Invest Like the Best with Patrick O'Shaughnessy - Joost van Dreunen – Unlocking Value in Gaming – [Invest Like the Best, EP.210]

Episode Date: January 26, 2021

My guest today is Joost van Dreunen, an investor in the gaming space, professor at NYU's Stern School of Business, and former CEO and co-founder of SuperData Research, a data-driven gaming firm that was acquired by Nielsen. He also recently authored One Up: Creativity, Competition, and the Global Business of Video Games, a great book on the business game industry and why I reached out to speak with him in the first place. Our conversation covers the rise and decline of GameStop, what parts of the value chain actually make money in video games, the evolution of video game business models from Nintendo to Fortnite, and what other industries can learn by studying the video game industry. I hope you enjoy my conversation with Joost van Dreunen.    For the full show notes, transcript, and links to mentioned content check out https://www.joincolossus.com/episodes/14574831/van-unlocking-value-in-gaming   This episode of Invest Like the Best is sponsored by Canalyst. Canalyst is the leading destination for public company data and analysis.  If you’re a professional equity investor and haven’t talked to Canalyst recently, you should give them a shout. Learn more and try Canalyst for yourself at canalyst.com/Patrick.     Invest like the Best is a property of Colossus Inc. For more episodes of Invest Like the Best go to https://www.joincolossus.com/episodes.  Stay up to date on all our podcasts by signing up to Colossus Weekly, our quick dive every Sunday highlighting the top business and investing concepts from our podcasts and the best of what we read that week.  Sign up here - https://www.joincolossus.com/newsletter. Follow Patrick on Twitter at @patrick_oshag Follow Colossus on Twitter at @JoinColossus   Show Notes [00:02:38] – [First question] – First chapter of the modern gaming business [00:06:28] – The product era of video games [00:10:11] – The different pieces that take place in creating and selling a game [00:12:25] – The story of GameStop [00:18:45] – The transition to digital platform-based gaming [00:22:55] – How the breakdown of platforms has changed [00:27:35] – Free-to-play vs free-to-win in digital gaming [00:31:27] – How the revenue models are changing the type of games that are made [00:35:07] – Socializing games and the future there [00:38:14] – Who is making money in the modern gaming world [00:43:33] – The zones of opportunity to invest in within gaming [00:47:12] – Why the business models can be more powerful than new tech [00:53:52] – Strategies from gaming that the non-gaming industries can learn from [00:57:05] – Kindest thing anyone has done for him

This episode of Invest Like the Best is sponsored by Canalyst. Canalyst is the leading destination for public company data and analysis. I'd heard of Canalyst over the past few years and became more interested after meeting the founder and CEO last year to pick his brain about SaaS businesses. Founded by a former by side analyst who encountered friction in sourcing, building, and updating models. Canalist is now used by over 300 institutions, including the largest money managers in North America and by a number of guests on the show. With detailed company-specific models on virtually every, investable public equity, Canales clients are able to react more quickly. If you've been scrambling to keep up with a deluge of IPOs these days, Canales has models on DoorDash, Palantir, Airbnb, and everything in between. Their pre-IPO models are built as soon as the S-1 hits and include all segments, KPIs, and non-gap figures. If you're a professional equity investor and haven't talked to Canales recently, you should give them a shout. Learn more and try Canales for yourself at canalus.com forward slash Patrick. That's C-A-N-A-L-Y-S-T-D-com slash Patrick. Stay tuned at the end of the episode where I talked to Canalyst's customer

Phenamore Asset Management about how Canales helps their firm better find and manage their investments. Hello and welcome, everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at invest. Patrick O'Shaunisee is the CEO of O'Shaughnessy Asset Management.

All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaunacy asset management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy asset management may maintain positions and the securities discussed in this podcast. My guest today is Yost van Drunen, an investor in the gaming world, professor at NYU Stern School of Business, and former CEO and co-founder of Super Data Research, a data-driven gaming firm that was acquired by Nielsen. He also recently authored One-Up, creativity, competition, and the global business of video games, a great book on the gaming industry. Our conversation covers the rise and decline of GameStop, what parts of the value chain actually

make money in video games, the evolution of the video games business model from Nintendo to Fortnite, and what other industries can learn by studying the video game industry. I hope you enjoy this great conversation with Yose Van Drunen. So, Yost, we're going to tell a story today of the history of the business side of video games and gaming. I recently finished your book and that's how we met. I thought it was a fantastic single industry deep dive, history lesson, picture of the day and potentially of the future. I think obviously we have to start at the beginning. What do you think the most appropriate first chapter of the modern gaming business is and what defined it?

The first thing to really cover is really the moment Nintendo came into the scene. I guess the short recap of the 70s and early 80s goes as follows. You had Atari and Pong and Pac-Man and all that, and which led to a huge undifferentiated market that ultimately turned off and alienated its customer base. So it grew explosively to $2 billion in value in only a few years as the console moved out of the arcade and into the living room. and very quickly after that, you had too many manufacturers and two little content.

There was just no reason for people to care, to give a crap. So the market then collapsed and quite literally became decimated to like a tenth of its value to about $200 million in 83. And then in 84, 85, you see the Japanese firm by the name of Nintendo rolled in. And everybody thought they were crazy. So you have this phenomenon of video games, which everybody at the time thought was a fad. So the games industry emerges from the toy aisle at retail. That's really where it started video games in their early iteration were basically toys with chips built into them.

And a lot of people regarded them as such. Basically, it's a hula hoop with a TV screen. So for all those reasons, people thought, well, this is not going to amount too much. Another toy makes it big and then disappears next holiday season. In 84, then, in 85, Nintendo comes in and they start to really put some terms around what it's like to be. be a platform, what it's like to be a manufacturer of hardware, and what it's like to be a company that hosts third-party content. And so the very first thing about the games industry that has led all the way to its success today has been this aggressive way of curating content,

of building third-party relationships, of keeping this promise to consumers, like having something new to show, something worth their time to show. And so from the beginning, because such a segment that was under pressure from just the bullshit economics that they had before that, you have very high standards in terms of production, development, marketing, and so on. And so that then becomes the blueprint for how everything else is done. Nintendo really wrote that blueprint. They really drafted it in the 80s. And some of the aspects of it, for instance, were that as a content creator,

you would only be allowed to have five titles on their platform. It would have to be a two-year exclusive to their platform. you would have to buy 30,000 copies of your own game to send around for marketing, and you'd have to give Nintendo a license fee. And so publishers at the time had just disintermediated from the manufacturers. So the origin, for instance, of Activision. It's not the Activision that you know today, but back then, Activision was basically eight people that escaped Atari and just went out on their own.

They realized that they had been on a salary job building these hit titles that would make millions. And they said, well, you know, that's not fair. So they just went out on their own and just disintermediated from that whole business and then start selling the content to other manufacturers and just made a lot more money for themselves. So in that universe, the idea that you would all pool resources

and pay a platform some license fee so that they could collectively market the devices and create an install base against which you could then sell content, nobody thought of that. And Nintendo came up about this idea, and it's immediately turned the fortunes of the industry around. So that's really the first chapter. for me to think about. I love this idea that what broke the late 70s industry was over supply.

Nintendo's sort of artificially constrained supply to improve quality, and that kicked everything off. And I think that begs the question of what I would think about as the era of video games that people my age mostly grew up in, which is you went to a store, you bought a $40 to $60 CD-ROM or whatever it was, and you stuck it on your PC or your console. That was the product. So talk us through what we'll call the product era of video games, and obviously we'll transition into the modern versions which have come to dominate. It's a similar experience that I had to. I'd remember you got this Nintendo Entertainment System, and then of course promptly took a week off to play. It was awesome. You had to play Super Mario and Zelda. It was really a significant

entertainment experience for a lot of people. In that conventional model, you'd have effectively a Razor Blade business model. So you sell the hardware. then you make money on the software. The devices, and that's still the case today, you have to subsidize, you have to spend billions of dollars developing this cool technology with lots of chips and bits and bytes, and then hopefully you'll have cool enough content that people will want to buy, not just one, but most of your games, and that's where you really make the margin. And so on a product model, then, you're really talking about scale, volume, economies of scale,

and for the retail business, of course, that's where you just want to pump out as many of these things as possible. And in the beginning life was, I think, still pretty good. In the early 80s, you have Nintendo subsidizing the retailer saying, take all these units, you don't pay us anything until you actually sell one of them. Retail is like, fine, we'll put it in the store somewhere. We'll see if it works. They had no faith in it at the time. But they very aggressively subsidized that efforts.

And then over time, they start to see like, okay, actually people want this, people like this, they enjoy this, they like Super Mario, they like Zelda. And then it's a matter of just selling more copies. because now I have this thing in my house. What else can I play on this? And so you see this boom in terms of content creators starting to make games for it. And that's where the retailers start to play a really important role in terms of getting cartridges to people, but also just marketing and solving a discovery issue.

So you imagine your mother walking into a retailer in the 80s and 90s going, well, he wants to play a game. It's his birthday. What should I get him? So that was where the retailers really had still in a very successful. significant role in terms of marketing and discovery and really just guiding consumers to this universe. Over time, that started to erode, of course, but it was initially really about economies of skills. So you see a GameStop acquiring lots of its competitors. Eventually, of course, this is after

it spun off from Barnes & Nobles because they felt that that was the same business, which wasn't the same as the book business so much, but it was really about economies of scale, volume, and then driving margins on these titles. And then, of course, ultimately, because it's that way, it tends to be very, much dependent on holiday cycles. So November, December, the two months out of the year when they have 40 to 50% of annual sales in a traditional product model. And so that means, of course, that in June, July, you have all the conventions like E3, where they showcase the new wares for the holiday season. So it gets very crowded and very, very expensive very quickly because now you have EA and Activision all spinning lots of money to get the new shooter game out on time and marketing the thing.

The retail model, the product-based business, worked really well in terms of scale and volume, but eventually, of course, becomes really cumbersome and expensive. And it leads to this consolidation across the value chain. And it makes it easier to invest. There's only a few winners, but the overall value is limited. One of my favorite little charts or tables in the book is for the $60 game, it breaks down the capture of that revenue, if you will, by five main players in the chain. So those are the developer, the publisher, the platform, the distributor, and the retailer.

I was quite surprised by some of these percentages, maybe most notably that the publisher makes twice as much as the developer in a traditional sense. Just walk us through each of those five categories, what they did and how they earned their share. Developers are really the makers of the game. So this is the people that have all the creative talent. This is the arts designers. This is the programmers, the engineers. This is people wearing like the full body suits.

with the ping pong balls for stop motion recording. That's really where all of that sort of Hollywood style stuff happens. And then the publisher is really the corporate component to a lot of this. And so they manage all the relationships with sales channels. They put up the capital. They will have legal department, HR department that will run across different labels and across different development studios. They build skill that way.

So just like a movie label, that will have different studios working on projects at the same time, and they just have an efficiency by way of running the corporate component as a single unit. If you think of a take-to interactive, they will have Rockstar, which is the studio behind Grand Theft Auto, which is one of their big titles and Red Dead Redemption, but they also have 2K, which is a big label for, for instance, MBA 2K. So here is then an example of a publisher that has multiple studios and each of different labels. And just like a music or a film business would have different flavors and categories and genres under one flag. Naturally, because they have access to the market and access to the platform relationships,

they are in a position to just capture more of the value than the developers can. The developers are really forfeiting their ability to invest, make their access to capital dependent on working with the publisher. And they, of course, don't have a direct relationship in a traditional product model to the platform holders. basically the publisher can charge the fee for that. And so they can charge double that the developer ultimately receives. Does that make sense so far? It does.

And just so that we don't keep everyone guessing out there in the book, the developer gets 20% the publisher, 40% of the total, the platform, which should be like a Nintendo, 15%, a small amount for the distributor and the remainder 20% for the retailer like a GameStop. So that's sort of how it breaks down. We've talked through platform already. And Nintendo's creative model was that they would take a Vig also on things that were sold on their platform. That's how they ultimately make money. Distributor move stuff around. And then retailer is ultimately, I think, GameStop is this is our opportunity to talk about

what I think is one of the most interesting companies in the story that you've written because everyone that is a gamer or like me as a kid used to go into GameStop all the time and browse around and buy stuff. It's familiar with the simple store in a mall somewhere or whatever. And I think it has this two-part history that I'd love you to walk us through. One, because in its heyday, it was an incredibly interesting business, especially because of the same, of how it created competitive advantage versus other retailers like a Walmart that are more generalist and it was a specialist. And then, of course, for its decline, which has been precipitous. So I'd love to take that in two parts. Maybe you could begin by telling us why GameStop was so

successful, what it did for its customers and how it knew its customers and tailored its experience around them because I think some of those ideas might be portable. If I told you earlier that the industry crashed in the early 80s, that same year that the video games industry fell on his face is when these two, I think they went to Harvard, these two guys, they started GameStop. They wanted to sell software. They thought, well, the computers is going to be a big thing. So let's just go and only sell software. They did that for a while until ultimately they started acquiring competitors, but it became a business based on economists of scale. And of course, as it gets bigger, it gets attention from larger

entertainment retailers like Barnes & Noble. They acquired a whole thing. And then eventually spin it again. But so their success in the very early stages was really dependent on just basic economics. They just could have been selling frozen yogurt for that matter. It was really just about having retail space and presence. What made GameStop successful after its spin-off from Barnes & Noble's was its incredible focus on its customer base. It became a specialty retailer.

This is a story. If you ever talk to GameStop people or former GameStop people, they will always say the same thing. It's like, if you go to Walmart and you. want to get Grand Theft Auto or a new Zelda game, Samantha from housewares has to go get the key and walk you over to this glass cabin and is it this one? Is it that one? So it's a very different purchasing experience than you get in a GameStop. And for my class at NYU, I will challenge my students with the same exercise which you go to a GameStop and see if you can outmaneuver and outwit

one of the clerks on their knowledge of a title, a franchise, the latest edition of XYZ. and you'll find that the clerks are really well read. They know the space really, but they know all the games. And so that's a very different experience, especially for a category like games, which is, of course, is a bit of a fringe form of entertainment at the time, 80s and 90s. You need someone to help you navigate the space. They really invested into their staff to make them differentiated from more general retail stores. Another component then of what they do, of course, is they know their audience well.

So they have all these loyalty programs, but they also do really clever things. It's like they will always have a ramp. And I don't know about you, Patrick. But I always wonder, it's like, why are they so good about having like the ability to have wheelchair owners in here? You could see the members. Like, I thought that was so nice. It's the only retail store that has consistent ramps everywhere.

And I realized now that it was possibly also for wheelchairs, but the way it was told to me was primarily for people with strollers because they figured out that 14-year-old boys, they don't have any money, but mom has money. Mom is pushing a stroller. And she needs to be able to maneuver through the store or she's done. never going to come here. So the aisles in the GameStop are also very wide, basically allow for stroller traffic to maneuver very easily. That sort of focus on their customer base and who's actually in the store, I think is genius. And then the third component really that drove their success.

And to this day, I think it's one of their biggest draws is use game sales. After you finish a product game, conventional model, you'd play a game and you'd solve all the levels and solve all the puzzles and you rescue the princess. And then that's kind of done. So the replay value, you of a product-based game tends to be limited, as opposed to, say, online games that you can play forever and ever. So you want to trade them in. You've finished Assassin's Creed. It sits there, collecting dust. And so you can go and then use it for in-store credit. And it's never a lot. You could have these very significant emotional experiences with a game for a hundred hours, and then you go to GameStop and they'll give you five bucks for it.

But it's five bucks. And now I'm halfway to the next game. Their ability to do that wasn't so much because they're trying to be nice to people, of course. So this doesn't really depreciate in quality, right? A game is a game is a game. It's not like a car which you drive off the lot and it's worth less, but it's also being used and has a lot of moving parts. The game at the beginning of a hardware cycle is the same quality as the game is at the end of the hardware cycle.

So in other words, they were then able to resell the same game six times on average. Blockbuster titles, have a resale value six times for GameStop. And what it does is drive traffic. And of course, it generates a lot of revenue. It also creates a lot of friction with the publishers who don't get paid out of the other five transactions. They only get paid the first time. So that never really sat well with them.

But for GameStop, it meant that a quarter of their revenues annually comes from used game sales. They really managed to do that by having a dedicated staff for it. And that's something that the best buys and targets of the world. They just can't follow. They tried. They tried repeatedly, but they just can't follow that effort. And that's what differentiates GameStop and led to its ultimate success in the 90s and early 2000s. I love the idea of specialty inventory management.

I can't imagine how complicated it must have been. They have two kinds of books. What's the value of a game that's been sold three times already? And then where is it stored? Is it in Arkansas? Is it in Pittsburgh? Like, where do you keep this stuff? So they have a dedicated team of 400 people.

And that's all they do is to use game sales. I just manage that inventory and do the logistics and shipping it around, which is fascinating. I love it also how a magazine people might remember called Game Informer, which was sort of the official GameStop. And I think it's actually literally the only gaming magazine that still exists. It was a large share and everyone else were not a business, but they're still around. And yet another sort of content-driven ecosystem, flywheel-inducing thing that GameStop introduced. Love all these specialty tricks that they had.

What then is the turning point? So stock market investors today are look at GameStock stock. You're not going to see a pretty picture. Went from this really interesting specialty retailer with some dominant competitive advantages to being in not a great space. Now we have to talk about a transition in gaming from a product model to a digital distribution and mobile model and maybe free to play. So talk us through that transition, maybe using GameStop's decline as a jump off. I spent the last five years predicting the end of GameStop either by way of just bankruptcy or by acquisition by Amazon.

And the reason is fundamentally that leadership at GameStop has been incapable of acknowledging the shift to digital. Retail people are like diehard, hardcore. If I just told you about how great they were with all these front of the house aspects, that's their world. They're a dollar per square footage type of metric. And so to them, digital is like this weird thing that doesn't make sense in their universe. To illustrate that, they describe digital in their earnings.

reports as basically prepaid game cards. It's like, oh, digital is an opportunity for us. It's not a threat. Digital distribution is going to be totally fine because we're going to sell in the store these codes for money and then we'll just make money that way. It's like, no, dude, they're going to start selling your entire game through these new channels and they're not going to come to the store, not for the games or your prepaid game cards. But in their sort of tone-deaf universe, for them, that's being part of on the front end of

the digitalization of the industry. If we put it in business school terms, it's the mental inertia of, management. They just don't have it. It's sort of mental model that they hold on to and refuse to surrender. That's one of the reasons I've been kind of bearish on them this all time because it's like, come on, get with the program. You see it happen around you. So they tried. They made some efforts. They made a few acquisitions over the years. They bought a digital distribution platform. And so they try to participate, but they mostly have been staying the course that they've had for the decade before that. So that's one of the components that I think have been missing out on. And then

GameStop in and of itself, digitalization is affecting all aspects of the conventional supply chain, right? In a product-based business, it is so tempting to think of digital as sort of accretive revenue saying, oh, it's extra money, that's great. But really, it's a fundamental shift. And if you don't believe that for your own segment, well, what's going on with Tower Records? If you recall, back in the day, that was like the dopest music store in the world. You had musicians and rock stars all doing cocaine side by side with the customers and party all day, talk about music. That was the place to be, right? And then it became this massive franchise.

And then the CD came around and it's sort of stuck around. And then iTunes and Napster basically murdered that whole business in collusion with the actual owners because they refuse to acknowledge it. Like, why isn't their entire record's digital distribution point? By the time you get to Spotify, it's a distant memory. So GameStop has always been one foot in the grave in that sense because they haven't really be able to do the same thing. But I think because they are so good at what they do in the conventional games market and because the games market has been never really scrutinized the same degree that

music and film and video have been. For that reason, I think GameStop has been able to stumble forward so far. I think maybe now as a result of COVID and Corona that you have a point where does it still hold water or is it, are we now in a space officially where I'll just buy it directly off of a publisher, sure, I'll just go to Xbox Live and use GamePass or EA Play, all these new services that have a lot of wind in their sales because of the pandemic. Is that then the final nail in the coffin? And if it is, it wouldn't be because of COVID, but I think COVID has then finally laid bare some of their weaknesses. GameStop used to be this communal point, but I think it's lost a lot of that shine in the last few years. Talk us through a little bit the landscape today and how it's

evolved in terms of market share, revenue share, let's call it, between the three ways that people play video games. So you've got PC, you've got consoles like Nintendo or Xbox or PlayStation, and then you've got mobile as an enormous third category. So how has that changed through history, where has it left us today? And that'll give us an excuse to talk about sort of the digitization of everything, games as a service. The three major categories are PC console mobile. So PC was, of course, really where a lot of things started. But that ended very quickly because the platform is open. There's a lot of components to it.

Piracy is, of course, a problem in the 70s, 80s, 90s, and so on. So nobody wants to invest all this money into stuff that other people are just going to go out and steal. Or at least that's how they thought of the world. So very quickly, the publishers all went with consoles because of its steady hardware features. There's no tricks. There's no changing hardware specs. You don't have to build 15 versions of the same game. Around 2000, you see basically a market that's 95%.

console and 5% PC games. So that carries on for a few years until 2004, a company called Valve, they launched a digital platform called Steam, which originally was really so that they could send updates for their own games to people over the internet and work out bugs, glitches, add content, and so on. They had a more fluid idea of what gaming could be like. And as you release updates and software changes, it improves the user experience. So in 2004, they launched this and then very quickly realized we should sell third-party content as well.

We need to have something that other people can use as well. So for that reason, you start to see the tides turn a little bit. Digitalization then allows PC to kind of regain some of its glory. And so today, PC is the second largest category, bigger than console nowadays. The way to think about it in 2021 terms is that mobile, which I'll get to in a second, is let's say, if that one is $4 in terms of total market share, then the PC is about $2 and console is $1. So it's a 4-21 ratio between the three. So as the industry shifts more towards digitization, PC then regains all this momentum.

And then in 2007, Apple launches the iPhone. And the iPhone really shifts the mobile space. And then Apple comes in and they revolutionize the model. Rather than having to build the same game for 400 different handsets for AT&T, you now have to only make one version of the game that goes into the hands of all these people everywhere that are just spending $600 or $1,000 or $1,000 on a new iPhones, and they're eager to try out new content. So the iPhone revolutionizes it because it becomes a must-have fancy device.

At the same time, of course, no one has ever tried to use a touchscreen interface So a game like Angry Birds, in addition to its brilliant design and its incredible creative marketing effort, it's also a game that teaches you how to swipe. For Apple, it makes sense to foreground a game that teaches people how to actually use the thing. But that's not really when it takes off. Mobile gaming takes off not in 2007. It takes off in 2009 when Apple turns the key on free-to-play monetization. And that's the moment when they kind of take the scaffolding down and you can go bananas. So there's no ceiling to what people can spend.

Free to play monetization becomes this breakout moment for the industry. Because up until then, in a product-based business, you end up spending 60 bucks or $5 or $0.99 up front, and then you get to play the game. In a free-to-play model, you can play as much as you like. And if you want to spend money, cool, that's up to you. But you get to play anyways. There's a lot of value, a lot of content for users there. So now all of a sudden, you have this hockey stick in terms of revenue from the mobile space

that crashes into console and PC. And so naturally around that time, you hear a lot about the death of the console because, oh, it's so close to the console, the console's going to go die now. And the PC, of course, is the same. Like, oh, well, that's such a fringe device, blah, blah, blah. Turns out all three of them grow.

All three of the categories, they continue to do really well up until present day where the console business today, they have to, up the top of my head, it's about $20 billion in terms of software sales annually. the PC market is $35 billion, and then the remainder is about $85 billion is mobile. And that's just a software business. And that is also the hardware components to it.

But if we purely look at content, the industry just explodes from $30 billion into early 2000s to about 150, 175 today is massive. The free-to-play transition, I think, has got to be one of the most interesting business case studies ever because of how it's aligned with digital distribution, which is so, so much easier than physical distribution. But I'm sure at the time the pioneers of this maybe felt like idiots. They're giving away the thing and uncertainty attached with giving something away. And someone once told me that this key distinguishing feature is free to play versus free to win. And a lot of the most successful games, you can even win the game and finish it

without paying any money. So talk about the details of this business decision. Who were the pioneers in this kind of thinking? And why has it been so successful? So the free to play model comes in perpendicular to how things have been going and functioned up until that point. You hear the CEOs with these big public traded companies, Take 2, like, Starzal and they're going, like, yeah, free to play, it's not for us. You can't fall, Take 2. Like, Take 2 just broke 200 bucks a share the other day. When I started my business, they were trading at $9 a share.

So it's not as if Take 2 has been suffering. From a management perspective, this is a company, and it's a legacy public. as I think of them. They're used to sort of these Hollywood economics where you used to spend a lot of capital up front, Grand Theft Auto 5, they spend $260 million, roughly spit equally between development and marketing. That's a huge amount of money, right? A quarter billion dollars to get this thing out. And of course, it makes a billion within three days after lunch. Those are the economics of a blockbuster game title on console. For the mindset or the management team that put something like that together, for them to think about these tiny screens in your pocket that have these

99 cents or these free games that makes no sense at all, which to me echoes the same sentiment that you would see in Hollywood when the TV became very popular when it started to popularize throughout the U.S. filmmakers and film producers were like, this is crap, look at this trash, low resolution, black and white television. This is not the form factor that would facilitate the spectacle that we're used to making. It doesn't match the economics that we have today. TV in his early phase was almost offensive to filmmakers. Nowadays, people can't wait, take Netflix money to make amazing things. But back then, that new form factor, that new format was perpendicular to how people were used to doing things.

Free to play and gaming was sort of the same for legacy publishers. They thought of it as something that was really weird, wonky, and almost blasphemy to how they had been doing things. And then, of course, you see things like Supercell and you see companies like Tencent. and they become the biggest companies out there with these free-to-play mechanics, like League of Legends, to be clear. So free-to-play does not mean I spent money, therefore you lose. It's mostly vanity items and visual and aesthetic upgrades. You can have some games where you could spend some money and I get a higher percentage hit rate.

So in like World of Tanks, you can buy golden bullets. They give me a bonus. But none of it is I spend, I win. And I think for that reason, it's something that's always a hit. overlooked, but it goes very much against the logic of having to spend $100, $200, $300,000, to be successful. So that's where Free to Play kind of sits. It became this oddball phenomenon for legacy publishers.

And because of that, of course, the winners in that scenario, the new generation of digital native companies, those became the ones that won that round, where one of Val's biggest titles is Team Fortress. Team Fortress originally was $30. And then they gave it away for Free to Play. They said, don't pay us for the game. but if you want to buy a funny hat for your character, then you can give us some money. And it just blew the roof off of that thing right away.

And so they learned very quickly that free to play is the best way to monetize because it gives a lot of choice to the user. Conventional publishers got stuck on their product-based business and the revenue model that goes with it, free-to-play opened a door for a lot of newcomers to take market share. Talk us through the accessibility side of all this as we transition from a product world to a digitally distributed free-to-play model where you're paying for cosmetics or a lot of these games seems like you can pay to speed things up by coins to advance quicker or something like this, not necessarily win, but speed things up. It seems like in this world, the top of funnel

becomes more important. You need more people playing the games, the whales that spend the most money at the bottom of the funnel to drive the revenue. How has that affected the gaming industry? Just fascinated by how these dynamics and the revenue models change the type of games that get created and get popular. Initially, you see companies that are very reliant on a handful of customers that spent by far the most money. I'm not kidding when I said, I used to be the data business around this, right? So I'd have these data providers,

and I would call them sometimes saying, why does it say 50,000 euros in this line item here? Right? Because that seems like an anomaly. It's like, oh, no, that is one of our Saudi customers. And he ordered a custom sword for his character in his game. These ridiculous purchases. And so some of these companies early on,

they were very dependent on just like a handful of ridiculous. ridiculous customers, like just the profile of these people alone. You would invest in it because if one of those people gets hit by a bus, half your business is gone. So that's not something that you want to be relying on. But Free to Play really became is a slow drip. Free to play was, of course, started very quickly to model the casino mechanics of, well, who are the big spenders and can be monetized them aggressively and how long can we keep them at the table kind of thing.

But you realize that it's really about retention. as the cost of acquisition goes up in free to play, because it is all the same, all these games are free, everybody has now accepted this zero dollar price point. As a result, there's just endless amount of marketing going on to all get users at the top of the funnel and then try to convert them onto the next to the next. It's proven to be increasingly difficult. The tension really comes down to this. As it costs me more to get people into my game, I'm going to instruct my designers to be more aggressive with the bottlenecks to encourage spending. You don't want to wait for your mom to come online on Facebook and help you herd your purple cows.

Cool, they give me some money. And so it goes. And so they start to really squeeze people, which is, of course, is a turnoff. It gives a very different experience than if you have this open meadow of opportunity. So in that context, you start to see a lot of friction around free-to-play mechanics becoming really aggressive. and that was a dog whistle for a lot of the legacy publisher who immediately said, see, they're only about getting paid and this is a very hollow, shallow way of doing business. This is not about arts and culture and creating things. This is really about squeezing dollars out of old ladies.

And to some degree, that was effectively the model. What makes this all make sense is network effect. As you start building a social layer into these games, that's when things really start to gel. And so League of Legends, for instance, if you follow that example, they never, really are aggressive about microtransactions and never really drive people to the point where they make them spend money or they get stuck. But what they do is to say, well, here are all your friends. And here is a really thriving community around it. We should have e-sports where you can come and see this tournament of these really great players and share with all the people that also like the things that you like and celebrate together the release of this new character, blah, blah,

but games stop being this box thing and they start being these digital on and offline experiences that you share with other people. So free to play in many ways and for all of its ills, it also had a lot of benefits down the line as they move through that model. Talk a bit about in that social aspect, the key players like Twitch and Discord that have in their own right become cultural phenomenons and really important social networks or at least entertainment networks. What role do they play? What other companies are interesting in that space? Anything else you can say about this kind of migration of gaming from this nerdy niche thing to a much more mainstream thing that's very social? The idea that you would want to see other people online doing

anything seemed ridiculous 10 years ago. Now it seems normal. I have a 7-year-old that he doesn't know any better. He practically tells me to like a subscribe when I put him to bed at night. It's like closed the door. So that's too dystopian. That's not actually what happens. Twitch, I thought, was interesting in that it would create a live feed. And if you are a gamer from an early age on, ideally with siblings, then you instantly understand how common and normal and organic it is to watch somebody else play. I was the older brother, so I would then troubleshoot certain levels because my kid brother couldn't solve them.

And we would have house rules about every other life and every other level you'd have to hand it over their controller. That was just a house rule. So I finished the level, then it's the other person's turn and so on. As you progress through life, then you go to college, I had this one friend, he was an animator, he was really into horror games. I was all into hanging out and playing games together. I can't play that stuff, man.

I'm too feeble for this. So I would basically watch him play Silent Hill for hours on end. It was just like psychological terror that happens. It's awful, but it's a really fun experience as long as I don't have to drive. This phenomenon of watching other people play video games is very, very common. Twitch then made that something that was online. And now suddenly we have interesting people in the same way that you would have a cool radio personality, talk between cool songs. So that's what I think Twitch was a very interesting acquisition by Amazon.

They purchased them in 2013, 14, for like a billion dollars, a little shy of a billion dollars, right from under the nose of Google. And live streaming, of course, has this additional component, which I think YouTube has overlooked for a long time, watching simultaneously with other people. So as a Dutchman stranded in New York now for 20 years, the one thing that I like about the World Cup is that I know that all my other Dutch friends are watching the same game at the same time. That's what Twitch kind of gives you too, that sort of magical experience of watching at the same time with other people. The other firm you mentioned Discord, I think once you get past the viewing,

you're really talking about online communities. And I think Twitch is a little too public and emails way too private, you know, these listserv. but having a curated group of humans through work or centered around a hobby or interest that you share, I think it would be a very effective way to just have a good time with others. And what Discord does so well is it integrates with all these other phenomena, like watching online, talking online, exchanging videos, playing together. I'm not surprised that they were valued at like $7 billion last month because they are effectively a social connective tissue between all of these online activities.

I'd love to talk now about just the world as it exists today, the most interesting companies. Who makes the money, right? We talked earlier about how the pie was shared of the $60 video game that you bought at GameStop. How does that change? What does that look like today? Maybe we can start there. Who is making the money in this modern world? And then I want to ask about some specific businesses and lessons that you think other

parts of the business world could take and learn from the video game industry. The movies and shakers are companies like Epic Games, obviously. It has a lot to do, of course, with the. the amount of money that 10 cent pumps into the ecosystem. But surprisingly, if you take sort of the clear-called business theory, it doesn't really apply to a lot of this in that you think that a lot of these businesses should have been out of business by now. You think that GameStop should have been gone.

You think that large publishers like EA would have been out-competed by Tencent by now. But somehow they're all still here and they're all making a mint. And I think that it has everything to do with the explosive growth about the industry. And so all the boats went up. There was some consolidation. There was some shakeout where companies like Atari, they tried to, but they never quite regained their former glory. But most of the companies that were there 10 years ago are still here, they just take on a

different position in the market. And I think one of the notable things is that today the market is no longer governed by Japanese and American companies. It's really the Chinese companies. 20 years ago, it was a Japanese company, Nintendo, Sony, and then of course the Konami's, Capcoms, Bandai Namco's, and so on. that would run the show. Ten years ago, then you see the American companies really drive a lot of the value

and take up more market share with EA, Activision, and so on. And then in the present day, it's mostly the Chinese companies, Tencent, Nettys. The big deciders today are the bonds that have the IP and the capital. And so Nintendo is a really good example of that. They've blown everybody away with their ability to not so much reinvent themselves, but just to almost be impervious to market cycles. The Wii was a huge hit. They sold 140 million units of the Wii.

And then the Wii U was the opposite. They sold one-tenth of that, but they sold 14 million units of the thing. And nobody cared for it. That was a crappy device. And that was the point when everybody thought Nintendo's done. Nintendo is toast. And it ends up being totally not the case because the switch is doing really well. And it's not just doing well in its traditional conventional markets.

It's also doing well in China and all these other markets. So they've been able to reinvent themselves and penetrate new market areas. No one saw that coming. So the legacy companies in the world, they do really well. At the same time, you have a lot of these newcomers like the Tencent I mentioned. And the Tencent's universe, of course, benefits greatly from having made a few smart, although high-priced acquisitions in a form of Supercell, in terms of Riot Games, and a bunch of others, where they just have a lot of fingers and a lot of pies, and that's just the fingers that we know about.

It's just a spider crawl their way across the universe looking for content and creativity. Then you have some newcomers in... Chinese market. So, Yoho with Genshin Impact, for instance. Conventionally, you would think of blockbuster titles and AAA productions coming from North America from Japan. And now suddenly you have a free-to-play Chinese title that looks and feels like Zelda Breath of the Wild, which is like sort of the high bar for Nintendo's creativity.

But it's free to play. It's not 60 bucks. I don't have to buy a dedicated device for it. It's on my phone. And it's this open world universe. So there's a lot of changes happening where the incumbents are being out-competed and out-maneuvered by newcomers. If we look back at the North American market, what's really interesting, now you have Epic and we have Robox, for instance. Those are the two major ones that have really manifested themselves in an interesting way in that they don't necessarily follow the conventional way of making games.

They offer so much more in terms of how they engage their user base and how they make money. You see this now with investment announcement for the series H for Roblox yesterday, valued at $29.5 billion, good for them, you know. And I know a bunch of the people on the management team, and they're really seasoned people. They know how to get things done. And they have this beautiful model of not just having the game, but also the engine and, of course, the backbone. And so they have this flywheel that they do really well. And it speaks to the imagination. And so all it takes is a pandemic to then really, of course, jump into the front of the row.

what it's going to do, it's going to put user-generated content on the map. Because of Roblox, every other company is going to be asked, what are you doing about user-based creativity? Like, how are you going to facilitate that process? And can people monetize that? Can they make money off of this? How do you navigate the space? So it's not so much that you have a novel idea and you're successful in your own right,

but you shift the category entirely. And I think that that's what Robox is doing. I think that's what Epic is doing, which relies not just on its third-party relationships in the Epic Game Store, but they also have the Unreal Engine, which they then, of course, sell to Hollywood with having the Mandalorian shot in Unreal Engine 4. All of these aspects make it so that no longer are we simply making cool games, launching them with a lot of fanfare and shipping a box to a consumer. Now it becomes this ecosystem of creativity.

And you see that really in the Epic Games, the Robloxes. And you have to ask where legacy publishers are with this, what's Microsoft going to do about this? What's EA going to do about this? I know that you've done some investments. in the space in recent times. And I'm really curious how you think about the zones of opportunity to invest in the gaming ecosystem. How would you break down the categories in which you could invest, like a studio could be one example that seems risky, but potentially very high reward?

What are the categories is how you think about them and how do you think about risk reward in the different categories? I'm a very irrational investor, I should say. I also build a business around games, which no one thought was a good idea. And in retrospect, it wasn't. It paid off. We had a great exit. But for an entertainment industry, I think rationalization of the business is always in short supply, which is to say, you can't take a piece of paper and a pen to it and say, well, what actually works here? So my angle in all this is I like it when companies are entering a new space that is uncluttered with natural apex predators.

So the reason mobile did so well is because all of the conventional publishers that held all the IP and all of the creative development power, they didn't think that mobile was going to be any big deal. I spoke with them. I said to Ubisoft of WhatsApp. They're like, yeah, we're going to sit and wait. Because to them, before the iPhone, mobile was a shit show because it was of the mechanics and the software languages

that you needed to go through. And so just from a development, it just didn't have any margin in it. They saw this fancy new phone and they see Apple. Apple's trying to get their piece, of course. They're like, yeah, we're not going to run at this. we're going to just have some of the newcomers first break their legs and then we'll step over the dead bodies and see if we can claim something. Because of that, they've moved so slow in that new category that allowed newcomers to take most of the value out of it. As an investor, I always look for moments where that's happening, where the incumbents are just sort of sitting on something but not acting on it.

And then you have these newcomers creating and you see the numbers go up. And I'm talking about healthy numbers. There is a phenomenal way you can say, well, what about fall guys or among us? I like those games. I think that they're great. I play them for more hours than I should admit. But at the same time, it's like, well, where does that business go after this? So they're going to sell me plushies.

Is there going to be among us too? And will I care about this? Probably not. They tried and people said, no, thanks. It's not a flash in the pan, but you have to wonder, do we still care about among us next year? What's the longevity here? So I'm always curious to look at the businesses that are at the cusp of something that's about to go big in terms of it's a space. no apex predators want to move into,

but they have a plan that goes a little further than we have a cool game around this. Because cloning is a real problem for the title like Among Us 2. You see lots of newcomers there. If you remember, Fortnite was based on Player on No Battlegrounds. PubG basically created the category in it of its own right, but it charged 30 bucks, and it was really photorealistic with shooters and guns and all stuff.

And then Fortnite comes around, and it's this goofy circus. but it's really smooth and it's free. Epic took the model, took the category, and they just ran with it. And so that's a moment to invest. I was told when I came to U.S., that's an expression, pioneers are the people with the arrows in their back? Pioneers get slaughtered, settlers get rich.

So you have the kind of wonder. As an investor, it's like sometimes I hear a story from a creative, I love the vision, but that is so far out. Like, no one will get it. I don't think being creative is a unique virtue. It's really about do you have a rationalized model around it that makes sense. And so PubG came into a lot of success and then Epic just ran with it. I think so many times you see companies run into his success, but then they don't know what to do next

to capture the lightning in a bottle again. So that's where I said it is a vestibre. Is there anything today that feels to you like Mobile did back then when the legacy apex predator companies were sitting on their hands and waiting to see what happens? Is there any platform equivalent or business equivalent to that today that you're watching? So mobile was driven a lot by technology. It was a new device category that was very disruptive of existing devices. So it's basically like asking me, what's the new iPhone? It's like, yeah.

To answer your question, what for me was interesting about the iPhone wasn't the new device or the hardware specs. It was really the business model that came with it. I always look at market saying, what is the competitive advantage of a business model? It is because of the way that you do things and combine components of the business that you are better than everybody else, not because you also have a website or a mobile game or whatever, a custom controller.

So I would look for the business models. I looked at it from a product perspective and okay, we're all selling boxes through retail. Then we move into a service component where it's free to play and we can do all that. And that's cool. Games are now mainstream, which means that they have 3 billion people worldwide as an addressable audience, which allows for novel business models,

business innovations. And if we purely look at how games make money, I can think of four of them. So it starts with subscription. If you look at the success of GamePass with 16, 17, 17 million subscribers nowadays, you have EA, play, you have Ubisoft Plus. That's just the games category. Of course, Ubisoft calls it their way because of the success of Disney Plus, which is blowing up in this so on. So this move towards subscriptions is something that works really well for consumers. They get this buffet of content. Everybody gets the model now. It works cross-platform. And it works really well for game companies, particularly the publicly traded ones, because everybody loves recurrent revenue on their books as opposed to transaction-based revenue. The valuations for those companies are much higher, access to capital is better.

Everybody wins. And so subscription is one. And anybody diving into that has a good time. The second one, because of the size of the audience, you can now also do indirect revenue. So there's a huge swat of people in free to play that don't spend any money ever, nor will they. And that's fine. but they're going to have to live with advertising. And so all of money dedicated to the $70 billion in TV broadcast in the U.S.

and the 300 billion or so that people spend on advertising worldwide, I should know that exactly because I was at Nielsen, I suppose. But all of those advertisers are desperately looking for pockets and places where they can reach younger consumers. So if you look at sports, sports is doing fine, but the average age of baseball fans and football fans is not going down. So for advertisers to look for younger audiences that are still consumers that can influence in their purchases behavior, sports and traditional media aren't really the place to go anymore. And so they try to get into games.

And so because of the size of that business and the interest in that, you're going to see advertising appearing all over the place. We already saw Bud Light did a cooler console where you could cool two beers and then KFC had a chicken fryer console. It always feels kind of broy and everybody had a good time, high-fiving each other. Is that really going to move the needle? Probably not. But it's not just the income that's like Candy Crush, Zingha, that are trying to explore advertising more aggressively. I think you will very soon see the game equivalent of Soap Series

where you just have a category of CPG companies that are all going to pull their money and say, we're going to make games of this nature, this category, the genre, and everybody knows that it's funded by automotive or people that make noodles or whatever. So advertising will be second. And the third one will be the Roblox category of user-generated content. Can you design a secure, safe, creative space for players

so that you don't have to acquire new ones all the time, but that you retain them longer? And also, they then take care of at least part of the production process and the development of the content that keeps everybody else in the ecosystem. I think part of the success of Minecraft was that everybody's creating stuff for everybody else in there and there's so much to do and see and play. There's no way that a conventional creative firm could produce the same amount of digital assets and content as its own user base. So can you figure out a way to set that up so that everybody benefits from it?

And I think Roblox will be the first. They haven't quite figured out the economics, right, valued at $30 billion, but they're $200 million in the whole annually. Like, all right, let's hope that works out. And I'm sure that they will, but it would be more credible if they were making less of profit just yet. So that's the third one. And then the fourth one, and I think that's one, is the furthest out. But if you think about how games really have allowed people to attach meaning and value to digital assets, we now do things online that people 10 years ago thought were meaningless and frivolous.

When I started my business, it was about explaining people the virtues of virtual items and micro-transactions. And why would you spend real money on in-game currency to buy a purple sword to go with your gold, horse to go on this, whatever, this timed raid. It made no sense to a lot of people. Of course, that is naive. I'm sure you haven't too, but if you've ever played Magic the Gathering or Pokemon, the card games, each of those has value. Those cards have an intrinsic value. And the creator, the publisher of those cards, they control that economy. They tell you exactly how many rairs. And so you have the Black Lotus cards in Magic the Gathering or spectral tigers in World of Warcraft. They're worth thousands of dollars and they can be traded against. So the equivalent of that in a digital

environment requires something new. And so you start to see the early shape of crypto-based gaming where now we have basically a financial system that isn't encumbered by international taxes and exchange rates. And you and I can trade against each other on this card or this asset that I've earned and grinded my way in this game. I can settle to you and we can trade against it. And so I think that that's going to be on the horizon. So that's still two to five years out. But that's a space where if you can somehow take that mechanic and make it work for you, I think that that could be very interesting and done a lot. Because ultimately, whether we believe it or not, then this might be our kids' children, it might be a behavior that we don't quite understand, but it will have meaning to them

in the same way that what we value made no sense to our parents. They never looked at gaming as something meaningful, yet here we are, 160 billion dollars later. For all those reasons, I think some of this is on a longer timeline than others, but those would be four areas where I'd look at and say, well, whoever manages to incorporate those new phenomena, those new behaviors into their business model and create interesting content around them, those are going to be very, very valuable companies soon enough. I love the four categories. And it begs one final question, which is, if we think about all these examples of games and gaming, being sort of at the edge of technology, of business models, it seems like they're always at the forefront. Is there anything in closing that you think

is especially portable about the cutting-edge video game companies of today that should cause other non-video game companies to take notice and maybe consider applying those business strategies in other industries. I would say something like this. The games industry has always been on the fringes of entertainment. No one cared. It was for the longest time, the category of entertainment that was bad.

Politicians would use it to demonize behavior and say, look at all these violence coming from these games, blah, blah, blah. And so the games industry has always been on its back foot. If you look at it culturally, it's starting to change a little bit now, but for as long as I've been in the industry, which is now coming up in 20 years, unlike Hollywood and unlike the music industry, there's not a lot of red carpet events. Just from a personality point of view, the games industry at the top, and I talk to people that have been part of like these billion other franchises, as much as I do to indies and like starting designers through my class at NYU, what they all have

in common is that they check their ego at the door. It's such a cliche and something, but from a culture industry, for an industry that's by its very nature, something that's built on people being extroverted and having a story to tell or having an idea to transmit and communicate to other people, they don't really do it for the sake of their own celebration. They don't really want to necessarily recognized and stood out into a crowd. And so the games, culturally and individually, as I experiences, have always been sort of the quiet kid in the back of the room tinkering away. And it has retained a lot of that character. So if you see it Tim Sweeney, so I met him briefly two years ago at E3, he looks like the programmer that's been sitting in the corner in a window

his office for the last 20 years, right? He wears a cargo pants. He gives a big backpack, dorky-looking fellow. That guy's a billionaire. And he has a vision for the world. And he's been it since he was a kid too. And I think he personifies in so many ways, sort of what really makes this industry tick is that there is this modest genius that operates it behind the scenes, whereas so many other entertainment industries, it's all about the fanfare and the flashy lights and, oh, what did Kanye wear it yesterday? And like, oh, let's talk. Who cares? There's no Team Z for games. So that absence, I think, of ego in everything that you do, and I said it's also as an entrepreneur, if you're able to let that go, if you're able to just focus on the problem,

If you're able just to focus on building cool experiences, I think long term that is far more interesting than your 50 minutes of fame. And I think from a financial standpoint, it's just much more interesting long term to invest in companies like that. So that's how I would personally always evaluate people. You just look at the management team and the seniority and their ability to get shit done, but really just a cadence of their ego. So that would be my lesson.

If you are in a different entertainment business, if you could just tone it down a little bit and actually just do your job as a musician and do your job as a job as a different entertainment business, and do a job as a marketing manager for a film. I think that that's one of the lessons I would take from the games industry. Well, Yos, this has been just a fantastic tour through what was a little niche thing. Now is a massive enterprise value industry in the entire world and lots of things to take away and think about. My closing question that I ask every guest is to ask what the kindest thing that anyone's

ever done for you is. My company started really with this wild idea because I wasn't sure what to do. I had just come out of grad school. and I had sort of lost my own way. The thing is that you grew up in a world where you end up thinking about how to be in that world. So you start a business, do you take a job? What do you go from here? One of the kind of things that anyone has ever done from me was a doctor at Columbia University.

So I was diagnosed in 2007 with cancer. It was her. I won't say her name because I don't want to embarrass her, but she was the one who said, look, you need to go get this checked out, and you need to upgrade your insurance. And if it's nothing, then you'll spend a little extra money. If it's something, then you're going to save yourself a whole rig and roll. So I went through a whole medical thing for like a year, costs hundreds of thousands

of dollars, which I didn't pay because she told me to think about this. And it wasn't so much about saving the money, but it was about someone who's like, let me look out for you. And so since then, as I was starting to think about what to do, I always try to honor that idea of what's the best for you. And I think it's in building businesses or talking to my students, going through the pandemic over the last semester, you know, I try to kind of channel that, pay that forward, but I say, like, let me just empathize with your circumstance a little bit and like,

how can we be together? But that was really such a helpful, beautiful person to help, you know, in that moment. So that was one of the kindest things back then, which was meaningful to me. Wonderful. Very unique answer. Some of these start to cluster around similar answers, and that one's quite distinct and unique. I love the story. I've loved our conversation today. Thank you so much for your time. Likewise, man. Nice to meet you, Patrick. This episode was brought to you by Canalyst. In this four-part mini-series, I sit down with Canales customer Fenimore asset management to discuss the firm's history and how Canales helps their firm better find and manage their investments. In this week's episode, Fenimore's portfolio manager, Drew Wilson and I discuss how investment analysis may change in the future. How do you think about the future as you think about continuing to pursue the same, like you said, evolve the process that maybe at its baseline is conceptually still the same, but, keeps getting more and more nuanced. In what ways do you think analysis will change in the future as you're

doing these deep dives on companies? I view the investment management process as essentially two subroutines, the research process and the portfolio management process. The terminal points of each of these process will always remain the same. For research, it begins with a list of 5,000 publicly traded U.S. companies and culminates with an inventory of our best ideas and our best guesses as to what those ideas are worth. This is where the portfolio management process picks up and converts that inventory into the best risk-adjusted returns for our clients. While these goals might remain the same, like I said, we're always trying to improve the process and the tools that we use to achieve these goals, panelists just being one example of these. I think,

think that the availability of data and the advancements in technology appropriately applied will continue to provide us with new tools to improve both research and portfolio management. For instance, we're using datasets now that were never available to us in the past to help us determine, say, when in industry, the fundamentals are beginning to improve or worsen. And on the portfolio management side, we're able to look at our trades in finite detail, like never before, to help us calibrate and hopefully improve our decision-making in the future. If you enjoyed this episode, you can sign up for a new email newsletter sent out each week called Inside the episode. Each week, I condensed that week's episode to my favorite big ideas, quotations, and more.

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