Morning Brew Daily - Netflix Sends Its Last DVDs & Building The "iPhone of AI"

Episode Date: September 29, 2023

Episode 159: Happy Friday! Neal and Toby discuss the end of and era, Netflix discontinued its DVD delivery service today. Plus, OpenAI is exploring building the "iPhone of artificial intelligence'. The guys explain why Costco is the stock of the week (thank you gold bar sales) and why Ryan Cohen can't save GameStop from being the dog of the week. Also, how the global coffee shortage could impact you and the creator of the nutrition label passed away. Finally, the fake steakhouse that went viral on TikTok. 'Listen to Morning Brew Daily Here: https://link.chtbl.com/MBD Watch Morning Brew Daily Here: https://www.youtube.com/@MorningBrewDailyShow Learn more about your ad choices. Visit megaphone.fm/adchoices

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On today's pod, better submit your request for Netflix DVDs because the service is ending today after a 25-year-run. Then we'll tell you about the coolest prank ever prunked that involved a group of 20-year-olds that I want to be friends with, opening a steakhouse in New York City. It's Friday, September 29th. Let's ride. Neil, yesterday during the show when talking about a Vermont town that is barring access to tourists, looking to take pictures of its fall foliage. You committed a major internet faux pa. You talked about an awesome food place that we've discovered in New York City, but then refused to give the people any details.

Neil, you gate kept. You are a gatekeeper. I did not know this was a term. So for all us olds out there, gatekeeping is a term where you got, I guess you talk about a place, but you don't divulge any of the details or where it is, and you're not supposed to do that.

So I didn't know that. I apologize to everyone who I offended, which it seems like there were a lot of, of you. I will tell the place. It's not that exciting. It is just a smoothie place that is attached to a bodybuilding gym right downstairs here from our office on 19th Street. It is a very good smoothie. Toby can attest. He's had a lot of smoothies. It's very good. Y'all should come. Say hi. Neil was sad yesterday. He's like, wait, is gatekeeping bad? We had a heart to heart. So thank you for setting the record straight. And yes, it is a dang good smoothie. Okay, let's go on with our first story.

we begin today with saying goodbye to an old friend. Netflix is sending out its final DVDs today, rolling the credits on the delivery business that vanquished companies like Blockbuster, changed how millions of people watched movies and TV shows, and ultimately set it on a course to disrupt the entertainment industry in a different business altogether, streaming. For a little backstory, Netflix shipped its first DVD in 1998, which was a Beetlejuice, and turns out getting any movie you could ever want sent to your house instead of going to a store was pretty popular. The business grew over the first decade of the 21st century to become a shipping behemoth at its peak in 2011. NetFix was the Postal Service's fifth largest

customer, sending 1.6 million discs every day, and it was doing Amazon things before Amazon, offering one-day delivery to 99% of its user base. Of course, times change, and not as many people watch DVDs anymore. Netflix has long ago pivoted to streaming and producing original content, Yet even in its last year, the DVD business is still cranking out money. About 1 million customers still get DVDs generating 60 million in revenue for Netflix in the first half of 2023. A 25-year run for the ages, Toby. Neil, this is so nostalgic. I mean, everyone remembers the first time they got in Netflix DVD, that little red envelope.

It's just such good memories. It was similar to the blockbuster experience of going and getting a movie. It replaced it and now it's ending. So I definitely had some nostalgia thinking about this story. But also, digging into the operation side of this business was crazy because in the beginning, they did it much like how you'd expect where they were hand stuffing all the envelopes, which is just wild to think about at this point. I mean, they did that until 2002.

So it launched in 1998, they were still hand stuffing envelopes four years later. But then they finally automated the process. And the automated process is really cool as well. It was one of the first times that machine learning actually came. into play. And the reason why machine learning was such a big deal is one of the big issues for Netflix was obviously scratched or damaged DVDs. And that's a horrible customer experience if you send them a scratch DVD. So they needed some way to identify which DVDs were damaged and which ones weren't. And one of Netflix's chief technological officers said, we literally

built the first machine learning algorithm in order to identify these DVDs. And they said, it worked really well, dropped reports of these 22%. So it is interesting. to see how you go from hand stuffing an envelope to building machine learning algorithms in the span of five years. What struck me was the parallels between this DVD service and the streaming service that Netflix eventually made its way into. I mean, it's kind of the same thing when you think about it, just a different mechanism for watching movies.

It's straight going straight direct to consumer. The recommendation engine that Netflix used for DVDs, finding DVDs per people, also laid the foundation for the recommendation engine that you see when you open up Netflix every day. So I don't, I think these things are more intertwined than you may think on the surface. And one easily led into the other. And Netflix, when Netflix started its DVD business, Reed Hastings, Mark Rudolph, these guys who started it knew that the DVD thing would be temporary, which is why they named it Netflix. And there were some other names that they went through that they decided wouldn't ultimately be what Netflix was, because they had this grand vision

straight from the outset. And so just kudos to them for, for, for, for, for, for, for, for, that and using the DVD service to fuel the streaming service that it would eventually become. It was such a moneymaker. Between 2012 and 2019, Netflix generated more than two points of, $2.6 billion in profits just from the DVD business alone. And you're right, that's, it kind of was, it reminded me honestly of Elon Musk and Tesla where he's like, we're going to sell this one type of car in order to power the next generation where we want to make mass produce cars. And it was the same thing for Netflix. We know this is a temporary stop for our business.

We're going to sell physical DVDs or rent physical DVDs in order to power this vision we have for an internet-enabled country. Every dollar that was sold in DVDs in the early 2010s went to make House of Cards. And House of Cards was the piece of original content for Netflix on streaming that created this behemoth that we know of today. So when you watch House of Cards or any not Netflix original or see Netflix, you know, stream anything,

it's because of this DVD business fueled all of that development because creating content requires tens of billions of dollars, and the DVD service kind of spurred everything. Shout out those little red envelopes. All right, Neil, let's move on to our next story where we have someone pulling a reverse Netflix and moving from software into hardware, and that someone is OpenAI. According to multiple reports, OpenAI is in advanced talks with both former Apple designer Johnny I and SoftBanks, Yoshi's Son to launch an initiative to build the, quote, iPhone of artificial intelligence. So who are those two names that I mentioned?

Masayoshi Son is the CEO and founder of SoftBank, aka the man behind some crazy venture investments with his $100 billion vision fund that incinerated money in some cases, most famously in WeWork. He's certainly not afraid to pour boatloads of cash behind one technological trend or the other, and the rumor is he's providing up to $1 billion in funding to bring this product to life. and the other is Sir Johnny Ive, who's about as legendary as they come in terms of hardware designers. He was behind pretty much every iconic Apple product you can think of. The original iMac, iPod, iPhone, and iPad were all born from IVE and his teams.

So this is about a good duo as you can pick to try to ease your way into the hardware space. But Neil, say it with me, hardware is hard. Do you think OpenAI can pull this thing off? I think they can pull it off. Sure, I don't know. But it's just an interesting thought exercise when you consider what AI and chat GPT and these new technologies do for hardware, because the way the iPhone is designed currently is for apps. That's the interface.

It's you open up Google Maps. You open up Netflix. You open up YouTube. But we talked earlier this week about how chat GPT has all these senses now. It can see. It can talk to you. It can hear you. So you may not need these apps anymore, this screen that we think about as a traditional phone.

So I would, when you designing this or thinking about this particular product, I would not use the term phone. I would just use gadget. And, you know, the possibilities are endless. So that's kind of where my mind goes. I'm like, all right, well, if it's not a phone, I have this, you know, AI assistant. What is the best piece of hardware that I could somehow attach to my body to get the most use, the most seamless way of interacting with this particular device? Yeah, it is interesting because the iPhone of AI might not look anything like an iPhone at all. So they're using it as a kind of a moniker for a paradigm shift rather than the actual physical product.

And it is interesting that this is coming to light, kind of in the era where we've almost entered a peak iPhone moment, I think, because, I mean, if you look at the most recent iPhone that just came out, again, we've been kind of subsisting on these small incremental changes. And it looks like this time, even those incremental changes might have set things back a little bit. There's been reports that the iPhone 15 has been overheating. It's not widespread reports, but some people testing it out, found that the iPhone would reach in the hundreds of degrees while charging or while performing heavy activity. So it is interesting. And then also, if you want to do another parallel, Johnny Ive has been talking to reporters and saying that Apple has a moral responsibility to mitigate some of the iPhone's unintended consequences, which are these addictions, these screen time addictions. So he is almost grappling with this post iPhone world where he's like, my invention that I created may have said. at the world back in some ways. Now he's looking forward to the future. Can I create another device

that maybe doesn't retread some of the mistakes iPhone made? One possible thing this could look like is there's a startup called Humane that debuted a device that runs on AI earlier this year at a TED conference. And what it is, it's a little black puck that goes into your breast pocket and this camera and projector and a speaker sticks out. And you can ask the AI assistant any questions and then hold your hand up and it projects onto your hand. So that's just one possibility that this could look like. Obviously, Zuck and Apple are going in a different direction. Zuck thinks that the piece of hardware that will unlock AI and the metaverse is VR and AR glasses. Johnny Ive and Sam Maltman think that that only blocks your, you know, understand,

your connection with reality and they're going with something else that has yes to be determine or it may not even happen at all. All right, let's head to our Friday segment stock of the week, dog of the week, where Toby and I highlight one stock that defied gravity and another that wasn't as popular. Toby, I think you've got something you want to tell everyone. Quick disclaimer, we are just humble podcasters. We are not financial advisors. So please do not take any of this as financial advice. Back to you, Neil. Okay, I won the pre-show Thumb War, so I'll go first. My stock of the week is Costco. Now, Costco sells everything under the sun, but in its earnings report this week, and an executive highlighted one product that was selling faster than Travis Kelsey jersey's gold bars. Costco sells two types of gold bars on its website, but its CFO said that as soon as the company loads them onto the site, they're sold out in a few hours, despite putting a limit on two gold bars per Costco member. For a little context, these bars weigh one ounce, go for a hair under $2,000 and are Kirkland branded.

Okay, that last one was a joke. So why are people scooping up gold bars? Well, gold is seen as a tried and true hedge when inflation is running hot and traditional investments are volatile. And gold has been a very solid investment recently, with there being a global pandemic and all. The price of gold has gained 57% compared to a 47% rise in the S&P 500 in the past five years. 24-carat magic in the air. I think it's a super smart play from Costco because what it's doing is just bringing people to their website, even if it is a little bit of a gimmick.

But any time you can bring people to your website, it's going to be a good play. And then, yeah, gold's in the news. Also, Costco is kind of leaning into this survivalist instinct, where a lot of people have been stocking up on canned goods. They sell this 150 serving emergency food prepared kit. And so they're kind of pushing people towards hoard gold, hoard food, kind of like doomsday bunker scenario. Yeah, I can't think of a better retailer to ride.

the doomsday wave than Costco. If things really do hit the fan, then Costco, you know, stock to the moon. That's where you want to go to. All right, Neil, our dog of the week is a familiar name to many of us, and that's GameStop. GameStop named the infamous Ryan Cohen as its CEO and chairman yesterday. I say infamous because Ryan Cohen is a notorious activist investor who made his first billions on building up the online pet retailer, Chewy, then selling it for $3.5 billion. He then turned his attention to GameStop where rumors of his involvement, with the company were enough to send shares skyrocketing during the craze of 2020 and 2021.

He was also a major backer of Bedbath and Beyond, flipping shares for millions before the retailer eventually went out of business. Sounds like this guy is all right. So why is GameStop our dog of the week? Well, it appears that the Ryan Cohn effect has lost the luster it once had, whereas in the past, just rumors of Cohen buying more stock used to make the share price explode. The market basically didn't react at all to the news yesterday.

GameStop shares were trading 2% lower on Thursday and are still down more than 80% from its record highs in 2021. Neil, you're not a big Ryan Cullen guy and it feels like the market is agreeing with you. It's kind of like a what have you done for me lately situation because, yes, sure, he built Chewy, but he has not done anything as a activist investor in GameStop.

You talked about him flipping shares in Bedbath and Beyond. Well, he didn't do any, he appointed people to the board and that company eventually went bankrupt. And now the SEC is actually investigating his trading in it because when he bought in, the stock price rose 34% in this euphoria, as you talked about. And then he sold it a few days later and pocketed nearly $60 million. And now the SEC, and eventually the company went bankrupt. So the SEC is looking into that.

Yeah, it was a bit of a pump and dump. But it does seem like he is in the GameStop arena for the right reasons. He's not taking his salary. So that's kind of the big headline news. He's been on the board for a while, so it does seem like he's in GameStop for a little bit more. I mean, obviously, he's CEO now, so he's in it for the long term. So it will be interesting to see if he can sprinkle that e-commerce magic that he's been promising for years now into gamesop. All right, Neil, we got a fun back half the show where we'll talk coffee, nutrition facts, and steakhouses right after this break.

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because for the first half of our lifetime as a company, we had to convince the world that we are a media company, not a coffee company, and yet here we are honoring the bean juice on its national day. But on Morning Brew Daily, we go deeper than just celebrations. So today I want to dig into the question, are we in danger of running out of coffee? Global consumption has almost doubled over the past three decades, as China, India, Indonesia, Malaysia, Vietnam,

and growing populations in sub-Saharan Africa all boost their consumption. Starbucks plans to open a coffee shop in China every nine hours to satisfy the demand in the country by 2025. And if the current trends continue, global consumption is expected to double again to 6 billion cups of coffee every day by 2050. Now, the issue, Neil, is whether we can grow enough. For the past two years, that answer has been no, as demand has outstripped supply, a problem that has only gotten worse in an El Nino year, fraught with extreme weather. Now the fear is what do we do if those deficits keep widening? Drink tea? No.

Neil, what do you think about this coffee shortage? It seems bad. I mean, there was this big study that came out last year that made a lot of waves that said that by 2050, up to half of the land used to grow coffee will be unusable due to climate change and changing weather. The problem is there's only two types of coffee beans that we grow for coffee. There are over 130 species, but we've tapped into two. There's the Arabica, Arabica and the, I'm sorry, everyone, I pronounce that around. Arabica and Robusta.

Arabica is seen as the tastier one, and it accounts for 60 to 80% of production. The problem is this bean is so fragile. It is endangered. It can only grow in like the most perfect temperatures, the most perfect climate, and obviously that's changing. So huge swaths of land that have been used to grow coffee are becoming unusable to grow coffee. and the millions of people who are working in coffee plantations in these countries are saying, look, this is just not worth it for me. I'm not reaping any of the profits from the increase in global

consumption. And there's all these pests and fungus and climate change is just wreaking havoc on my crop. So I'm just not even going to stop growing coffee anymore. So it's going to lead to these devastating supply shortages, it seems. Yeah, you mentioned the way coffee is farmed. Over 25 million farmers across the 50 coffee belt countries, which accounts for about 80% of production are, or sorry, 80% are these small producers. And so a lot of these are not big operations or anything like that. And a lot of the risk falls on the farmers. Producing countries retain less than 10% of the retail value of the estimated $200 billion coffee industry, even though experts estimate that they take on 75% of the risk. So eventually something in that math has to break. If they're

saying, listen, all the risk falls on us. All these weather changes are impacting our profitability, and we're not even making that much money to begin with. So you might just see people moving away from producing coffee just because it's so risky. Right. Producing countries retain less than 10% of the retail value of the $200 billion annual coffee industry. So they're not seeing any money that, you know, Starbucks is charging whatever for rent in New York City. That's, you know, what we're paying for here. And the people who are actually producing the coffee aren't seeing as much. One way, you know, there are optimists in the coffee industry that say, you know, look, we face challenges before, we can face them again.

All we have to do is maybe innovate our way out of this. We can develop new coffee beans that are more weather resistant, that are more resistant to different fungi that may take us down. So we'll see. Starbucks and other coffee companies are funding a lot of the research into developing new beans. The problem is they just don't taste as good as this particular one. So maybe we all will end up drinking tea, but there's going to be a lot of collateral

economic damage as millions of people around the world work in the coffee industry and they're not going to going forward. I'm still not drinking tea now. I know. For our next story, have you ever looked at the nutrition facts label and admired its simple, elegant design that provides you with critical nutritional information in an accessible way? No? Well, I encourage you to take a closer look today because the person responsible for designing that label, Berkey Belser, died this week at 76. Belser's Nutrition Facts label, a clean black and white color template with Helvetica font, is praised for being one of the best designs ever. In fact, the New York Times said it was the most printed and viewed piece of literature,

piece of art in the world. Belser himself compared it to the iPod because, in his words, the detail is so important that you wouldn't even notice it, and if you didn't notice it, it is a sign that it succeeded. Belser's design was introduced in 1994 following the Nutrition Labeling and Education Act, which, for the first time, set standards for putting public health value on food packaging. It's bizarre to think about, but before this law passed in 1990, it was not always required to put nutrition information on packaged foods and beverages.

And perhaps the wildest part of this story is that when Congress approved this law, they didn't appropriate any money for creating a nutrition label. So Belser did not get paid for any of this work. Toby, I spent a lot of time looking at the nutrition facts label last night. Got to say, he nailed it. He did nail it. And what's even more impressive is when you consider all the cooks in the kitchen that were trying to influence which way this packaging went. I mean, you had consumer groups advocating for this and then agricultural groups advocating for that. The agriculture department actually was concerned that the label would cause consumers to eat less meat, which is typically higher in fat and calories and other foods.

So imagine all the different interest groups that wanted the design to go this way or that way. And he just ended with this such, it's so simple. That's the beautiful thing is it stripped everything down. Everything has its place. There's no punctuation. there's no commas, no periods. It just gives you the information you need. And yeah, it made it all the way until 2016 without changing.

And when they did change it, they made the calories a little bit bigger. And he was not happy. Belser said the calories are literally shouting like all caps in an email. So he did pop off and say, listen, we made it this far. I'm kind of mad with the change, but I'm just happy that we did a good job. No, it is a beautiful design. I got one quick trivia for you before we move on to the next story. What are the four vitamins and minerals required to be listed on every nutrition facts label?

All right. I'm just going to go through the alphabet here. Vitamin C? No. No. Vitamin D, I'll give you that one. Okay, vitamin D, vitamin B12. No, there's no more vitamin.

Oh, I thought you said which vitamins are. And minerals. Oh, and sodium? Nope. That's not a mineral? Nope. This is a good bit of trivia for people. Vitamin D, calcium, iron, and potassium.

Those are required on every nutrition facts label. I did not know that. I'm going to start checking those now and just as an homage to Mr. Bellsor. Fun fact, too, he did go to Davidson, which my brother went. So shout out to the Wildcats. I don't know. What a Davidson shout out? These are the fun facts.

There you go. All right, Neil, let's move on to our last Saturday day. And I want to tell you about Marin's Steakhouse, a super exclusive New York City restaurant with 91 glowing five-star reviews on Google in a month's long wait list. Sounds like it might be impossible to get a seat there. I mean, this is New York after all, where reservation. hunting is a full-blown sport. And you'd be right.

It is impossible to get a seat there because Marins is made up. I'm not joking. The whole restaurant is a prank concocted by a 21-year-old tech founder and his friends. During the pandemic, because they were bored, they listed their friend Maron's apartment on Google as a restaurant. The joke progressed and they added a website, wrote some fake reviews on Google, and finally added a phone number. But then the phone started ringing.

People wanted a reservation. So for one Saturday night earlier this month, they decided to go all in on the bit and actually turned Marins into a real restaurant. They informed people on the wait list that they had earned a table, decorated a location in the East Village, and actually hosted a full-on pre-fee steak dinner priced at $114 and cooked and served by him and his friends. Neil, there are so many other subtle details that this group prepared in order to pull this thing off. But man, this story is just awesome. It's so funny. Everyone should read articles about it because it is just, it will make you cry, tears of laughter.

I love the effort that they put in. They went to other steakhouse and quiz the servers and the cooks there about what went into it. Probably my favorite detail is when you walked into the quote unquote restaurant, there was a, there was a lobby with pictures of Marin with various people that he had served over the years. And it included Albert Einstein, Marilyn Monroe, 1920s mobsters, Obama and JFK. And he said, he told the New York Times an interview, I would recommend suspending your understanding of linear time. So it's just these little details that show that this group of people is just super smart with it and just kind of went all out in the bit. I loved also. The meal came with a glass of milk and they said that the milk is intended to represent the bovine life cycle.

And it's so funny because their menu was also created in a circle. So they were trying to add this element of a bovine life cycle to it all. They states a fake proposal in the restaurant, which is another one of those classic things that you see at a restaurant. The music, too, was violin covers of pop hits, and at one point they played the Curb Your Enthusiasm theme song. They had fans outside, Drake fans outside, just to imply that Drake was in the restaurant. So there were so many small details where they just said, what did it be funny if we put Drake fans outside the restaurant? So funny to me. So people might be wondering whether it was, whether the patrons realized what was happening or not.

And it does seem like over the course of the night with the fake proposal and the, you know, the chef being seen with Obama and Marilyn Monroe, uh, decided that, you know, they were like, uh, maybe something's up, maybe something's up. Uh, it seemed like the overall, even if they did understand that this was part of a prank, they still enjoyed the night. They were like, oh, this is pretty wholesome. Yeah. There were a few people who were complained in threatened legal action.

Yeah, one couple threatened legal action. That was where my first, uh, reaction was is that, are you allowed to do this? They did get the requisite. They got a one-day liquor license. They got a food service license. So technically they are covered. But if you went in and you saw in the kitchen, it's just a bunch of 20-year-olds cooking your steak back there, I'd be a little nervous.

That's what tip people off the most is the amount of staff because they had 65 people working there. And everyone knows the margins in the restaurant industry are pretty slim. So, you know, you don't go to a restaurant where there's 65 people working. My biggest regret is this. It happened very, very near to my apartment. I could have gone and I missed the opportunity. so Marin, if you run it back, hit me up, please.

All right, that is our final show of the week and of the month of September. Have a wonderful weekend, everyone. Toby and I will be watching The Rider Cup. It is not looking good for the U.S. so far at all, so we got to pick it up, boys. If you're feeling a bit revved up on National Coffee Day, channel your energy into sending us an email at MorningBrew Daily at Morningbrew.com. Let's roll the credits. Emily Milliron is our editor and producer.

Bryce Belloff and Raymond Lou are associate producers. Euchenowa Ogu is our technical director. Billy Minino is on audio. Hair and makeup has acquired gold bars and has moved into a bunker. Devin Emery is our chief content officer and our show is a production of Morning Brew. Great Saturday, Neil. I wish you all well. Pay off your home, travel for life, drive a Ferrari. In celebration of the world premiere of the Monopoly Big Board Buckslot Machine by Aristocrat Gaming,

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