Invest Like the Best with Patrick O'Shaughnessy - Mario Cibelli - Cornerstone Investing Insights - [Invest Like the Best, EP.205]

Episode Date: December 22, 2020

My guest today is Mario Cibelli. Mario is the managing partner of Marathon Partners Equity Management, a long-biased, concentrated investment firm that he's run for over 20 years. In our conversation, we discuss how his firm figured out Blockbuster's DVD volume and told Reed Hastings and Netflix about their numbers, why visiting a company's distribution center can be an edge for investors, Mario's interesting foray into the world of tequila, and how a few "cornerstone" investing insights have led to many of Marathon's long positions. I hope you enjoy my conversation with Mario.   This episode of Invest like the Best is brought to you by Tegus. Tegus has built the most extensive primary information platform available for investors. With Tegus, you can learn everything you’d want to know about a company in an on-demand digital platform. Investors share their expert calls, allowing others to instantly access more than 10,000 calls on Square, Snowflake, or almost any company of interest. All you have to do is log in. Visit https://www.tegus.co/patrick to learn more.   For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club and new email newsletter called “Inside the Episode” at InvestorFieldGuide.com/bookclub. Follow Patrick on Twitter at @patrick_oshag   Show Notes (2:34) – (First question) – Doing a deep dive into the early days of Netflix             (2:43) – Netflixed: The Epic Battle for America's Eyeballs (6:50) – What was impressive about Reed (7:34) – Visiting Netflix’s distribution centers early on and the lessons of those visits (10:44) – Lessons learned from other distribution centers (17:52) – What helps create good luck for a company (19:17) – Why tequila was fun to investigate (25:09) – Why tequila is different from other hard liquors (27:40) – Finding the cornerstone insight in a company (29:20) – What he’s learned about media-driven personalities and WWE (34:30) – Lessons in starting a media company and developing IP (39:00) – Having to battle activist shareholders in business (42:43) – How the rate of return in deep investigations has changed over his time (45:08) – Kindest thing anyone has done for him   Learn More For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club and new email newsletter called “Inside the Episode” at InvestorFieldGuide.com/bookclub. Follow Patrick on Twitter at @patrick_oshag

This episode of Invest Like the Best is brought to you by Teegas. I started hearing about Teegas when several of my close professional investor friends sent me passages or ideas they'd found on the Teegas platform. Conducting effective primary research shouldn't take weeks. It should take hours. Searching for answers shouldn't be lengthy, cumbersome process. It should be easy and nearly immediate. Expert calls should not cost $1,000. Teaguez solves these problems and makes primary research faster and better for professional investors. Tecis has built the most extensive primary primary information platform available for all investors. With TIGIS, you can learn everything you'd want to know about a company in an on-demand digital platform. Investors share their expert calls, allowing others to instantly access more than 10,000 calls on Square, Snowflake, or almost any company of interest. All you have to do is log in. Still want to do your own calls, TIGAS has a solution. Experts that are just as good or better than what you'd find on other networks for just $300 per call, not the $1,000 or more that others charge. If you're curious about Tegas, call the top performing investment manager you can think of. They're probably already a TIGA's customer,

and they'll point you in the right direction because customers, myself included, love Tegas. Visit Tegas.co slash Patrick to learn more. 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 investorfieldguide.com. Patrick O'Shaughnessy 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 Mario Chabelli. Mario is the managing partner of Marathon Partners Equity Management, a long-biased, Interated investment firm that he's run for over 20 years. In our conversation, we discussed how his firm figured out Blockbuster's DVD volume and told Reed Hastings and Netflix about their numbers. Why visiting a company's distribution center can be an edge for investors, Mario's interesting for

way into the world of tequila, and how a few cornerstone investing insights have led to many of Marathon's long positions. I hope you enjoy my great conversation with Mario. So, Mario, you and I discussed a place to begin this conversation a couple days ago, and I think it's hard to pick something better than an amazing story that you were a part of that's been written about publicly in the book Netflix. And I think you've never told the full story from your perspective in a setting like this. So I just think it's an amazing wedge into a conversation about doing extremely deep dives on companies. And I'll just leave it there. I'll let you begin with the Netflix

DC story. You tell us how this started and walk us through it. I haven't fully told it. I haven't told it at all. Good. I love being first. For a while, I kind of considered it proprietary. This is a good time for a great reveal. We had an investment in Netflix. We've been fortunate enough to have a number of really good companies in the portfolio over the years, and Netflix is one of them. We got in there at a time where the company wasn't particularly in favor on Wall Street. So we got a fair amount of access. I tweeted at one point about a visit to a distribution center on Long Island. It was one of the most interesting DC visits I've ever had in my career. We do a lot of thinking, a lot of deep work, detail

concentrated portfolio like we run are very, very important. So one of the things I came up with, let's track how these services run in comparison. Netflix had its service subscription DVD by the mail, red envelope, everyone knows that stuff. Blockbuster had something called total access that they were competing with against Netflix. And even Walmart jumped into the fray at one point. We subscribed to every service and we said, let's start putting them through their paces. One of the things we looked at is what percentage of the time did you get what was at the top of your queue, how many days did it take to turn around? So you selected them, when did they come, when you sent them back, when did the next one come, when did they receive it? All that stuff.

Unsurprisingly, Netflix outperformed everyone. That was interesting. One of the ways that we kept track of everything, we had all these envelopes. We'd keep envelopes and write data on and when it was shipped when it came back and we had eventually entered into a spreadsheet. We had DVD envelopes all over the place in the office from all three services. If you stare at something for long enough, sometimes certain patterns reveal themselves, and a guy in our office works with me to this day, Eric Heidi, noticed that on the envelope, the Blockbuster envelope,

there were certain sets of numbers that kind of would repeat and in other sets that wouldn't. And we started looking into this more closely. And what we discovered was that on the Blockbuster envelope that you received your DVD and Blockbuster was telling you how many customers there were and how many DVDs they were sending out. We started tracking that. On the quarterly conference call, Blockbuster would say, this is how many subscribers that we have. And then you could kind of triangulate what was the beginning subscribers, what was the ending subscribers, and then how many subscribers they kind of had throughout the quarter. Essentially, we could see that their churn was astronomically high,

absurdly high, maybe three to five X, the churn that Netflix had. We saw that, we spotted that. We were tracking it, but it was pretty labor intensive. Maybe you might argue with somewhat limited benefit. It told us what we wanted to know, that the blockbuster service was, to us, was unsustainable and didn't perform nearly as well as the Netflix service. So what we decided to do was let Netflix know about what we had discovered. We had a couple calls of them. I think they initially didn't even believe us that we were able to do this and then we showed it to them. They took it over. The reason I was in the book, Netflix, was because we were the ones that kind of cracked the code on envelope gate. And it was very helpful to Netflix for a period of time.

When it wasn't all so clear that they were going to emerge victorious, I kept in touch with Reed for a number of years. I still consider him one of the very best leader CEOs that I've ever had the pleasure investing in my career. He would absolutely, no doubt remember us. and remembered that whole incident. So literally on the envelopes, the serial number was like counting up or something. Is that what you found? That's right. Not getting too specific, yes.

It's incredible. I mean, talk about a good example of doing insane, detail-oriented work on a business. What about Reed was so impressive or is so impressive? His ability to just see things as they were going to be was just absolutely, incredible, you know, and he can boil down kind of a very big problem into super simple language. You know, a little bit like, I mean, how Warren Buffett does. So you can distill a very complicated thing into a handful of senses that kind of wouldn't make sense. Absolute tremendous vision. He would believe the direction that he needed to go and would get there before to anyone else

and have a strong belief in it pulling a lot of people along for the ride, including in that as motivation as well, how to organize a lot of individuals, a lot of smart individuals to get behind you would push in the same direction. I'd say first and foremost, just tremendous, tremendous, visionary. We're going to talk at some length about why it's valuable and interesting to visit distribution centers of companies, which is certainly a topic I've never talked about on the show before. It seems sort of like almost mundane, but my guess is that they're treasure trove of information. What was interesting about the visit to Netflix's distribution center early on? This is a part of the business I've always loved. Lots of people analyze companies without visiting them.

Some people have a bias. Management teams are. marketing to you, of course they're going to tell you what you want here. I've always had the belief that I can potentially learn more and get an edge by visiting companies, and I may see something, I may spot a detail or something that either changes my mind or reaffirms kind of what my existing belief is. I'd say if I zoomed out a little bit on Netflix, we visited three D.C. We visited Long Island, D.C., which was the first one. We visited D.C. in San Jose, which a lot of people visited, then we also visited one in Atlanta. So we started mixing and matching and seeing certain patterns repeat about with the DCs. But the one in New York was the most epic one. They sent us there

without any representatives from the company. So it was just us and the mandra of the office. I think what we saw essentially was an operation that was very, very hard to replicate that had years and years of finding and bumping into bottlenecks and eliminating them and getting more and more and more efficient. That would range from how labor was used. The lack of storage of DVDs, they actually didn't store them anywhere. They always remained on the desk.

The manager explained to us how the DVDs were always looking for a home. They weren't trying to find the DVD that the home wanted. They had the DVD in hand and say, hey, which home would this want this? To a bunch of machines that they bought that sorted the material that didn't work, that destroyed a number of DVDs and that they had to customize.

just tremendous amount of things, and you get the sense that this is not going to be easy to do. Blockbuster can't go from running stores to running a DVD by the mail subscription service without a tremendous amount of work, a lot of brilliant people running around and trying to fix it. I think that's ultimately what we figured out there that it's not going to be easy to replicate, and that's a continuing theme. The market gets validated. Competitors are coming. Some of them are going to be bigger and more well capitalized.

is that business defensible? And I do believe that you can get insights into that in a distribution center, of course, talking to the management team and whatnot. But it's great to get out in the field and see what really makes an operation tick. Not all investments obviously lend themselves to that. There's no factory to visit for Facebook or PayPal, but on a lot of other services, there are. How many distribution center visits do you think you've done across your entire career? A lot less since COVID happened. I've done one since then. I did one trip. I got in the airplane two months ago to visit a distribution center in Dallas for Stitch Fix. Across my career, I mean, I mean, eight to 12 times 23 and a half years. Using Stitch Fix or another example, just give some more

examples of things that you have learned. What are some of the most interesting lessons you've learned spending that many days and trips to visit these places. My guess is you're in the top percentile or something by that end of experience walking through these places that are sort of the unseen force behind a lot of physical businesses. What are some other examples of things you've seen? You said, huh, that's funny or that's interesting or that's impressive. The Stitch Fix DC visit that we did recently, I'll say this. I was like a kid in a candy shop down in Dallas. that was the most interesting DC that I've seen since my early days on Netflix. It was super, super interesting some of the different dynamics that were going on there.

So we got two hours there, which was super nice of them to allocate that much time. We spent time with their head of U.S. operations, absolutely brilliant dynamic guy that explained the flow of product throughout the facility there. And I walked out so many questions. I mean, I could have just spent 12 hours there. Really could have. I walked out saying, this is not an e-commerce business that we just saw. This is a whole different kind of service.

And I don't think anyone in the world potentially is trying to do what they do at scale. And it's going to be a very complicated thing to get right. But if they get it right, and I think they've gotten a lot right so far, it could really be something special. There's a number of different things that we saw there that I think very dramatic. versus traditional e-commerce. I've spent exactly zero time in a distribution center. When you say they're not a traditional e-commerce company, like what is that gap? The way I would think of traditional e-commerce and potentially even Amazon is that they're sending

out finished goods. And generally speaking, they're hoping that they don't come back with their customers satisfied. I think there's been a tremendous amount of volume of that type of e-commerce. For starters, Stitch Fix is built a tremendous expectation of re-com. returns that most e-commerce operations don't kind of have to think of. And returns are margin killers for that model. There were some really interesting labor bottlenecks present at Stitchfix that I don't think other companies in traditional e-commerce think about. You might say a labor

bottleneck is negative, and I would say, yeah, it potentially is. It's a level of complication there and difficulty that makes it harder to get right. So the way Stitchfix presents its units, generally speaking, all the collar stays are out, the plastic's gone, everything is taken apart. They're picked, they're folded, they're stacked, they're wrapped, they're put in a box, and they're sent out, and the quality control quality checks go on at this point. That was a tremendous part of the human labor that was present in the D.C. was in that area. When the box is opened, you could try everything on inside a six or seven minutes because it's all ready to be tried on. That's an interesting way to present units versus another e-commerce operation that will send you some shirts.

The collar stays are in. There's pins in them. They're folded nicely. There's plastic on top of them. If you had four or five things sent you from a traditional e-commerce company, you want to try them all on, it might take you seven or eight minutes just to get everything set so you actually could try them on. They put great effort into ensuring that when the box is open, that it's very presentable.

that's an expensive, labor-intensive thing to do for a very small win. So that labor bottleneck is, I think, very different than traditional e-commerce. Another thing that's just absolutely fascinating is that if you go onto their site now and you want to get a fixed set to you, they show here's the first available date. That first available day could be seven days in the future, 14 days in the future when they're business. There's some range of things. Just think about from an operator's point of view what it means to know that shipments, what they're going to be like in two weeks. It's very different to traditional e-commerce.

There's no seasonality in the business, really. It has grown over time. But they have a very, very predictable production schedule. So if they're sending out a thousand fixes today, they might send 110 tomorrow and 110 plus another five the next day. Like it's very kind of predictable. So when you introduce that level of predictability into a facility, what allows a tremendous amount of efficiency in planning and whatnot that would refurbate throughout the whole distribution center,

that's just simply unavailable to a traditional e-commerce operation that might have a peak to trough delta of, I don't know, 3x to 8x. It just is a whole different way of planning your business. I mean, how nice. It's an apparel retailer. they have a set schedule of production where like next week sold out the week after that sold out it's absolutely fascinating to me you start getting into the whole personalization of inventory and how they use data and all that so their keep rates on what they're sending out should be better than someone that would would hope to compete with them we actually need to do more work on the data side and everything we've heard about that that makes sense to me but what we saw in that distribution center to me is that is not traditional e-commerce by any stretch it was hard to to do, they have years of mistakes and bottlenecks kind of being solved. And the copycat companies, they'll come. They're going to have to make all those mistakes. And Stitch Fix will continue to innovate

and keep that delta between them and the would-be competitors. And that could be mine for years and years and years. So look, if they're doing a good job, they're going to continue to innovate very rapidly, but more and more distance between them and would-be competitors, they kind of want to make it look hopeless for those that are coming in after them. And I think a store operator like Jake Crew or Urban Outfitters, I think is attempting a service like this that operates stores. Good luck. It's going to be tough. It's going to be tough to do subscription apparel. It's not going to be easy. My interest, by the way, I would say it's not entirely clear that Stitch Fix is going to succeed. I think they will. The level of success, how far they take it. I don't know.

But I'm not saying this is easy. I'm actually saying it's really, really hard. That's the whole point. That's going to allow them to potentially escape Earth's gravitational pull in a big way. I think there's a chance that they could really be big and successful. And 10 years from now, I'll be talking about that DC visit in Dallas that I did, just like I am about the Netflix visit we did in the early 2000s. You said something there, which is fascinating to me. Good luck, which it's kind of an interesting way to think about competitive advantage

that you want the businesses you're investing in to have some version of that word. To would-be competitors, you would be saying, good luck for some reason or another. That strikes me as a good example of the kind of seven powers or some of these traditional methods for thinking about edge as sort of process power. There's no way to learn how to do it, but by doing it and they've made so many mistakes that there's just this compounding separation between the best and the second best that's trying to catch up. What are other things that you've seen, perhaps, like you said, Facebook doesn't have factories?

What are other things that you've seen that feel like that good luck concept? And is that basically what you're always looking for when doing one of these deep dives on a company? On the challenger company side, disruptive business model side, absolutely we'd be looking for that. We had a great investment, a company we really loved called Zoom that I think right now would be valued in the billions of billions. It happened to be taken over by PayPal a couple years. And they were looking to disrupt traditional international remittances, so the Western unions of the world. we did a tremendous amount of work of that company. Unlike Stitch Fix, not unlike some other ones,

there weren't a lot of profits necessarily, the near term to kind of justify the interest, say, from an outside investor. The way they did remittances was so difficult to get right and was fraught with risk and fraud and know your KYC rules and all these rules that required for financial intermediaries, it was so terribly difficult to get right.

We came to the conclusion that if this company's growth rate, kind of falls off a cliff, the platform is extremely valuable. And we were right. PayPal recognized that. They had a multi-year head start. So I guess that's a yes to your question. That was a small example, another example of a company that just put so much distance between it and its competition. Can we talk about tequila and everything you've learned about why it's an interesting beverage and perhaps a specific company that's interesting in that arena? I'll tell you, it's been a lot of fun to do research on this one. I wasn't a fan of tequila. I'm not even a big drinker, but I now have an appreciation for tequila, and I have a small little tequila collection, but it was on the basis

of an investment opportunity. The biggest tequila producer in the world, no surprise, is headquartered in Mexico. The name of the company is Bechle, and a couple years ago went through an IPO. The story of Bechle is really the story of tequila. The story of tequila is really about a plant And that grows primarily in central Mexico called blue web agave. Blue webber agave takes anywhere from five to nine years to mature, different than a lot of other spirit companies. The input is not an annual crop. So there have been in the past. We've found three of them more recently.

We're in one of the price spikes. Now, there have been three epic price spikes of blue web agave. Blue rubber agave a couple years ago, traded hands for five pesos a kilo. The current price is in the high 20s per kilo. That is the main input in tequila. Tequila producers have had to absorb a massive price spike in their main input. That caused the Beclet shares to trade down to levels that we thought were absolutely absurd. For about coming up on two years now, we've been buying shares of Beclai from its absolute lows until the current price.

And we think that that company is a very unique opportunity. One of the other certain sectors that we can talk about that later that we tend to find a lot of our investments in. But I consider as generalists, but going back to my old days of selling research to hedge funds, were always turned on by inefficient sectors in the marketplace. And Backlight was a super interesting company. You essentially had a really old company with absolutely tremendous brands that was driving most of its profitability as a U.S. company, but decide to list equity on the Mexican bores and sold a relatively small sliver to the public, 15%. There's questions why they do that.

What was the motivation behind that? The company was practically debt-free. It didn't really need to raise any capital. To us, that was a perfect recipe for potentially mispriced security. Essentially what we saw. I actually called this one the second best risk-reward trade I've ever seen in my career ever. I don't think I can lose money here. And I got really good upside and I got free calls all over the place.

That's a super interesting equity. Beckley was trading at a discount to peers in the spirits business, but its margins had been compressed in fairly dramatic fashion because the price of blue Weber-Agave had spiked. So here they were trading at a cyclically lower than peer multiple with cyclically depressed margins growing faster than peers because their tequila exposure is way higher than peers with very little debt. And I was like, this just doesn't make sense outside of malfeasance or something or the numbers

weren't real, that there was no way that we really could lose money. And that was the initial appeal. Now, as we've gotten to know the company better and become more familiar with the story of tequila, it's gotten really interesting. And I do think it's one of these kinds of things, you know, 10 years from now. It's just going to be a bigger and more valuable company. I guess I think what we've really done is we've figured out a backdoor cheap way to buy into the spirits business.

Spirits businesses are hard to justify for value type investors because they're always well bid for. Why are they always well bid for? Because they survive inflation, deflation, feasts, famine, war, they're always around. They don't go away. You're not going to get disrupted. In a zero interest rate world, you have an opportunity for real earnings growth. That's infinitely valuable. I think what we've done is we found kind of an interesting way to buy into a spirits company

that hasn't been fully recognized that it belongs with its peer set, yet valuation-wise, what we believe we're at the beginning stages of a very likely collapse in agave pricing. Agave, blue-weber agave, farmers in Mexico have been planting multiples of the harvest for the past three years, and we think there's a windfall event, margin event in the future of Beclay. We kind of believe Bechle is trading at 12 to 13 times EBITDA on 20, 2022 numbers versus peers today like Brown-Fleman and Diageo that are trading kind of in the high teens multiples of 22 numbers. And we think when we get to that period of time, there'd be no reason for Beckley to trade a discount to the group based on the earnings that we think that they'll have.

Agave pricing does not have to collapse for us to make a positive return on Beckway. But if it does, we're really going to have a charged return. And we think it's very likely that it will. But that's the downside protection. That's the interesting part. It doesn't have to happen for us to get pretty positive returns for our investors. Oh, by the way, what's also interesting is that Bechley has been insourcing more and more of its production of agave. And that takes time to build up your agave fields because they take multiple years to mature. More and more of their production will come from in-house. We think the agave price decline will be the catalyst that people would identify and see to ultimately bid up shares of Beckley to probably more appropriate evaluation

over time. But because they're insourcing more and more of their production where their costs probably five to seven pesos per kilo, it almost doesn't matter if agave prices don't correct because they're producing more and more in-house. And at their scale, at their size, not everyone will be able to produce internally like they do. What else have you learned that's interesting about the spirits business in general and maybe tequila just as a thing relative to other spirits. It seems like there's been a surge in its popularity. I love the features you ticked off about sort of the cockroach qualities of the industry in general, which is why they trade at large multiples. Anything else interesting from the story of tequila that you uncovered?

It's hard sometimes in the spirits and beverage businesses to create a trend. But once that trends starts, it's also hard to turn it off. I think there is a wonderful trend going on in tequila right now in the U.S. and Canada that we can't see how it turns off at least for an extended period of time. And that trend is, I presented the idea to a group of people not too long ago, brought a bottle with me, and a lot of people that didn't want to try it because it was like, oh, I had shots when I was in college and got sick, whatever, they had a negative experience for it. And I said, try it anyway, try it anyway. And I brought a nice expensive ball. bottle. They ended up loving it. I think a lot of people have figured out that it's a great drink.

Latin heritage and the internationalization of our country, I think it's kind of played a role into that. And essentially, there's a lot of different variations of it. So it can range from pretty crappy to absolutely amazing. That range would exceed, say, something for a vodka. I do think vodka and a couple other spirits will be shareholders to tequila for an extended period of time. Look, there's no parties right now, but the party five years ago, there was one tequila drinker. Party three years ago, there were four. Next year, we're going to get past the coronavirus. There'll be eight.

It's kind of playing out like that. So it's absolutely growing share domestically. And, of course, we border Mexico so that a lot of people travel to Mexico. And, you know, that heritage translates into the U.S. and Canada more easily. absolute home run will be is that it catches on internationally. The market share for tequila is something in the 9, 10% range in the U.S., but internationally, it's much lower than that, maybe on the order of three or four percent,

which would include, of course, a big contribution from the U.S., which is the biggest spirits market in the world. If tequila starts catching on internationally, look out, it could be an absolutely epic run for Beclay. It has the potential to be the fastest organically growing spirits company outside of China globally over the next 10 years. Absolutely, it may happen for them. In each of the companies we've discussed so far, there's an example of what I would call cornerstone insight, the serial numbers, the bidirectional nature of Stitch Fix's shipping, expecting lots of returns and the sort of optimization and intelligent labor use around making the presentation of that and the experience of that great. the five to nine year cycle of whoever agave that's just kind of a unique feature versus other spirits business do you find that those cornerstone insights that you have and I'm sure we'll talk about a few more

tend to come first in your diligence of something and that kind of open the door or rather is it just that you do lots of deep dives on a lot of businesses and with some of them you arrive at the cornerstone invites like what's the chicken and what's the egg here I would say they happen in a variety of ways how do you find these interesting companies? you pay attention, you read a lot of S-1s, try new things, try new apps, you're just trying to suck up information everywhere that you can. I'd say sometimes I would say that, well, gee, like with Uber, I had an instant reaction, this is maybe 10 plus years ago when I heard about it. I think Rich Barton mentioned it to me on the beach once, and I was like, well, that just sounds

like an awesome idea. I had an instant reaction to that, you know, and how many years later we had the opportunity to buy it all this summer and during the coronavirus pandemic. and that make good prices that we thought were pretty attractive. And so I guess on that one, we had the observation first. This is pretty good. Can it come down to the price where it's attractive? On other ones, I would say that we dig in. We keep thinking.

We ask questions. We ask detailed questions. We do a lot of work. And then the nuggets of gold may reveal themselves after a lot of digging. So probably both ways. I'm really interested right now in the topic of media and character creation and media personalities and all this sort of thing, which makes me think of WWE. Business, I have no idea how it works, especially because it seems like maybe there's

pay-per-view and there's in-person events. I'm not a wrestling fan myself. Never really have been. But it strikes me as probably a really interesting business to understand the mechanics of. Can you walk us through how business like that works and what you've learned about this sort of personality-driven media phenomenon? Because that seems like something that's going to be important in the next several

decades with social media and beyond. I've been following WWE for two decades. They know it quite well. I think it's a really unique U.S. media asset. I have to say, actually, first and foremost, I forwarded one of your podcasts to some of the people I know there when I think you had this guy Matt Ball on and you were talking about the metaverse and all that kind of stuff. And it just struck me that WWE, the difficulty in developing such a good IP and having three generations of people in the household were fans at one point. It is terribly hard to develop some of these things. Some of these personalities are larger than life.

And it just struck me. I was like, boy, WWE is going to have license to Facebook on their Oculus or some VR platform. Why shouldn't you be able to put the Oculus headset on and be right on the stage all around you, the match going on? But I think it doesn't get taken as seriously as it potentially should. It's generally speaking, it's men and women clad in bikinis and tights, kind of throwing each other around and scripted. But the engagement they get is just. It's phenomenal. Now, if you measure engagement only by ratings, their engagement over time has fluctuated, and I'd say opportunities that we see in the shares, I think the third major

opportunity since 1999 to buy the shares at the prices that we consider be very attractive. Those have been good times to consider buying the equity when Wall Street investors were worried about engagement. And there's certainly some things to be worried about it. It gets a bad rap. It's misunderstood. They hold events in New York City, but I wouldn't say like New York City, their core mark used to be that National Tennessee would get the highest rating share, I think, for wrestling, if I recall, or you might say it's kind of a NASCAR crew. But I do think that they are exceptionally good at what they do. They've been around forever.

To me, I'd say there's no chance that the fans disengage with the company over time. And there's a lot of really interesting upsides that are built into the model. Now, I haven't talked about the model so, so much. You can think about it like a circus. They traveled around and they put their show on. They charged for events. They'd sell you stuff at the events. They would televise it and be on TV and people would pay for those rights.

But a couple years ago, the company went through a massive transformation. And all that really happened was Fox woke up one day and said, we want to own Smackdown. So two main shows are Raw on Smackdown. Raw is broadcast Monday night. Smackdown is broadcast. Friday night. Comcast previously had had those rights. Fox decided that it wanted to play in those rights. And so now those rights are split between Fox and Comcast and the value of the U.S.

media rights went up by a factor, I think, almost four times on the last go-around. So that really transformed the company into a different beast and different animal where the touring side of the business absolutely shrunk relative to the overall profit pool. I think the debate on the wall Street is, well, what happens to those meteorites in 2024 when they come up for renewal? And when you're in a COVID crisis, you don't have an audience. And their audience participation is way more important than football and baseball and everything like that. The performers feed off the audience. So the loss of the audience here has been way more difficult than kind of any other event. They will come back from that. But I do think that has created a perception

that the next renewal for the U.S. media rights will not go well. I don't think that's going to be the case. I think that they have plenty of time to re-engage the audience. I'm assuming sometime between now and 2024, we're doing live events again, and that will re-engage the audience and help the storyline and get them back on their feet. In the meantime, we're Wall Street investors. We're not just talking about the business in the vacuum.

You've got it like, well, what's priced in? My belief is that with reasonable assumptions that the market is pricing in, a down round on their media rights. And I think that's wrong. You just saw a Major League Baseball kind of re-up their rights. I think it was a 60% premium to the last round. And there was some additional games that were at and additional things thrown in. So you might not say 60% is the new market. And each of these properties has a unique renewal negotiation.

But I don't think the market is down on U.S. media rights for an important property that does a very specific thing well, and the specific thing that WWE does well is it delivers a highly engaged relatively large audience on Monday night and Friday night, and it's been doing it for 25 years. Anything you've learned about how the revenue shakes out, I wouldn't be able to guess, first of all, what the revenue is, how much comes from events traditionally, how much comes from contracts, how much comes from merchandise. Is there anything interesting that you think if I wanted to start a media company today that involved the creation, of IP playing a 25-year game. What are the lessons could I learn from the way that W.E does it,

the mixing and matching of the different business lines? It's a unique thing that happened to among the last renewal rights. The media rights, which I think are fast approaching a billion dollars in revenue, now dominate the P&L. So the trinkets they sell online and the t-shirts they sell when the events come back, those are smaller items. So those are all not kind of optimizing. But it's really going to be about the U.S. media rights and the rest of the world media rights going forward. So that dominates the PML now. So it kind of makes everything else not matter. The last time that we bought shares of WW in bottom and size was when the company went through a very interesting transition. It was profitable business that was paying a nice dividend.

Vince McMahon had a vision that he wanted to have a direct path to his fans. And that was a WWE network. And the internet and the explosion of infrastructure or design. to create all the services that we now love and enjoy like Netflix, whatnot, allowed him to do that. And that's the WWE network. Now, to do that, they had to put at risk their pay-per-view model, where they were getting 10 or 12 pay-per-views a year. They had to risk pissing off their partners in distribution. And so they went from a money-making business to a money-losing business, cut the dividend to make that transition. And Wall Street absolutely hated that because it created a high level of uncertainty, and it wasn't certain that they would emerge victorious from that.

That goes back to some of the sectors that we like. Essentially, WWE, when it launched its network, was investing to create its network, became a completely different company. That tends to make Wall Street very uncomfortable, and they were, and that also created an absolutely amazing, six and seven dollar price to people that kind of had the vision or shared vision that the network would actually be valuable. Interestingly enough, and this is, great opportunity right now relative to the share price, is that the company announced that it's looking at alternatives, quote unquote, alternatives for the network. And what that really means is that they are now looking at their direct path pipe to their fans. It's just another licensing

opportunity. The product is the product. It's the performers. It's the on-stage athletics. It's the story that they create. It's years and years of IP. And I think they're going to be looking at their network is just another potential thing to license out. Now, who steps up for that? This is where it gets really interesting. And it all makes sense, too, by the way. The streaming wars are in full swing. My opinion is that the bundle is in the process of being reassembled in OTT environment and digital environment, and that's likely to happen again. It makes sense that one of the big players could do more with the WWE Network as part of a portfolio of properties than they could do alone. Would Disney potentially be interested in the WWE network to help drive more subscribers to

ESPN? This is what they did a deal like this with the UFC. That's very interesting. Would other big tech companies be interested in the audience and the engagement that WW has? Absolutely. One of the NOx is, I told you, people are worried about how the US media rights renew for the pay TV, the traditional pay TV, ecosystem, linear TV. Again, I don't think the market for that is going to down. It's not going to be a down round for WWE. But even if it is, that means their streaming rights are more valuable. There's another transition going on. The main thing is, it's that they just get highly, highly engaged fans, and they've done it forever. And yes, there's ebbs and flows and how the performers relate to the fans, but they always find another one. When the Rock

retires and gets out of wrestling, and he still wrestles, by the way, it has an effect on engagement and ratings, but they've time and time again been able to find the next one. That's the brilliance of the company and Vince McMahon. I mean, I consider him a visionary. I have nothing but respect for what he's built and for the family. It's wildly impressive, actually. What have you learned through your history in having to fight around businesses? I think especially early on, you were involved maybe in a little bit more of like activist style investing and probably against some formidable opponents. It's a unique feature of public markets that this of thing can happen where you don't get to choose your shareholders as much as might as a private

company or do as a private company. So interesting things tend to happen in the activist world. Talk me through your experience there and what you've learned. That's kind of funny. Look, I came to the business pretty naively. I'm like, well, I expect to be treated fairly. If someone didn't treat me fairly, I got pretty upset. And then a couple times, I said, well, I'm actually going to do something about it. I learned, we got into a spat with Ron Perlman many, many years ago on a company called MNF Worldwide, and I learned an awful lot about how to fight and an awful lot about boards and dynamics and all that kind of stuff, how to justify transactions that are not justifiable. That was a very, very interesting experience.

I don't want to go over the whole story, but if you Google my name and a company called M&F Worldwide, some stories would pop up. We helped reverse a decision, blatant, kind of play to create wealth for Ron Perlman at the expense of shareholders. And I learned a lot doing that. I was kind of a corporate gadfly complainer with a company in Chicago called John Neveen that was paying its executives very, very generously early on. And I remember I went to the annual meeting and started asking questions. Again, super naively, just like, this is unfair. Why are we doing this? I kind of learned a lot from some early interactions trying to stand up for shareholders. John Neveen, was another one. And I remember got down to, I went there, I flew there, I had meeting with him,

and the co-CEO and the co-CEO and the investor relations person, they brought me to this boardroom and they're like, how can I help you? I must have been 25 or 26 years old. I mean, that room got real hot suddenly. But I said, you know, I think your compensation plan is unfair. I would just kind of say these things to people. So that, I guess that naive assumption that I should be treated fairly by a management team combined with another naive assumption, you know, maybe there's something I can do about this. We've always been active shareholders. We're active. I don't consider us activist necessarily that we have played the activist role from time to time. It's labor intensive. It's not necessarily fun. It's a tool in our toolbox. Generally speaking, we try to find

company like Stitch Fix, something else where we could help wind up the management team and watch them go for the next decade and not have to do a lot of work. We love working with management teams. I still remember that story. Go back to Netflix a little bit. I don't know exactly what happened. because I wasn't in the room, but people at one point thought that Carl Icon was going to make run at Netflix, and I think I read some story, something. Reed just invited him in and said, let me tell you about our business. A really talented management team that's working hard for the shareholders, they have nothing to fear from an activist.

A lot of times, it's the management teams that have a situation that's too attractive, the compensation is spent too good, the board's overpaid for underperformance, that kind of thing, or there's a very big delta between a company's intrinsic value. strategic value and market value, and it's persisted for a long time. And maybe the company has been unwilling to say, we purchase shares or do something that might make the situation better for shareholders. Those are the kinds of situations where a good activist could add a lot of value. And not all activists are good.

Some of them do kind of hit and run activism. That's not us. People that are thoughtful take a long-term point of view and are really trying to help the company, they should be welcomed by management teams and boards. sometimes they are, but oftentimes they're not. If you think about the sort of rate of return, I don't know how else to frame this, on deep work, the type of which you've described on something like Blockbuster serial numbers or something like this, that I'm sure is still quite rare because deep work is just always rare everywhere.

How do you think that's changed across the last 25 or 30 years from when you first started doing it to today? Do you think that that's more valuable work to do today, less? How would you describe the change? the opportunity set for that kind of work? I think it's just as valuable now. When I first started the fund in 1997, kind of go back to the 90s. Things have changed.

Things haven't changed. You know, I'd say it's probably tougher and more competitive to get differentiated information today. Access to information has been democratized. Information moved more slowly in the 90s when I first started in the investment business.

I remember, this will sound funny. I like telling those stories every now and then. I do that on Twitter and remind people of what the business has changed and how it hasn't. But I remember in the 90s, you could short spin-offs in the one-issued market. And then everyone would get their shares and then they would trade down. Then you could cover them and even go long, you know, if they're a reasonable business. It was like 80% of them you could do. I remember if there was a high short interest ratio in a company, it was a red flag in of itself.

Companies weren't highly shorted. What it meant much of the time is that a sophisticated shortseller had found out that something aggressive was going on in the accounting. It's like, oh, you look, that doesn't just think, oh, it's a high short interest ratio. I'll look at something else. So the information moved more slowly. All that being said, I don't think the game has changed that much. It wasn't a piece of cake to figure things out back then.

It was labor intensive to get information. You had to call up the companies and ask them to send the quarterly reports and annual reports and all that kind of stuff. It was a slow and painful process. If you really wanted something fast, you'd go fish it out on microfeas or pay for service and they deliver the papers to you the next day or something like that. I think the participants were also different. There weren't as many hedge funds and certainly what's on Twitter or the Internet or anything like that,

kind of talking about deep things on very specific kind of companies. But the job was the same. It was challenging then. It's challenging now. It hasn't changed as much as maybe others might say. at least in my mind. I have to turn now to my traditional closing question that I ask everybody. This has been such a cool different episode diving into random different companies,

done a lot of rhyme or reason other than something really interesting going on. My traditional question for everybody is to ask what the kindest thing that anyone's ever done for you is. There's a lot of things that I could say or anyone could say. One that comes to mine goes back to when I graduated college. A good friend of mine, guy by the name of Rich Jaffe, his parents were standing. and Myra Jaffe. And they lived in Pleasantville, New York. My parents were like up in Canada.

After I graduated, I went to Binghamton. And I had a job. And my first job was Mario Gabelli, still around today, pick and stocks. And I had this gap where I was like, I didn't have any money. I had a job. I was two weeks after I graduated, I had to show up for work. I was like, where am I going to live? I didn't have any money.

I couldn't afford rent. Now my friend was doing an internship. He wasn't even in town. But he was like, you can live with my parents. So Pleasant Bills in the Westchester. So Stan and Meyer, Jaffe, opened their house to me with their son, not even there. I moved in and lived in the basement with my parents and my friends. And I don't want to get choked up here. That I'll never forget that. That was super nice for them to have done that for me. They passed on. So it's a worthy thing to mention is the nicest thing that someone's ever done for me. Wow, fantastic. What a great, wonderful story. Always my favorite question. There's always something remarkable in there, and it's cool to hear that one. I love it. Mario, thanks so much for the time today. I learned a lot, as I do always when talking to you.

Appreciate your time. Yeah, thanks so much. 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. I've been recommending books to members of this email list for years, and we'll keep doing so in this weekly email. You can sign up at investorfieldguide.com forward slash... Book Club.