming the video game stuff that they really were are talking about in the q4 letter but i want to ask you alex you do a great chart you post on uh twitter x whatever we're calling it every quarter with the Nielsen market share from streaming. It seems like Netflix and YouTube are the big ones there. But I guess in related to the streaming wars question, is there anyone that Netflix needs to be worried about from these direct competitors? Or is it just YouTube? Or is the competitive field just really are they just pulling away here as we say you're in 2024?

Well, the interesting thing is, and then first of all, thanks for having us on again. The interesting thing from just looking at the Nielsen data is that the services that have made the most significant strides over the past year or so have been the fast services, the free ad supported, you know, typically channels. There's some, there's some video on demand, but they have channel components to them as well. So the Roku channels, the 2Vs and the Plutos of the world, they've made a decent amount of progress over the past year or so in terms of engagement share. It also coincides with, maybe fortuitously for something like Netflix, with the move into these ad-supported tiers and these lower-priced offerings to do a better job of segmenting the base. But in terms of the legacy players, you know, they've all, generally speaking, been stuck at similar levels to where they've been for some time. And just for numbers for people who haven't seen the data, if you're looking at a Paramount+, a Peacock, a Max, that's right around the 1% of US TV time for each of those services. I believe Disney Plus is closer to 2%.

And then you have, you know, the Hulu's and the Amazon Prime videos, which are more in the 3, 3.5% range, I believe. And then finally, you have Netflix and YouTube, which are up around at least 7, 8, 9% of moving around over time. So yeah, they've really, you know, kind of maintained that clear leadership position over the past, call it 12, 18, 24 months when the industry went through probably its most intense period. And the other thing I'd add to Francisco's answer is, you know, I think it's really important in my mind. And we talked about this last time that I was on Checkout Money on Netflix. It's really important to understand this business from a regional perspective. And I think what they've done in UCAN over the past year or two, particularly on password sharing and the impact that's had on volumes and pricing, is just such a great uh example of how the results that netflix is delivering today are are the output of decisions that have been that they've been making for the past five to ten years and they they they've played this very intelligently and always with a long-term vision and

you know the the alternative route of trying to compress what they did over 10 or 15 years into a period of two to three years has proven to be very very difficult and it speaks to speaks to disruption and you know how important it is to respond quickly and intelligently when your when your business is potentially at risk so this has been a great case study on on how change can impact the ministry okay now there's been a lot of changes i guess you mentioned some of them but what have been the important changes to netflix's business model since the beginning of 2020 um are you guys mentioned something what do you think are the most important things that they've changed about this business since 2020 that's allowed them to separate from

as you mentioned the the hulus the amazon primes of the world look i think there's some things that changed pretty um pretty dramatically but i think others um i go back to that jeff bezos quote that you know when you're holding your breath and you're underwater it's basically you versus the competition you just better make sure you got the bigger lungs um it's another way of seeing saying that you know when you you're in an intensely competitive environment just make sure you can survive right that period of time because it's not going to last forever um so so staying with that right they had netflix had still dramatically a bigger global scale than all the competition they had dramatically bigger

content budgets and a team that's been in executing this for for well over well for well over a decade and you know even you include the dvd days you know well over two decades so they had a very very strong hand even though subscriber numbers had gone negative and revenue growth had just basically like gone down to like one percent um so they just needed to hang in there in in many ways that to keep producing good content at scale um and eventually you know with hits with the content like the smaller players just couldn't survive the numbers wouldn't wouldn't work because if you're every year 14 billion a year 14 billion a year 14 billion a year and your competitors really can't make a business out of it with with 6 billion in content spend

um you're just going to you're just gonna you're just gonna you know outlast them so i think there's an aspect of that but but also very very importantly they took a good hard look at their business model and they said like look some of the things that we thought in the past we have to change and the biggest example of this is advertising right they were always like no way never advertising never advertising they were very content with you know as they say asking a little bit from their members every once in a while because they've increased the value to them with more content and as i look back and it's obviously very very obvious in hindsight um but you can't raise prices forever um on this type of content and you you you have to start to assume that like

hey they can charge 30 a month 40 a month etc way down the road and that just becomes way way too difficult for if you want the type of global scale that we're talking about with 500 million plus subs well they realize that when when you have an advertising tier you can attract a lot of people right offer a very low arpu a low very low price but their average revenue per user can match that of the ad free to yours right because you got the the advertising coming in and essentially that means that you have infinite pricing power as the the trade desk uh ceo likes to say right because you can get more and more and more engaged in more and more and more subs more and more ad revenue right and that you know um comes back to your art group and then the other

aspect is that like look the password sharing was way too prevalent and they used you know they did a lot of testing introduced new tech and and they cracked down on that fairly hard and anecdotally just i know a lot of people that just uh have been booted because of password sharing and they uh and they become subscribers themselves and then when you become a subscriber yourself right then you and you see the ad to your plan it's just a very attractive option not for everybody when they've been used to for many years not seeing ads and advertising as netflix point out in the call just opens up the the avenue for you know telecom providers bundling your service with other streaming subscriptions offering more deals and promotions because you can take that hit on

on the sticker price but make it up on the advertising revenue that's something hulu has done for many years um so you you you offer you know more price ranges you bring in advertising it's a very new muscle right um that they had to build they built a uh the password crackdown um technology and they say it was a huge contributor of the subscriber growth this past quarter which is i think the best q4 ever with i think they added over 13 million subscribers but again like just hunker down you know have bigger lungs and they basically froze their content spent but they kept it very high they didn't start slashing it right and now revenue has re-accelerated the competition has suffered has suffered they've got an opportunity to license

content from others um and now they're seeing double-digit revenue growth again accelerating and they have the opportunity to increase content spend again to the extent that they want to. So just a lot of little things, right? But importantly, you know, the scale advantage that they had, right, was something that they continued to use to their advantage. I know it. Yeah, just to put the numbers on that real quick

because I think it's a fantastic point in terms of bigger lungs and the scale advantage. They came into, they ended 2019, so right before the pandemic. Run rate revenues at Netflix were roughly $22 billion a year. As we look to the Q124 guidance, that number is now about $37 billion a year. And if you look at the main competitors in the space, they've been very aggressively invested to try to scale Disney, Max, Peacock, Paramount. Their collective D2C revenues are roughly in that same ballpark. So, you know, Netflix versus any individual player has continued to expand their scale advantage. And, you know, they've done it in a way. Again, it's funny to think that the narrative for a long time on Netflix was one of just pushing sub growth and not being particularly concerned about building a business. And it's a lappable comment when you actually look at the ARPU composition of their book, again, on a regional basis, and you compare that to where basically every other major player is at today. It's just lappable. I mean, they've been truly building a business for a long period of time in terms of pricing. And that's something they've certainly hit the gas on over the past five or so years with paid sharing being one notable example.

But they have been building a business for a long time. And, you know, it's the legacy players who are now seeing just how difficult that is. Again, when you try to compress it into a two to three year window and have to sustain many billions of dollars of losses to get to somewhere that may or may not be that attractive of a business at the end of the day. You mentioned, well, you mentioned the ad supported tier earlier. And then, Francisco, you mentioned how it's a new muscle they're kind of trying to have to flex.

And I remember reading in their Q4 press release, they talked about continuing to scale their ad business as kind of a big objective. Do you think there's any world in which they end up offering a free ad supported tier? Or is it kind of dependent on how effective their advertising revenue can really be? I mean, I don't think it's impossible, but I don't see it happening soon either. um i think if if they built like just you know every year they have a lot of original shows that are that are effectively owned by them or very very very long you know you know exclusive deals um if they accumulate you know 10 years past uh five years past you accumulate a lot of content and maybe like you know season one of a show released in 2015 or whatever um you could add

in that type of of tier um but i i think i think you started to entertain that idea if your scale is on subscribers it's just dramatically higher than it is today and your advertising revenue is at a point where it's several billions you're reporting in sec filings and and and maybe you're just creating a new customer acquisition vehicle um so it's not impossible i wouldn't rule it out i just don't think it's in in the near future but i could be wrong yeah i think this is i think it's somewhat tangentially related and you know i i think it speaks to netflix again with long-term focus and and pricing the product relative to the value that they provide to the customers and they're being open to new models but i think again anecdotally as

someone who has done this a number of times now if you go to cancel peacock or if you go to cancel paramount plus they'll they'll dangle offers in front of you for you know 70 80 off for a period of three months and i again i think in terms of managing these businesses for the long term and with the right with the right mindset i just think it's one clear example again of where where netflix is again not to say that they would never have a three ad supported tier but but i think they appreciate the value that they provide and they are willing to be aggressive when it's justified in terms of asking for more pricing so i i'll be surprised if they go direction just because they appreciate that the value out of their offering is head and shoulders above you

know some of the fast services as an example okay as we wrap up this advertising segment i have one more just to connect it back to the stock and kind of the potential, I don't know, how big can the advertising segment get? They talked about, I think, and you guys can correct me if I'm wrong on the years here, 2024, advertising revenue still won't be relevant. 2025, their goal is to actually have it contribute meaningfully to revenue growth. My question is, given the global scale, given their 10 years, maybe five years now of huge investments into markets such as Latin America, South Korea, even India, how big can the advertising revenue get? Are we talking 10, $20 billion in revenue eventually? Or is that maybe a bit too ambitious for a business like this?

I'll give a cop-out answer before Francisco goes. I think the big variable that's going to impact this over the next five to 10 years is how they really think about sports and you know i wrote about this uh yesterday one key detail i thought from the from the wwe deal which we're going to talk about was the decision to there are not going to be traditional ad slots according to reporting from cndc's out cndc's alex sherman they're not going to be traditional ad slots on the wwe raw program and i think it's a very interesting decision and it makes me that that's for the non-ad supported customers to be clear the s5 tier um i think it's an interesting decision and i can appreciate why they why they would choose to do that given their basically historic

branding and point of differentiation from from linear television um that's going to be much harder to stick to i think over time if they truly want to get into a broader sports portfolio so i think answering that question is is it's pretty darn important in terms of just figuring out what what type of content they're going to have but then also how much how much ad revenue they'll derive over time yeah i think i think my my quick answer is like you know the potential is you know extremely i wouldn't be shocked if we're looking back like down the road and and they actually can get to 10 10 billion uh but to answer that question i mean they really have to increase the penetration of the the advertising subscribers as a percentage of all of their subscribers right

so right now i mean i i would guess that the advertising subscribers is like maybe definitely under 10 maybe even under five percent of subscribers depending how you know they have a i think some report out there 20 million 20 million uh monthly active users on the ad tier and there's more users one one user per account um just depending how you're you're looking at that so i i think some of these other services like hulu that's the billions in ads even even peacock that's growing as uh well right i think it's like two-thirds of their subscribers are probably in the ad tier and that's where you can get a real muscle because you get you know scale the number of users and and the level of engagement so they need to focus on

penetrating that and i think they start to signal the last few quarters that that that that is their goal and one of the ways we're going to do it is that they'll probably be aggressive in raising prices on on the ad free tier um in a way that they as they went through this period of the streaming wars right they they kind of stopped increasing prices as much now they're going to return to they had the password crackdown they had the ad tier i'm going to return to increasing prices a little bit more aggressively it's like hey if you don't want to pay just to say a number 18 19 20 and there's a 699 option and i think you're going to be able to migrate people and acquire more people and i think 40 of subscribers um 40 of gross has is it 30 or 40 of gross as

alex that they mentioned last quarter that that's that in the ad tier markets are getting the advertising tier 40 40 40 and i think that number was 30 was 20 and so they've been scaling that penetration so that's what they got to be focused on so every time you see like hey price increase in the u.s you know um i think that's another sign that they're trying to push more and more they removed the basic tier which was i think 9.99 they're starting to move that in many markets so they're very very focused on this business being big and working and additionally to alex's point which i think was a great point on on how they get into sports um i think that's going to be a big part of it because you know if you have wwe programming and they got the rights now

and you got coca-cola to you know let's say coca-cola really wants to advertise for for for netflix on wwe globally right big global brand um netflix is going to sound like yeah fantastic we'll give you premium spots or whatever but you also got to advertise on on our our normal on squid games on other originals that they're releasing right etc um and that's you know that's a trick that disney has done traditionally like hey do you on monday night football and you gotta give me uh inventory for abc and fx etc netflix is going to start playing that game and i think it's really helpful to have properties that are captive audience so the more you see them getting to live and things like that that can work well for

advertising i think the more it bodes well so but yeah on the point that you said earlier on the on a different muscle it's just you know acquiring advertisers is just one muscle the technology you know is another the customer acquisition you know is another ad format is another so it's just a completely new new business and you know something rec peter says institutional knowledge and expertise that they've had to build you know and you know basically over two years and And it's been pretty impressive to see how they started to build. It's not material yet, but, you know, I'm sure like over the next few, you know, probably quarters and maybe a year or year and a half or so, we'll start to get real hard numbers reported by the company. Yeah, the only other thing I'd add is I think, I think aspiring to build a very large ad business is fine.

But I also think it's important to keep the eye on the ball of just building a large business overall, right? And I mean that in terms of the user experience, the product, and maybe this is a little bit of a too much of a peer view of Netflix back in the day. But the product experience when there's no ads is, I think, the vast majority of people would agree is better than when there are ads. And when you introduce the ad component in terms of not just the quality of the product, but the value equation, you start tinkering with things like engagement. And my point in saying that is if Hulu or Peacock, whoever it is, has 75% of their customers on the ad tier versus 25% on the subscription tier with no ads, I personally would hope that Netflix would have a subscription mix that's quite a bit higher and being representative of the fact that it is the default service for people and they're willing to pay the full price in order to spend more time with that service. as opposed to some of these secondary and tertiary products that they may use, but they're not going to be where they start the experience every night. Because I think that is a hugely important part of Netflix's business model over time.

We've alluded to the sports rights a little bit throughout the show. So why don't we talk about that? Netflix just announced sort of a pretty big deal, it seems like, with the WWE licensing agreement. can you guys maybe go through some of the actual terms here so like what what does the deal look like why do you think they did it and how will it impact the other media players do you want to take that or do you want me to take it why don't you start on deal terms because you're the tko expert here so deal terms is um you think about wwe they have two weekly properties right smackdown on fridays and bra on mondays in addition they have the premium

shows like royal rumble wrestlemania that there's another package and they call the ple's premium live events domestically the smackdown rights they renewed with usa network it used to be on fox and raw they just renewed with with netflix right the ple's are with peacock so wrestlemania is on peacock so that's that's a big component of it they renewed raw with netflix but they they also did a deal with netflix as part of it that for the vast majority of global markets not quite all of them and not immediately because some of these deals expire over time netflix is going to acquire the rights to raw smackdown and the ple's so the wrestlemania so they're basically going to have all all of wwe content including original programs documentaries

um it's going to be added to netflix you know internationally and and domestically they're going to have raw so it's a 10-year deal worth over five billion dollars so call it on average 500 million per year but netflix can opt out after five years at year five or they can decide to extend the deal for another 10 years so potentially you're looking at a situation where netflix has you know wwe raw domestically and most of or based practically all the wwe content abroad um for for two decades so it's it's a pretty flexible and advantageous deal for netflix on the economics but if it works out it's a very very good deal for raw because you're exposing the wwe content is the the bread and butter is is a younger audience right um the younger audience

is not watching linear programming and it's declining with adults. It's declining way even faster or even more dramatically with young kids. And so you're going to open the audience and the younger audience, the tech savvy audience, the growing demographic of WWE fans on Netflix and you're going to give this huge exposure.

they've done this indirectly or directly i guess you could say with other sports leagues with most famously formula one how documentary just exploded the growth of the sport well they have an opportunity now to explode the growth of wwe by giving it you know the biggest streaming platform in in the world um and i think wwe management said like look we're we're we can talk about some of the economic terms but we're basically not getting the best deal on a dollar basis it's a good deal on a dollar basis but it's not the best deal on a dollar basis but we're going to take that because we are going to to have the biggest audience of streaming in the world and most households or many many households check netflix daily

or weekly and they're going to be exposed to wwe so it's a it's a big opportunity to expand the sport um the sport entertainment i guess it's it's scripted um so those are the the rough terms of of the deal it's scripted no way all right uh yeah uh alex do you want to maybe talk about any opinion on why they did this specific deal or how it could impact other media players i guess one thing that comes to mind is that in the united states the sports licensing stuff for the traditional cable bundle is the number one thing that keeps people around does adding that you know more and more sports or

sports entertainment as you might call wwe to the streaming platforms does that potentially accelerate the decline of the cable bundle that's kind of what's in my mind when talking about netflix this deal and any other future deals with them well if the legacy us media companies are worried about that then they they should probably stop doing it themselves they're doing a fairly good job at that uh currently on their own um and just to put that in numbers i mean comcast reported this morning which i believe is still the largest mvpd i could be wrong on that but that they've lost past five years they've lost eight million pay tv customers and And that was it. So it's down 35 percent over the past five years.

And the majority of that decline has come in the past 24 months. And, you know, the reason why is it's due to price. It's due to competition, in my opinion, a.k.a. you know, a service like Netflix, which has been eating their lunch for a long time. I looked at, you know, I looked yesterday at Comedy Central's programming guide for the day. It was like nine hours of Seinfeld. And obviously that has ads and you don't get to pick what episode you're watching. And then, you know, it went to some other show like Netflix for the next nine hours.

I mean, it's just they completely the value is obviously not there anymore for anything that's not news or sports. And then when you look at sports specifically, you can look at what Paramount's done with their NFL rights or what Peacock has done with their NFL rights. Most notably recently was was the wildcard game for the AFC wildcard game, I believe. So, yeah, they've done a they've done a fairly good job of that on their own. so they don't even really need netflix to help um you know more broadly on the on the deal with the wwe i think it's i think it is very the content is particularly unique in terms of being sports entertainment and i don't i think that distinction is meaningful in my mind relative to other properties like nba and season tournament or something um i think the other major point from

the conference call as uh as said by co-ceo ted sarandos was in terms of the value that they brought to the table for the wwe in terms of global reach and you know i i just think it's a very important comment because it speaks to management's understanding that they're only going to play in these things when in my opinion they're only going to play in these things when they can truly add something incremental to the equation from what exists currently and and again in many cases that probably will not apply and the deal value here was also smaller so it made a nice place to nice place to start out but i think it's a deal that makes a ton of sense for both sides and um i again i think tko really deserves a lot of credit for going out and doing

this because i think in hindsight it will prove to be a very smart deal even though it may not look that way in terms of you know maximizing top dollar uh tomorrow okay i want now since this is the podcast i want to do something a little more speculative do you guys think one of the big like well why don't we just call it the big three or really at the end of the day it might even be the big two sports uh leagues in the united states nfl nba and then to a lesser extent you have major league baseball and national hockey league what or excuse me do you think any of those games playoff games whatever will be on netflix at any point within the next five to six years or how about we say by 2030

um i'd say there's a good chance that you'll have some um but and i think i think the the one that makes the most sense in my opinion is is at least like a slate of games uh from the nba to netflix and there's been reports that they're interested or at least in preliminary interest in the in-season tournament the reason is because the nba is is the most global out of all those leagues um and you can package something that is impactful and meaningful but it's not necessarily like your average kind of um you know weekly game that maybe is not as valuable um so i think i think that's what makes sense because if you look at if you look at wwe right it's it's it's global it's weekly it's live opens opportunities for

advertising potentially opens opportunities for merchandising and video games um there is a big on-demand audience to wwe as well um not necessarily something that like hey an nfl game ends you know you're if you unless you're a super freaker especially an nba game you're not going to want to re-watch it right especially when there's proliferation of highlights everywhere across social media youtube etc um but wwe people do um watch it on demand and catch up right i couldn't necessarily be in my house uh from monday from eight to you know seven to ten or whatever when raw is on but but i'll watch it in the morning the afternoon the next day whatever so wwe touches a lot of those boxes um and the nba that also touches many of those boxes not

quite as much um but particularly on the global nature of it and creating a an event around season tournament you're not talking about the nfl um yes it's expanding globally but um the interest is not quite there to to that degree they could definitely help expand the you know global audience maybe something more interesting is an nfl deal outside the u.s quite frankly for netflix um because you're not necessarily going to expand the reach of the nfl domestically um in any big way like people go out of their way to find the nfl and nfl you know your local nfl is always going to be available for free on on over over a broadcast channel and the nfl is very religious on keeping that in netflix i'm not sure we want to compromise on on that point um

And as you get down to the other leagues, like MLB and NHL, they just become ultra, ultra local or very, very local. So, you know, you don't necessarily like, and many of those teams have their local rights to themselves or tied to RSN. It's a bit of a mess. um so i i think for for leagues again global nature and marquee events um i think it makes a lot of sense for netflix and you know there was a talks that before they were you know interested in potentially surfing interested in formula one you know now wwe i think something like all future reported boxing these are things that have global appeal um and more broad appeal and something that they could help grow significantly um and take advantage of so

so long answer to your question i think out of those major leagues i think i would put the odds higher on the nba um but the other the other leagues like never say never there's always ways to you know carve out these deals but i think it's it's a it's a longer shot unless unless netflix starts to have a very very very big uh portfolio of rights oh yeah sorry one fall up there the nba is supposed to renegotiate or excuse me not renegotiate do its new deal this year correct yes yes okay all right so we could see some news on that we could see some news i think the i think the exclusivity there's a exclusivity period with espn and warner brothers um and that i think it's their spec i mean i don't know the exact

day might be out there i think that might end in april or you know the middle of the year so i think you'll see things heat up you know towards the end of the nba season potentially the offseason to see you know second half of middle or second half of this year to see where the bids come um so and and they've said again that they're going to carve out the in-season tournament and potentially carve it out globally um so we will we should we should get some news there and by the way just one more quick one more quick thing um there is interest from amazon other streamers i think amazon acquired some nba rights in some markets but and i followed the situation closely with the wwe a lot of people thought amazon was the front runner for the wwe rights

um netflix ended up getting them so it was kind of out of left field in many ways and um you know i think now people have to be a little bit more respectful if they're involved including other streamers not just not just your traditional media players yeah i can't remember if i mentioned it already i may have but the surrenders quote on the call that he would not look at this as a as a change in their sports strategy and it ties in well to the to the nba uh the new rights deals coming up here fairly soon so to the extent that they do plan on playing there that would he's he's going he's gonna have some questions about what he said three to six months ago uh very quickly so i'd be i really think this statement and it's similar to what they said

have been saying on acquisitions right i think they they pretty clearly said for the past six twelve months whatever it is that they're not interested in acquiring anything that's not a good strategic fit with their business and this quarter they came out for the first time and very directly said we don't want to acquire linear chance and you know i think sometimes what they say is is um is put through a filter of like trying to figure out what they're really saying And I think sometimes they're really just saying what they're saying. And I think there's certain things like, I think Francisco framed it well, they will be interested in things that probably have global appeal and in ways where they can add value. And, you know, something like US NFL rights is, in my opinion, not where that's going to happen. what what would sports sports rights look like within the service do you think it would just be a part of the existing kind of uh premium subscription tier do you think it's something

i believe i think it was either francisco or alex that mentioned that they're not going to do traditional ads within the wwe service would if they're doing something with the nba would that pivot would that switch or do you think it would replicate kind of this wwe model so that's a that's i think that's the problem is the question right this is what's happening now i mean you can look at zazlon's the perfect example who who railed against the model of renting sports rights for many many years when he was at discovery now that he's in charge of wbd and has a huge book of sports rights he's he's forced to navigate this question of what do we do with this in an environment where the largest paid tv distributor just saw its customer base

decline by 35 percent in five years and that pays our bills and the cost is rising how do we transition from a to b and you know i think what they've announced recently with with i believe they're still calling it br sports i know they changed the pnt branding and internationally but i think it's still br sports but there's going to be an add-on tier onto max after they get through a little bit of a free trial period here to get people to hopefully start using the product i haven't heard too much chatter in terms of people actually doing that. But, you know, that it's not an offensive decision. It's purely defensive. And it's purely trying to figure out how to sustain these economics. And the answer to that question is going to be very, very difficult. And by the

way, ESPN and ESPN Plus have a similar issue here, and they've come about it in a somewhat different way. But I think they're also finding now as this evolves that getting to the answer is very very difficult because these rights are very very expensive and you know putting it in an all-you-can-eat product is is inevitably going to drive up the cost quite significantly which for a certain customer that's going to work very well and for a different type of customer that's going to be very problematic so i think again i think netflix will spread very very cautiously before before they move down a route and i think there are clear opportunities for them to add value just as flyers that that can work better for both parties and a good example is you know

a 20-year deal with the wwe yeah i i just want to add i mean i agree with alex i think you know adding tears and all this stuff and mumbo jumbo and particularly when you have issues with like when netflix has issues with like the in-app purchases with apple and all those things i think it becomes a little bit too messy i think you know especially when you know you this year the content budget is 17 billion cash wwe starts in 2025 and that's it's 500 million dollars so it's it's material part but not you know it's not something that's going to drive your your cost of programming too too dramatically um so it's just it's it's much simpler to keep it i think another perspective is in the user interface like how is it going to call to attention and

And you're going to, you know, WWE provides a lot of content. How do you organize that? I think, you know, I'm not sure what they'll do, but they're like the best at user interface and tag and looking clean and organizing. So I trust that they'll find a good solution for the WWE from that perspective. Okay.

Real quickly, one more thing. Yeah, go ahead. Just one more thing, and it ties back to the prior point on engagement and having this be the service that people pull up every night right so there's certain things like an nfl playoff game that people are going to seek you out and find you you know when you own the out-of-market rights like this does getting that in front of people there may be plenty of people who are willing to watch a random game that they don't know is on but you have to actually get that in front of them somehow they have to know that it's on and you know this is where you get into

issues that they have been navigating and will continue to navigate like they've done very prominently with ESPN plus basically being a row of tiles when you open up Hulu um you know these are the things that you have to think about and have to build the business around and again if you're driving a huge percentage of your sub base to the lower priced ads here where they're not as actively engaged they're not opening the service as much on any given night you know these things will matter over time in terms of the economics on on those rights so it's it's all tied together in a way that is particularly messy for the companies that are trying to make this transition.

So in the Q4 letter, they led things off with saying they want to broaden their offering with three different things. First, live. Second, sports, which I guess relates to live a bit. And then the third one was gaming. Gaming, if you're not following Netflix closely, may surprise some listeners. I'm sure a lot of people don't even know that they have the games there. They've kind of been testing the waters for the last two years. Either of you can start first.

Why do you think they're interested in gaming? And why now? This is a hard one. I know you guys don't like this question. Look, I'll start. Well, they've been at this for, you know, over two years, i think at this point since they like announced their initiative and started building it and they hired um one of the top gaming executives from from facebook known as meta um the reason why

they started right is because they see you know they label competition is you know sleep you know anything that takes away attention from them as you look at the the younger audiences just gaming and even growing up growing older audience gaming it's a big part of your your your daily entertainment and if you're highly engaged with with a game let's say on a console or mobile or pc or vr right um that just takes away time you know if i sit down in my bed and even like playing chess on my phone right that just takes away time that i could be watching netflix let alone if you're you're you're on call of duty fortnight etc etc younger audiences roadblocks so they know that that is a a threat to to taking you know attention away from them i suspect that's why

they thought it would be interesting to them but also a way that they could you know we're talking earlier about sports and bodily a part of the entire cost of the business being together well potentially gaming can be a part of that with your subscription you have games and they said it hasn't been really a tool for customer acquiring customers but it's been a decent tool for those that have used the games to retain to retain customers and then as technology evolves you know cloud computing gets more advanced internet speeds improve etc etc you can imagine world where we're streaming uh games like um like roblox has done it becomes way way more ubiquitous with with you know high quality games and you can imagine ways that you know that happens directly

on your phone you don't even download the game just play it on netbooks app but also on your pc so it's a very very long-term bet um you know greg uh peters talked about in the in the interview that you know they're they're putting a big investment meaningful investment but they're also not like super rushing to it because they got to build the institutional expertise and know-how it's not just about hiring good people and off you go um they've acquired small studios they've licensed different shows different sorry games um but they it's also a benefit with with their own you know intellectual property and content and even i think one of their biggest hits in games was based on one of their reality tv shows right um they also licensed the grand theft

auto games and that's you know been their biggest downloads ever and it was at one point you know top of the uh the apple uh game uh charts so i think it's a it's a place that they can scale over time be meaningful be a big player and it's in its um uh medium of entertainment that's just growing dramatically in in in the time spent that that the people are consuming this so um and eventually the again they'll leverage their ip you know can do you can imagine a situation where they're super advanced or you know they're in triple a games which are the most high quality games they'll have a triple a squid game game right you know pristine production with voice actors and audio quality and graphics and the sophistication of the gameplay um all you know

And with playing with friends that are also Netflix subscribers across your phone, television, that'd be like the home run super scenario. Right. But, but it takes a long way to get there. And I think they're building the muscle, but I think they're also doing it in a way that we're just not really hurting their, their, their free cashflow growth. It's not really, you know, they don't have like another segment that's just burning a lot of money and slowing them down. But they're, they're putting good attention to that.

that's why i think they're they mention it a lot even though it's really not material to them i think they mention it a lot because they want this to be much much more important over time and they want you know they want investors to know this they want their management team and employees to know this you know and so i think it's going to be a bigger part of netflix but it's a it's a much more longer term play right i don't think i don't think next year is going to be a crazy crazy change from from you know last year you might have more tons of gains but i think it'll it'll take time to really crack that code because they don't want to look at a very costly triple a game can be in the hundreds of millions of dollars right and you got to market these as well

um and they don't want to start at that level because then you know you risk yourself blowing up um or blowing a lot of money away and and that's happened to amazon uh they spend a lot a lot of money on trying to go to the triple a segment very very quickly and you know you stumbled right um and they're rethinking their their gaming aspect so i think the way they've approached this is good but i i would call it like a a call option uh as an investor in the company yeah i mean i basically have the same thoughts i think it's you know i think it makes sense in terms of of time spent thinking about what entertainment is and how that continues to evolve i think there's clear benefits in terms of of sustaining and driving popularity of key ip and

i think they said that the quote about this on the q4 call i think pretty well said that that's where their focus will be going forward which makes a ton of sense you know i think there's continued continued evolution technologically we saw we've seen things like google stadia and like and you know it's it's not hard to imagine a scenario where the the ability to the ability to interact with netflix's gaming services you know beyond just mobile usage which i think is the primary primary if not sole way to use it today so i think it's an area that makes a lot of sense for them to to explore and to to get their arms around and again i think it's something like not to say it will become this but it's something where if it does become a meaningful part of their

business and and what people uh kind of demand or want as part of the value proposition they'll they'll be many years ahead of competitors who are you know they're obviously doing things with gaming and gaming in certain ways the traditional media companies but they're not they're not taking the same approach in my mind or anything comparable to the approach that netflix is taking so it's uh i think it's a very reasonable that that that may or may not work out okay let's uh kind of shift gears a little bit to discussing netflix stock more specifically they just had their earnings report i guess as of the time of this being released it will have been about a week prior so thoughts on the guidance for 2024 what do you think about

the valuation at today's price and then i kind of as a follow-up you talked about the nielsen engagement ratings earlier in the episode today and i'm curious do you the ctv space as a whole is growing do you think netflix needs to grow their share within the space in order for this to work or can it just maintain its position i can start on that one um yeah i've been tracking for anybody who doesn't know i've been i've been tracking netflix's share within ctv or within streaming as part of the u.s is the region where we have the clearest data on this and for basically as long as it's been reported they've been in that call the 20 25 range of the broader market and the broader market's gone from correct me if i'm wrong maybe 25 to now pushing 40 uh mid 30s um so i think

they i think they can do quite well if they if they you know kind of sustain that level of share that said i i would expect it to to start moving higher over time and you know depending on how you think about what youtube is and whether it's a competitor or just a a different type of offering um obviously that the numbers can look quite a bit different um as well you know in terms of the in terms of the stock and and the way the business is valued i think part of the reality and it's kind of as we discussed today, is that the level of certainty in this business, in my mind, is even higher than it was two, three years ago. We just went through a very significant test of the sustainability of their competitive advantages, and they came out quite well

on the other side. I think if you looked at the valuation 18 months ago or 24 months ago and asked what's priced in here you know a lot of the answer would come down to do you believe that this is a business that's going to be capped at 225 million paid subs at at ten dollars a month or is this something that's got room to run on on both of those variables and um you know we've we've we've come a decent way on on the volume part of that equation subsequently and um i i think we're very well set up for for both legs to to keep moving higher over time um so yeah as always it depends on on the assumptions that you're willing to build in and also you know the type of investor you are in your time horizon but i think the company's position today is is uh as strong as

it's ever been and they're while they say they are not interested in acquiring linear assets which i think is almost certainly the right decision that i i do not think that will preclude them from finding other potentially interesting ideas with with legacy content owners or uh content production engines so i think there's there's certainly more common in the months and years ahead yeah i uh i completely agree um i think look if they had 6.9 billion of free cash flow last year effectively guiding to six billion in free cash flow this year reason why it's down is because we had you we had the the actors and the writers strike last year for for a long period of time which was a billion dollar impact so all production and development of content was shut down

uh for many months and obviously they so they saved a billion dollars and now you restart development you restart production so there comes a swing there and i thought the swing would have been higher quite frankly i thought you know you know had 6.9 million free cash flow last year i would have thought maybe it would have been five this year but it's going to be six billion free cash flow this year and then if you go well six million free cash flow you know it's basically roughly 40 times free cash flow um and then you're you look at that you're like okay highly certain of their past subscription business but still a very very very high multiple um the flip side of that is that look now they're they're growing at 12 to 13 percent and this year advertising is not

going to be material to their growth but it will be in 2025 so you're going to have a decent in the past for crackdown and um it's contributing to subscribers and now you're you're you basically have the the best options of licensing and producing your own regional content um than you ever had before because before nobody would license to you now like we just added uh they just announced they're going to have or it was reported that they're going to add sex in the city right something a property that i think you know two years ago you you said the odds of that going to netflix were like nearly zero percent um and and now they have access to to this type of licensing opportunity so the path is very very high but also look if

they can sustain even low double digit you know um revenue growth and the guy to 17 billion of cash content spend this year you know black look alex said like you're 37 billion in run rate revenue slap a 10 growth on that let's just you know round up the numbers a little bit so incremental revenue of four billion dollars you're not gonna raise your incremental content cost by four billion dollars from 17 to 21 right it's just not gonna happen um and you can be much more you know you're spending 17 billion the competition is coming off you have the access to license uh most content that you want globally um you don't really have to like put down the hammer on content spend so i they talked about that they were willing to play

offense reinvest in the business grow that but you don't got to grow it um in a dramatic way my point being that you got a four billion incremental uh revenue growth on the run rate basis just uh as an assumption an example um could be higher could be lower you're not going to grow content cost, which is your biggest cost, anywhere near that. And that creates pretty high operating leverage that goes down to free cash flow. In other words, that $6 billion of free cash flow can swing to $8 billion very, very quickly in a short period of time, $10 plus billion in a faster, in a medium term time range. And that multiple that we're talking about this year starts to look you know fairly low for such a high quality

business if you're looking down let's say five years from now so i'm not i'm not saying the stock is cheap it's it's full um um but their competitive position is so strong the nature of the business business being largely subscription based and their competitive position in terms of subscribers and usage um we might look back five years from now and today might be a pretty decent price um but there's always volatility you know hey you miss subscribers by by this much the stock tanks you beat subscribers by a little bit stock goes up a lot so there's always going to be a lot of volatility here but but i think they're they're extremely extremely well placed it's hard to just one other thing i'd add on that is we're thinking about some of these assumptions going forward and

obviously it's hard to really put this to an apples to apples comparison but it is interesting to think about if you pull up you pull up netflix tonight when you're at home and and just look at the breadth of content that's on there and obviously it's you know depending on the tier you're on it's all exact accessible when you want it where you want it obviously with no ads if you're on the s5 tier and you look at that business and in the in the united states or in you can the the arm average revenue revenue for membership in the fourth quarter was just shy of 17 um you know you can compare that to what i was saying earlier about how comedy central where you can turn on your tv right now and your choice is to watch the episode of seinfeld that's

currently on tv and it's it's uh it's a 22 or 23 minute episode with seven or eight minutes of ads and when that ends they'll air the next episode that they decide to air and that'll be 22 or 23 minutes with seven or eight minutes of ads and if you look at comcast's results for their cable business this quarter their programming expenses are roughly these numbers are getting harder and harder to calculate cleanly because of the pace of the decline but their programming expenses per sub are roughly 75 which is uh quite a bit higher than it was five or ten years ago and that's just their programming programming expenses right they're still they're still pricing at least or some margin on that to cover their op-ex.

So point being, the cost of that Netflix subscription or at least the arm is maybe one-fifth of what the average pay TV subscription costs. And there's obviously differences between those two products, most notably in terms of sports and news. But I think it just provides some context for what you're getting relative to

what you would have paid five, 10 years ago, 20 years ago for Redbox subscription or rentals, Blockbuster rentals, etc., etc. The value-add here and the improving value-add here, in my mind, is not reflected in a $16 UCAN harpoon, nor is it reflected in a $10 global auction. All right. We've been optimistic, rightfully so, on Netflix on this discussion. They crushed it with their Q4 earnings. But I want to, as we always close out with any stock-specific discussion, talk about

a pre-mortem. So we're not going to talk, you know, clearly the stock is premium valuation when looking at trailing numbers. People can debate whether it's a buy or not here. But I want to talk about their underlying business and market share. So what would have to happen for them to lose market share, let's just say, in U.S. streaming TV over the next five years? Who could come in and steal market share from them? How do they lose relevance to the North American customer?

I think the way I would answer that is more about the losing relevance part. um i think you know when you have young kids just on youtube all day long and very very young kids and then when you have a slightly older cohort you know on tiktok all day and you create those habits and the proliferation of social media um i used to think you know and then you go older so i used to think when i was in college looking back if i had some free time between classes or after studying or whatever i you know i would binge a bunch of shows um now you might i mean i'm not sure you know maybe i'd be flipping through instagram for like 30 minutes and then like you know then doing something else right um and um or you know now tiktok or or whatever or

playing more video games um even though back then um still played a lot of video games but just it's it's an entertainment industry and there's many more ways to be entertained and i think that's something that um is more of the of the bigger risk um and it kind of ties into kind of like the the movie industry overall like you know in the in the you know 1960s right uh 70s uh 80s um even 90s like it's like you know i used to i used to wake up um as a as a young kid and like take the newspaper to see the scheduled times for for certain movies it was like oh my god it's gonna take them forever to watch this after it's gone out of the movie theaters if i wasn't able to watch that movie um and then you gotta go to you know blockbuster or or buy the movie

um you know now it's just like well to go to the movie theater like it has to be something so so impactful like a barbie moment right a top gun moment a big avengers movie moment just like be special unique it's it's like you know you know genie in a model type of thing um so it just becomes harder and harder and harder and harder i think i think that would be the bit the bigger risk and particularly kind of youtube social media whatever is going to come next because there always will be something next um i mean pre the pandemic i mean not a lot of people knew what tiktok was um so it just keeps evolving and that you know that i think that goes to show why they're expanding their horizons with with with gaming and live programming and they can't just sit there

and be like hey tv shows and movies right um they kind of have to keep expanding and pushing um their boundaries because it's just you know entertaining people just becomes way way way more competitive over time right i mean people used to go to you know theater and drive-in and then things change so the entertain entertaining uh people evolved um and that's i think that would be the bigger risk i wouldn't necessarily say it's like you know um another streamer toppling them that's you can't rule that out right uh i think if i'm looking at it over a very very very long period of time i think that that's the risk uh that that i would point to yeah the one that i as francisco mentioned the one i personally focus on the most and i see this from from tracking the

nielsen gauge data and then actually when they reported they reported q4 they had to start in there with some other uh country specific data and i immediately pulled up the last q4 letter because it had the similar countries poland mexico etc um and what i wanted to see was the youtube share in those markets and how that's trended over time and youtube is a extremely popular platform in the u.s and even more so globally would probably be my uh my my guess based on the data that's reported and by the way this is typically this is typically tv data at least the united states and other markets it is inclusive of mobile and whatnot but the idea that youtube's dominant obviously on the tv form factor um you would think that would suggest

they're much more dominant when you properly account for mobile whatever it may be and i think back to i think back to there's a comedian tom segura i mean and he mentioned i think it's his book or on a podcast at one time that his 2013 or 2014 he was talking to his agent he was really hoping to get his special on comedy central and he called him and told him yeah we didn't we didn't get the deal but it's going to be on netflix and he was you know kind of disappointed like oh i guess we're going to like you know that crappy dvd service which at this point already had streaming but maybe he did or didn't know that um and what he found subsequently is that his his ticket sales exploded and he's like oh my gosh this is a much bigger platform than

than i realized and that was 10 years ago when he was he would have preferred to have been on comedy central over netflix which nobody would say today and i would just note from following comedians that many who do not sign deals with uh netflix or i guess hbo to the extent they do this at all anymore a lot of them throw their specials up on youtube and they get very significant viewership and there is a component of their overall economics or the way they think about their business that makes that probably a pretty compelling platform to consider using and i'd also note that youtube was playing uh had a strategy that focused on more premium content a handful of years ago they've subsequently exited that and and and not revisited as far as i know but

point being youtube is a very dominant platform in a lot of ways and um there's there's nothing written in uh there's nothing that says they can't reconsider how they want to play in this space so i i think they are a very real competitor in a lot of ways and and they and netflix both are competing with each other all right guys this has been a fantastic discussion i think any listener now has a much better understanding of the netflix business model where they sit why they've been winning so much over the last few years but before we go where can listeners and investors find you guys and maybe talk about now this is uh this is a longer form discussion but you guys do your 10 minute actually you talk about i forget the exact name but what have you guys been doing on

every friday morning so i'll just quickly say you can find me on twitter but you can find alex on as well but he writes an amazing um newsletter sub stack and i think it's it's very unique and insightful he covers different companies talks about investment philosophy talks about his portfolio which you can track and and whenever he buys or sells something it's a very very unique uh service and and i'm really happy to be associated with him in in our weekly podcast uh called tsoh weekly um and we we just discuss about any any company that um or situation that kind of is interesting to us but we we you know cap it at around 10 minutes and it's a quick discussion and forces us to like hone in on what's important about each issue but um i i wanted

uh alex is a very humble guy so i wanted to make sure to to really uh to to promote um his service we can attest to that as well we are uh happy subscribers and love reading the uh tsoh sub stack netflix update uh this will be out the week after but netflix update did come out this morning so also timely stuff in the in the the updates very much appreciate that it's called tsoh weekly to be clear because Francisco and I can now think of a better name. He does. Most of the thoughtful analysis and great insights come from him on the podcast, not me. I mostly just sit there, which is fine by me. That's not true. The other thing is for anybody who listens to this podcast, you may recognize the reason we had to get into 10 minutes is because we tend to run our mouths

a little bit when we find a topic we like. So we decided to cut ourselves short at 10 minutes every week. But yeah, you can find me over at the TSOH Investment Research Service or on Twitter at TSOH underscore investing. All right. Beautiful, guys. Let me hit the disclosure and we can get out of here. Ryan and I are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan, I or any podcast guests may hold securities discussed in this podcast. We may have held them in the past and we may buy, sell or hold them in the future. thank you everyone for listening and we'll see you next time