Motley Fool Hidden Gems Investing - Amazon Music is now FM Radio

Episode Date: November 7, 2022

Sometimes opportunity comes in the form of competitors making a mistake. (0:21) Jason Moser discusses: - Shares of Meta Platforms rising on reports of "large-scale layoffs" coming this week - How long it will take to know if Mark Zuckerberg's investments in the metaverse will pay off - Amazon angering Prime members with an "upgrade" of their music service that changes the user experience for the worse - Spotify and Apple being gifted an opportunity to find new members for their music services (13:57) Dylan Lewis and Ricky Mulvey discuss the changing advertising landscape and what the shifts mean for major players like Netflix and Google. Companies discussed: META, AAPL, SPOT, ROKU, SNAP, NFLX, GOOG, GOOGL Host: Chris Hill Guests: Jason Moser, Dylan Lewis Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

When WestJet first took flight in 1996, the vibes were a bit different. People thought denim on denim was peak fashion, inline skates were everywhere, and two out of three women rocked the Rachel. While those things stayed in the 90s, one thing that hasn't is that fuzzy feeling you get when WestJet welcomes you on board. Here's to WestJetting since 96. Travel back in time with us and actually travel with us at westjet.com slash 30 years. When opportunity knocks, sometimes it comes dressed as your competitor making a mistake.

Motley Fool Money starts now. I'm Chris Hill. Joining me today, Motley Fool Senior Analyst Jason Moser. Happy Monday. Happy Monday. How's everything? Everything's going okay. You sound on the fence there. But then again, you and I don't work at MetaPlatforms. Yes, that's true. And the reason I say that is because on Sunday, the Wall Street Journal reported that MetaPlatforms

is preparing to start, quote, large-scale layoffs as early as this week, affecting thousands of employees. And not surprisingly, because we see this pretty much every year when a large company announces layoffs, the stock goes up. Shares of MetaPlatforms up more than 4% this morning. I guess I'm not all that surprised by this news. No, I mean, I'm not surprised either. I mean, I guess it's a little surprising in the sense that when you just go back to the earnings call recently, I mean, Mark Zuckerberg noted on the call that he said they expect hiring to

slow dramatically going forward and to hold headcount roughly flat next year relative to current levels. This feels like it could be running a little bit counter to that. On the one hand, you don't like seeing people lose their jobs. That just is bad news. That's like seeing that. But as an investor, the other side of that coin, this is really what this company needs to do. As an investor, you get to feel really good about this, I would think. Now, I'm not a shareholder in Meta, but if I were, I would certainly be applauding this news from that perspective. I mean, a little while back, I went through and just did a little digging into looking at Google, looking at Meta, and then looking at Twitter, and getting an idea. Revenue per employee can

be an interesting metric to follow. It's not some tell-all metric, but it does give you a window into what's going on with the company and how efficient it is being or not being. In looking at this revenue per employee metrics for these three different companies, it was pretty telling. If you look at Google or Alphabet, revenue per employee in 2019 was $1.36 million. Fast forward to today, and that is $1.51 million. They've accelerated. They're making more money per employee. You could argue that Alphabet, too, is a workforce that has become somewhat bloated. You look at Meta, Meta's revenue per employee in 2019, $1.57 million. Fast forward to today, it's $1.35 million. They're doing less with more. Now, that on the surface

seems like it's not good, but perhaps it's something that reflects investments that the is making in the metaverse. I mean, that's obviously what it is to an extent, at least, because Zuckerberg has told us as much. But the bottom line is that in the near term, they're doing less with more. And you have to kind of look at that. You look at Twitter, revenue per employee in 2019, $706,000. Revenue per employee today, this is before all of these layoffs were announced, $697,000. Now, if Twitter cuts that workforce in half, basically, now they get to a number that's really on par with something like a Google or a Meta, which would make a lot of sense. It's a smaller company, but you don't need the same bloated

workforce. It gives you an idea of what to keep an eye on with Meta to see, ultimately, are these moves resulting in a better situation for the business? Because there's no question that in the near term, at least, expenses have just gotten out of control, not only for Meta, but really for a lot of these tech companies. I think this is the right move. I don't know, Jason. It just seems like this is only going to beg more questions about the investments that Zuckerberg is making in the metaverse. It is a very clear choice. We can't afford all these employees because we're continuing to plow money into the metaverse. That's a bet that is years away from knowing whether or not it's going to pay off. Fully agree. That's just it. You're

to see them pull back on this workforce, on this headcount. Headcount as of September 30th this year, 87,314. That was up 28% from just a year ago. Clearly, we've seen revenue has just hit a brick wall. It is going to boil down to, is Mark Zuckerberg making the right call making this investment in the metaverse? We won't know that answer for a really, really long time, time, which is why I think this is at least a first step into trying to throw investors a little bit of a bone. Say, hey, listen, we understand the dose of skepticism that you're carrying right now. Stick with us. We're going to try to maximize the efficiencies to where we can. But ultimately, with this shift in headcount, ultimately, we need to

figure out, well, the people that are remaining, what are they focused on? We'll see that quarter in and quarter out, they'll be talking more and more about the sources of the revenue growth or lack thereof, and that'll give us a little bit of a better idea. But my suspicion is, if we continue to see just this stagnating revenue and promises of a better tomorrow thanks to the metaverse, he is going to have to continue throwing investors a bone in one form or another. Headcount is one way to do that, but there are a number of other ways to deal with it as well, as we saw in that recent letter from Brad Gerstner. I want to go back to a story that Bill Mann and I talked about last Tuesday on the show, and that is, Amazon made a couple of announcements.

One of them was about how they were adding 98 million songs to their free music service, Amazon Music. When I say free, it's free to members of Amazon Prime. Folks can go back and listen to that episode if they want. My memory is that Bill and I basically said, well, that seems like a good idea because they have raised the price of Prime by $20 a year, and this seems like a good move. I said that at the time. That was before I actually tried the upgrade, upgrade in air quotes. I tried the new version. I'm someone who listens to Amazon Music. I'm a Prime member for many years and use Amazon Music. I deleted the app. I'll just cut to the chase. I deleted the app because that's how bad it is. Basically, they added all these songs, but changed the

interface so that you can't pick a song to listen to. It serves up your song on shuffle mode. everything's in shuffle mode. And it just reminded me of, I was like, where have I experienced this before? Oh, that's right, FM radio. That's what this is now. Amazon Music has invented FM radio, or their version of it, where it's like, I want to listen to this one particular classic rock song. It's like, well, turn on, in the DC area, turn on 100.3 FM and a classic rock station. We'll get to your song eventually. I'm baffled by this. I suppose there's a version of the future, Jason, where they come out in three months and say, we know that people didn't like this, but it drove so many more signups for Amazon Unlimited Music,

which is on top of Amazon Prime, you can pay, I think it's $10 or $11 a month for just sort of the all-inclusive service. But I don't know. It just seems like even if they get there, they have disrupted the goodwill of a lot of Prime members, myself included. Yeah, it feels that way. I mean, I will say, I'm not an Amazon Music user. We are Prime members. I guess I've used Amazon Music maybe unintentionally here and there if I ask Alexa to play something for me while I'm cooking dinner, but usually it's a podcast or something like that. I think I actually set it to where it links through our Spotify account. But ultimately, we're Spotify family. It's an interesting premise that Amazon is

approaching this with because they say that basically 80% of folks out there won't pay $10 a month to stream music. They feel like this is something that they're building more for the casual free streaming service user who's just looking for music in the background. Maybe that's the case, but then it begs the question, why are you pushing this, hey, upgrade for $10 to unlimited music, why wouldn't you just maybe raise the price of the Prime relationship and just give people this expanded catalog? Because going from 2 million songs to 98 million songs is a significant change. On the surface, that sounds really awesome, but in a world where personalization is only becoming more the norm, and when companies continue to invest

and strategize around data and personalization, this really seems to take that in the opposite direction. It's like, what would you rather have, a large catalog and limited personalization, or would you rather have it the other way around, a smaller catalog, but the ability to really control it fully, on-demand in the purest sense of the word? I think a lot of this really boils back down to Amazon is more or less an also-ran in the music streaming right? The two far and away leaders in the subscription service side of things are Apple and Spotify. I don't think that's going to be disrupted anytime in the near future. Maybe they're right that people will never pay $10 a month to stream music, but we pay $15 a

month for a Spotify family plan that gives us, I think, up to six accounts. All four people in my household, we have our own Spotify user accounts through this $15 a month subscription, so we're not paying $10. But you know what? I'll tell you what, if Spotify boosted it to $40 a month, we probably would pay it because we use it so much, and the more you use it, the better it gets. It is frustrating. It seems somewhat disrespectful of Prime members if the goal is to get more music signups. You're just like, well, we value you as a Prime member, but we really have the additional $10 and you subscribe to Amazon Unlimited Music. I have a feeling that's probably going to fall flat on its face. Hopefully, if this is something

that people really just don't like, the management has the wherewithal to go back and reassess. I'm glad you mentioned Spotify and Apple Music because one of the thoughts I've had watching all of the drama around Twitter play out, is that it seems like an opportunity for other social media platforms that sell advertising. As large companies pause their ad budget spend on Twitter, if you're selling ads for Instagram or Facebook or Snap, it seems like an opportunity. What Amazon has done with their music service seems like an opportunity for Spotify and Apple to just really make the case for people who are disgruntled with what has happened and say, hey, come give us a shot. Yeah. You're absolutely right. If

they're paying attention, they're looking at this and saying, you know what, we have a chance to really just finish them off, for lack of a better term. I don't know necessarily what they would do to do that. They could always resort to some sort of promotion or something like that. Again, it just feels like for Amazon, it probably would have earned more goodwill in saying, hey, we're going to raise the price of your Prime membership by $10, but here's what you're getting in exchange. Because the Prime relationship now has gotten to the point where it gives you so much, it's impossible to remember and list off all of the benefits that you get. You literally need to to go to the Amazon website and read up on it because they're adding stuff to it all the time.

It's never a question of them wanting to offer more value. Doing it in this particular fashion, though, seems a little bit out of sorts. Jason Moser, great talking to you. Thanks for being here. Yes, sir. Thank you. If you've been noticing more ads lately on different media platforms, you're not alone. Inventory is opening up and platforms are hunting for growth. Dylan Lewis and Ricky Mulvey take a look at how the advertising landscape is changing and what these shifts mean for the industry's biggest players. Dylan, you're seeing two interesting stories play out in advertising land right now. One of which is that among these, I would say,

global consultancy research firms, you're seeing these projections that advertising revenue or advertising spend isn't going to decrease next year, yet you're seeing a lot of these companies, platform-based companies like Roku, Meta, Alphabet, not necessarily sounding the alarm, but giving much less rosier projections on where they see the advertising landscape going. Yeah, I think there are a couple of elements that feed into that. It's not surprising to me to see that estimates will go up, particularly digital ad spend estimates will go up. That's a mega trend that we've seen play out really over the last five to 10 years. Even if companies are a little bit more restrictive in their advertising budgets, I would not be surprised

to see more overall dollars going to digital platforms just because the tracking, the ROI is so much more robust there. We are going to see ad buying budgets tighten up a little bit. And we're going to see a lot of advertisers focus on channels that lead to the highest ROI, whether that's customer acquisition, whether that's lead gen, whatever they're trying to do. And that's bad news for a lot of companies that have less robust ad tech. On the flip side, for the advertisers and the advertising platforms, I should say, these are all growth businesses that have been hit pretty hard by a market pullback. And they are looking for growth. And they're trying to be realistic in how much growth they think they can deliver without

disappointing the street with growth estimates going down in general. I think one of the things that we're seeing is a little bit more of a sober look from some of these companies because they want to set themselves up for numbers they can hit. Yeah, you're seeing that with Roku right now. They're projecting an ad slowdown in their latest quarter. That's what you're seeing Wall Street really react to, but their platform revenue, and a lot of that's the ads on there, was up 15% year-over-year at $670 million for the quarter. We've talked about this where some of of the ad spend has been boosted by election spend. But also for a company like Roku, they had a billion more hours of people streaming on the platform than they had a year ago.

It's macro headwinds and tailwinds colliding at the same time. They want to under-promise and over-deliver. That would be my interpretation of it. Yeah. And to dig into some of the inputs for businesses that connect advertisers with customers. And you mentioned Roku, but this is applicable to a company like Meta, like Alphabet, Snap, Pinterest, anyone who's serving up digital ads. There are a couple of main ways that a business like that is going to be able to show top-line growth. Usage is one of those. In the example of streaming hours, that's going to be the amount of time spent on site, which is going to be a function of the overall number of people who are using it,

and the amount of time on average that they're using it. The other way that a business like that is going to be able to generate revenue or increase revenue is by increasing the value of ads, so the price of ads going up because of their effectiveness. All three of those things are tough for businesses to pull off. To increase the reach and the number of people, you need to acquire new customers. That can be costly. It's an acquisition play. Increasing the time spent on-site is something that ties into the usage and the site experience. That's something that businesses are always trying to improve. They're not going to have this renewed focus on this in an environment where they're struggling for growth. These are always things they're focused

on. The fourth lever that they really have if they're looking to increase ad-based revenue is to increase the number of ads they show in an existing experience to existing customers in the time that they're already spending on-site. I think we're going to see a lot of focus there for ad-based businesses as they start going up into a more tough and competitive Q4 and early Q1 of next year. It's a fancy way of saying, get ready to see more ads on especially these platforms that have less robust ad tech systems. That's your Pinterest and Snap. I'm putting words in your mouth. But you might say that Pinterest has a less robust ad system than a company like Meta. Yeah. And that's simply resources and the amount of time they've been doing it.

And the reason that I think it's important to think about it in that hierarchy of who's been doing this the best and for the longest is, that's the exact hierarchy that advertisers are going to go through with reduced budgets. And so, understanding that is important. You mentioned, expect increased ad loads. I think we see that. One of the interesting things as an investor and consumer is, this is one of those things you can experience firsthand and have a little bit of a feel for where a market is going. There are times where I notice that there's ad inventory or there's not ad inventory on a place like Hulu. That to me signals how interested advertisers are in spending money. You go back to March

of 2020, April of 2020, there were a lot of ad spots coming up in Hulu while I was watching programs that were empty and immediately went back to the program. It's because people had dramatically reined in their advertising budgets. I do think, so much as platforms can control that, we're probably going to see an increase in ad load. I think even anecdotally, we've started to see that a little bit with some of the major platforms. Yeah, Meta announced that. Meta's advertising revenue, I believe, was down about 4% from the prior year. That company loves the Metaverse, but it sure would like to grow advertising revenue as well. Meta said it's going to test image carousel ads on the Facebook Reels. These are those

horizontally scrollable ads. That could be two to 10 images when you're flipping through those videos and images that used to be on TikTok. With the ad load increasing, the one that scares me is YouTube is now testing 10 unskippable ads. The caveat is that it's largely five or six seconds each for the ad. But to me, those are signs of what you're saying of the ad, get ready for more ads on a lot of those more established platforms. I think so. And different types of placements. We'll see some testing and different treatments. Some of that's going to be advertisers coming to them and saying, hey, we'd love to do a takeover and we'd love to be in this spot. And others are going to be the folks who are working in ad tech and working in site experience, trying to find

different places to monetize. One of the spaces that I think is a little bit more interesting for it. It's different than some of the more web-based players as the streamers. We're thinking about things in a little bit more of a conventional cable sense for what that experience is becoming. And we're seeing already in that space, a lot of previously un-ad supported or ad-less experiences now have ads. Or a lot of platforms that were like, you know what, we're just going to be a subscription model. We're not going to lean on ads at all, are turning to that and trying to monetize that way. It's a little bit of a double-edged sword. It's a revenue opportunity for those businesses. It allows for a membership tier that comes in at a lower price or is free,

but it also dramatically changes the user experience. It also can be used as a way to get people to the premium offering. Hey, are you sick of seeing ads on Netflix? Well, don't worry, we can take that away for $10 to $15 a month. I think YouTube might have a similar strategy, and Hulu's been working with that ad-to-ad-free strategy for a long time. Yeah. As these businesses continue to look for ways to grow, I think one of the overall themes is going to be the golden days of what we've experienced with streaming and social media are past us. The user-friendly, very bingeable versions of these things are probably going to go to the wayside because businesses are trying to eke out ways to make more money.

That shows up in a couple different formats. It's more ads, perhaps more intrusive ads, on places like social media websites. In the case of Netflix, I think they created the modern streaming landscape and the idea that you could binge and just watch and watch and watch. And it's a pretty dramatic reversal for them to even entertain the idea of ads being in there. To your point, Ricky, I think if you're in that position, you get so used to watching something without ads, it feels so weird to see the ad breaks in there. It probably keeps people that would otherwise cancel in a premium subscription. I think it's when The Office left Netflix. Maybe that's when the golden era ended. But to your point, though, I think Netflix is being extraordinarily

careful in how they bring ads onto the platform. I think the chief operating officer told Variety they're expecting four to five minutes of ads per hour. They're going to be 15 to 30 seconds long. And then for something like a new release movie, they're putting all the advertisements up front. so they're preserving the cinematic experience. But again, this is a starting point. If they're looking for growth five, 10 years down the line, you might see a similar situation to the radio or cable, where it's like watching the Shawshank Redemption on TNT. Yeah. In the case of streaming, we have some idea of what a cable experience looks like, right? You take a half-hour block of TV, 22 minutes of that is going to be the show that you want to

watch, and about eight minutes of that is going to be the ads that the cable company gets in there and the channels get in there. I think that is the benchmark for what we'll see in streaming. A lot of these streamers still have room to run to get to that point. I think we're seeing probably less than eight minutes of ads for half an hour for most places. We don't have that same benchmark when it comes to social media. This is uncharted territory. That is both good news and bad news, because we don't really know where the natural limit for ads are for those platforms. One thing I've been thinking about as an investor is watching these digital advertisers and how they treat ad load. For me, when I

see an increase in ad load, that brings me back to radio and cable television. These are the options that were made by those legacy industries, made revenue in the short run, you don't look back and think of them as high-growth companies. So, when you see a company that's saying, we're going to increase the ad load, is that a red flag for you? It depends a little bit on the relationship they have with the customer. I mean, in the case of the streamers, we've entered a period of exclusivity. And to a certain extent, it doesn't really matter what the end user wants. The end user will make the choice on whether they want to pay to be ad-free or to have an ad-supported model for a lot of these streamers.

But if you want to watch a certain show, short of pirating it, you have to go through and watch it via that streamer. I do think it comes a little bit more into play with some of the social platforms and where people choose to spend time for things like news, for things like entertainment. I think one of the things that you run into is, the more you increase monetization and ad load, the more you intrude on the natural user experience, and that dynamic only holds for so long before people get sick of it. It also might make it harder for people to try a new platform that they don't currently play on. So, businesses like Snap and Pinterest that have lower user counts, and maybe there's still some upside for them, the more they

try to monetize the platform and make the experience a little bit less user-friendly, the more it might make it hard for them to bring more people on. Have you seen any of these where there's these sponsored Snapchat stories? I haven't used Snapchat in a couple of years. Okay. So they have these like sponsored Snapchat stories, which are like these like celebrity news, something crazy on the internet to get your attention. And then you watch it for, they give it to you in like, like essentially five to 15 second

chunks. And then every third or fourth one, there's an unskippable five to six second ad. And that experience has kept me from using the platform more, I would say. And that's why I'm going more to like Instagram at this point. But now Instagram might be doing the same thing. Well, we'll see what happens. Yeah. And that's the thing. I mean, if everyone winds up following more or less the same tactics, then you're going to have a very similar experience everywhere. I think the broader takeaway for investors thinking about this kind of thing is, remember, as the environment gets

more competitive and tougher, that the decisions advertisers make are zero-sum with their budgets. A lot of marketing teams have a set amount of money that they can spend for the year. and whatever they put towards platform A means it's not going towards platform B and C. They are always going to focus on putting spend to work in the places that they can get the best return. Let's see who takes some market share. Dylan Lewis, always a pleasure talking to you. Thanks so much for having me, Ricky. As always, people on the program may have interests in the stocks they talk about, and the model may have formal recommendations for or against, so don't buy or sell stocks

based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.