Motley Fool Hidden Gems Investing - Ignore "The Slap", Here's How Last Night Changed the Business of Streaming

Episode Date: March 28, 2022

Will Smith slapped Chris Rock onstage at the Academy Awards. That single moment overshadowed everything else during the event, including how a single award altered the landscape for streaming video businesses. (00:20) Tim Beyers discusses: - Ripple effects of Apple becoming the 1st streaming service to win Best Picture - Overall spending on content increasing  - How things are going today at the offices of Netflix - Tesla's proposed stock split (14:00) It's 2022. Weren't we supposed to have flying drones delivering packages to our homes by now? Ricky Mulvey talks with Jacob Goldstein, host of the new podcast "What's Your Problem?", about drone delivery, self-driving cars, and the future problems that entrepreneurs are trying to solve right now. Stocks: AAPL, NFLX, DIS, AMZN, TSLA, UBER Host: Chris Hill Guests: Tim Beyers, Ricky Mulvey, Jacob Goldstein Engineer: Rick Engdahl, Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

Chris Hill. Tonight after the Academy Awards, everyone's talking about that one thing that happened. But if you're an investor, there's something much more important that happened in Hollywood last night. Motley Fool Money starts now. I'm Chris Hill, joined by Motley Fool Senior Analyst, Tim Beyers. Thanks for being here. Thanks for having me. Good to be here. Let's talk about the Academy Awards. Why not? Because this is a show about investing, all the other shows, we'll be talking about the slap heard around the world. Will Smith

going up on stage and slapping Chris Rock. I get it. I was watching it live. I was fascinated by it. I'm happy to talk socially about that. But this is a business show and I think the slapping overshadows a much bigger story, which is that Apple wins Best Picture for Coda. They become the first streaming service to win Best Picture. And I think this has altered the streaming landscape as we know it. Because if you don't think Netflix in particular, Amazon Prime, But Netflix is furious that they are not the ones winning, they're not the first streamer to win Best Picture, you're out of your mind. I think there are several big ripple effects here, but let's start with that. Do you agree with me or you're like, Chris, you've had too much coffee?

No, I do kind of agree with you. I would say this, I'm thankful that I am not in a meeting with Ted Sarandos this morning. That's good. I would imagine that there's a lot of unhappy people in meetings with the Netflix co-CEO and Chief Creative Officer. However, I would say, does this really mean game-changing results for Apple? Probably not. Does it alter the DNA of streaming as far as Netflix's business goes? Probably not. Where I will agree with you on this, Chris, is you're going to have everybody at the major studios thinking about how do we amp up our streaming capabilities? How do we rethink distribution throughout the world? Because the economics of our business are crumbling. We do know that to be true. I'll give you

just a couple of quick numbers here. Chris, this is from the 2021 report from the Motion Picture Association, their annual theme report. Combined ticket sales worldwide were $21.3 billion. You think of these as basically box office sales, that's $21.3 billion worldwide. That was a massive improvement over 2020 because 2020, but that's 50% lower than the high of $42.3 billion in 2019. In other words, the box office is getting disrupted. However, combined global theatrical and home mobile entertainment revenue reached $99.7 billion in 2021. That was up 24%. So this, in a way, Chris, I think what your assertion that this changes the dynamics of the business, I think what it does, maybe it doesn't change it, but it certainly validates

the idea that if you are not thinking about a streaming-first strategy, what are you doing? Here are the two things I think are different as a result of Apple winning Best Picture. The first is, I think this really whets their appetite for this type of success. Even when they launched Apple TV, most people watching what Apple was doing said, and rightly so. This is interesting, given the amount of cash they have, they're allocating some money here, this is not a priority for Apple as a business. This is nowhere near the priority that even other parts of the services business are. This isn't a priority. I think this changes that, I think it becomes more of a priority, and I'll get to the money they're spending in a second.

Two, something you hinted at, I think the overall spending, the combined spending on content acquisition from Apple, Netflix, Disney, Amazon, everybody, that number was going up anyway, I think this bumps it up even more. I think the meetings happening today at Netflix and Amazon and elsewhere are, we need to beat the bushes to find this type of content. Because remember, Apple bought Coda out of the Sundance Film Festival over a year ago, it was early 2021, for $25 million. Then six months later, I may not be right on the exact timeframe, but at some point in 2021, they went out and spent five times as much to get the rights to a film coming later this year called Emancipation,

is directed by Antoine Fuqua, and which stars, wait for it, Will Smith. Again, that's more interesting as a result of what happened last night between Will Smith and Chris Rock. But to me, from a business standpoint, it's the amount of money they're spending, and they can spend it because they're a $3 trillion company. Yeah. The economics, where this is going to get interesting. Let me backtrack to where I think this is probably not as big a deal. I'll say this, the reason I think it's not as huge a deal, even though I agree with everything you just said, there's going to be people who are tempted to say this changes everything for Netflix, they're going to have to overspend and they're already spending too much. I fundamentally

disagree with that. Netflix has a very good budget and they commission a lot of content. Please understand that the difference between Netflix and everybody else is not that they are funding all of the big budget stuff, they're funding all of the things. They have so much stuff that they're funding. It's a volume game for Netflix because they're trying to appeal to a very wide audience and get into the niches of that wide audience. There have been disappointments for Netflix before. I do think Sarandos is probably really unhappy this morning because Power of the Dog was on that list.

That's another Netflix original that had a chance to win Best Picture and didn't. I think there's real disappointment there and I think you're right about that, Chris. they have lost out before in big categories, and they've won before, and it hasn't changed their strategy. So I don't expect them to change now. The economics, though, are very different. Can you imagine how Apple is thinking about the payback period for Coda and Emancipation? It's like, well, how many people are we going to get into our ecosystem? Because we're not going to make it back on Apple TV Plus subscriptions at $4.99 a month. There's no way that's happening. So, it's different, it's very much an Amazon-like model, where Amazon is not funding originals

to get people to spend a lot more on Prime, they're getting those originals on Prime and bringing in programming, so that you just think about Amazon for more stuff. No, that's true. And obviously, Amazon and Apple have the ability to sell or rent these movies in a one-off way where Netflix does not. Either you're a Netflix subscriber or not, you don't have to be an Amazon Prime member to watch stuff on Prime, you can just say, well, I'm just going to rent this movie for $4.99. The other thing, and this goes back to how things must be going at Netflix HQ today. And this is something that for folks who might have missed it over the weekend, we did an episode on Saturday about, among other things,

the business of the Academy Awards. And in the opening segment, Maria Gallagher does a wonderful job of laying out how Netflix is really the company that forced the Academy Awards to change the way that they enable films to be eligible. And so, it's just one more reason this thing. Apple didn't do that legwork. Apple didn't spend years cajoling and trying to convince Academy members to make streaming services eligible. They just waltzed in this year and picked up the biggest statue of all. Right. It's fascinating. Here's the other thing. If you think that Ted Sarandos is upset, how much more upset do you think the distribution and production executives at Walt Disney Studios, Buena Vista Pictures. How upset is that group?

And the reason, not because of the awards, but because of all the economics that you were just talking about, Chris, this has changed the game for Disney in such a fundamental way. And please, I'm a Disney shareholder, so I'm not saying that this is horrible for Disney, but I will bet you a dollar, Chris, that right now Disney is talking to executives saying, we need to renegotiate distribution agreements everywhere we've got them, we need to rethink pricing and tiering around Disney+, and we need to start going out and getting scripts. Do it now because this is going to hurt us materially if we don't do something about it. because they have an anchor in terms of a legacy distribution business that neither Apple has,

Amazon doesn't have, Netflix doesn't have. Disney has got that anchor and they've got Disney+. You better believe they're thinking about it right now. They also own ABC and a tiny silver lining for Disney is that the ad rates for next year's Academy Awards just went up dramatically because of this unscripted moment from last night. Before I let you go, help me understand what is happening with Tesla. Shares of Tesla are up about 5% because Tesla said they want to split their stock, but not in the way, if I'm understanding it correctly, and not for the reasons that Alphabet and Amazon recently announced their splits. Tesla wants to pay a stock dividend to shareholders. I'm just

quoting from the SEC filing. They're going to ask at their shareholder meeting, quote, for an increase in the number of authorized shares of common stock in order to enable a stock split of the company's common stock in the form of a stock dividend. Look, I'm an unabashed fan of stock splits. How does this change things for Tesla shareholders? Because when I hear dividend, I think, okay, well, that's going to be some amount of cash and I'm going to pay taxes on that. Is this different? Are people going to be taxed as a result of this? I have no idea. The only thing I can think of, Chris, if this is either just pure spin it's it's just an absolute positioning statement meant to make tesla

sound good which is entirely possible mathematically one way it could actually be a dividend and i don't even know if this is possible but let's just let's just play the game and say this is possible that if you are a tesla shareholder of record on x date then you're to get an extra share. It's not a split of all of the shares outstanding meant to increase the pool and so you create liquidity. It is, if you've got a share, now you've got another share, I guess. The last time they split their stock was August of 2020, that was five for one. It sounds like what you're saying is, this is not going to be an insert number for one stock split, this is going to be members get a little bit extra.

That's what it sounds like. A, can they do that? Answer, I have no idea. and B, will the SEC approve this because it's wonky? I have no idea. And am I even right or is this actually like a two-for-one stock split and we're just calling it a stock dividend, which is also entirely possible? There are so many variables here, Chris, but what I will say is even though Tesla is a much more profitable and cash generating company today, one thing that has been true for a long period of time with Tesla is that it has used its equity as capital very, very aggressively. So if they are trying to increase the value of the company, increase the value of their equity by doing positioning statements, that should surprise exactly no one.

Tim Beyers, always great talking to you. Thanks so much for being here. Thanks, Chris. Remember years ago when Amazon and Uber announced plans for widespread drone delivery? Haven't really heard much from them on that topic lately, have we? Jacob Goldstein has been investigating how one company is making drone delivery work outside the U.S. Formerly the co-host of Planet Money, he's hosting a new podcast called What's Your Problem? Ricky Mulvey caught up with Goldstein to talk about the future challenges that entrepreneurs are trying to solve right now.

I think some of the most interesting problems you tackle involve transportation, and one of which is drone delivery, because I feel like there've been a lot of promises around drone delivery, specifically with like Uber and Amazon. But in your show, you didn't go to them. You went to a smaller startup operating in Rwanda and Ghana called Zipline. I mean, why go to that small startup instead of these massive companies that you would think have more resources to solve this major problem? I went to Zipline because they are actually running a big drone delivery business now. As you said, it's in Rwanda and Ghana, not in the U.S., but it's hundreds of flights a day, every day across most of those two countries. So, you know, Amazon, you know, Jeff Bezos was on 60

Minutes years ago promising drone delivery, but we haven't seen it yet. And one of the things I want to do on this show is talk to people who are actually doing the thing. And Zipline is really doing drone delivery. It still seems to be difficult that outside of, you know, medicines and blood transfusions, that sort of thing, it's difficult to do drone delivery for that consumer product or justify that. I think that's right. I mean, in a way, you know, if you think of the classic adoption curve for technology, you start out with this sort of high value, high need use case, right? And like their very first use case was blood in Rwanda. And that has like this very specific set of attributes that make it perfect for drone delivery. Like you need the right kind

of blood. You need it when you need it. Blood doesn't store for very long. And drone delivery, you can keep the blood at a centralized place and get it out all around the country very quickly in a matter of a few minutes. And so it's sort of the perfect use case. And then what typically happens with an adoption curve is you start with the most necessary thing. And as you get your business to be more efficient, in this case, as drone delivery becomes more efficient, then there are other use cases where it makes more sense to spread to. And that seems like what's happening. And it seems like drone delivery versus autonomous driving, the technology is there, but the issue is regulation, which is something that the CEO of Zipline, Kenan Wyrobek,

addressed on your show. Our airspace is very old fashioned. We have a philosophy here in the US in the airspace where we kind of grandfather everything in. So not absolutely everything, but mostly everything. A lot of things you could do in the 40s, you can still do in the airspace today. And that makes things very complicated. Most other countries, basically the way they talk about it is say, we have modernized our airspace. We've required things like transponders so all planes can tell by radio where all the other planes are. We don't require that here. So you're telling me there's some device that you can put in a plane that allows all other planes to know that plane is there. And in the US, you don't have to have that in your plane?

That is correct. You know, is that surprising to you that the problems with drone delivery in the United States have more to do with regulation and the technical aspects of weather and essentially tracking these planes from distribution point to delivery point. Yes. Yes, that was truly surprising to me. And in particular, because as it turns out, the airspace regulation in Rwanda and Ghana seems to be more modernized than the airspace regulation in the United States, right? And the fundamental problem with getting drone delivery to work in the U.S. is essentially a regulatory problem. They're already doing it successfully and safely in Rwanda and Ghana.

I wonder if the problem is essentially the lack of lobbyists on one side or lobbyists on another side. Because unless you're trying to, like, smuggle something within a plane, I don't understand why you wouldn't want other planes to know that you're in the sky. Yes. Well, I mean, one of the things that's interesting to me, and Keena and I get into this in the conversation on the show, is path dependence, basically, right? Like these other countries are sort of creating their airspace regulation now. They're more open to modernizing it. They want to think of themselves as sort of modern, forward-looking countries. And in certain respects in the U.S., we are more oriented towards sort of preserving traditional ways we have done things, right?

And there is this tradition that you can, you know, be a solo pilot flying in your plane and in many settings, you know, not have to tell everybody where you are. And that turns out to be a stronger force than I would have thought. So you wipe out the regulatory problems. Do you think a company like Zipline is technically there where they could have widespread drone delivery if you ignore that part? I do, as evidenced by the fact that they are there in other countries now where they don't have the problems.

And I'll say, I mean, another thing, another thing Keenan was telling me about was they are trying to develop a technical solution to the regulatory problem in the U.S., right? So basically, because planes in the U.S. are not always required to have transponders, the drone has to be better at figuring out, okay, is there a plane without a transponder anywhere that might be relevant? And you can't just use radar. You can't just use cameras, essentially because it's too heavy. You need too much radar, too many cameras on this little drone. But he said they are working on a technological solution. You also spoke to Ayesha Evans. She's the CEO of Zoox. That's an autonomous car company. It was sold to Amazon for $1.3 billion. Zoox seems to have, it's a different set of problems, which is maybe the regulation is there, but technically, it seems to me that they're solving for an impossible problem, which is we need to have a computer interact perfectly with human behavior on the road. It's 2052. This is something we've talked

about on another Motley Fool podcast. There's two ways of spinning this. It's 2052, and autonomous vehicles are not on the road. What do you think happened? Well, I guess the same thing that's been happening for the last 10 years. It turned out to be a way harder technical problem than we thought. It is striking with autonomous cars. It does seem like, if you go back, oh, I don't know, five or 10 years, autonomous cars felt closer than they feel now, right? It felt like five, 10 years ago, it was like, oh, we're almost there. And now we feel like less almost there than we did. And, you know, one of the things that was really interesting to me in that conversation with Aisha is what is hard? What is the technical problem that they can't solve, right? And it turns

out like AI is really good at driving when it doesn't have to figure out human beings, right? If there were no people, if it were all AI cars, you could do it now. And the really hard problem for AI is human behavior. What's that other person, that human driver who just pulled up, you know, at the other side of the four-way stop to me, what are they going to do? What are they acting like? And that is the piece that humans are really good at figuring out, right? You can look at a glance at a person in another car and get a whole vibe. Are they aggressive? Are they going to want to go first? And a computer can't do that. So I think if there are still not autonomous vehicles in 2052, it'll be because that problem is so hard to solve. And then vice versa. It's

2052 and we do have autonomous vehicles. Do you think it's because we found the technical solution that the computers are good enough and quick enough within these autonomous vehicles that they can measure human behavior and still deliver people safely? Or do you think it's because we've made a trade-off that these drivers, these autonomous drivers, are generally safer than humans despite the fact that there will inevitably be some accidents when you have people and computers interacting on the road like that? I mean, I think it would have to be the second of those, right? You could have autonomous cars that are way safer than humans, but still not perfect, right? And so there is this interesting kind of emotional slash political question,

which is how safe do they have to be, right? If we were purely rational, then a little bit safer than people would be great. 10% safer than people would save thousands of lives, right? But clearly something about us, and this in a way goes back to the drones thing, right? Like we're very wary of change, I think, as human beings in many ways. And like, there's reasonable reasons for that. But clearly, you know, autonomous cars are going to have to be way better than people to be widely accepted. But I don't think they're going to have to be perfect. I think one of the things that scares me about a lot of the autonomous cars, Zooks included, is there is like, well, I'll give you the exciting angle and then I'll give the thing I'm concerned about. The exciting angle is it solves so many problems.

You can imagine someone with disabilities being able to go where they want to go because autonomous vehicles, they have a subscription. They can have a car pick them up. they sit on the benches, there's no space for a driver, and then they can be dropped off. The thing that I'm concerned about is the move to subscription is everything. And what that means is I like that I own a car and that I own that car and I can take it wherever I want to go. Is that across the board in autonomous vehicles that they want to keep the technology in-house and preserve the ownership of the thing? It's not across the board, right? So yeah, just to be clear, the Zoox model is like, they call it a robo-taxi, right? So it's basically

like a driverless Uber. And, you know, one of the reasons I wanted to talk to, to Aisha, to Zooks on the show is they are like the self-driving car maximalists, right? Like if you start not with, okay, what's a car today and how do we sort of tweak it so that, you know, you don't have to drive as much. They're not that they're like, okay, let's just start from scratch, build something from the ground up. It doesn't even look like a car. Nobody's going to own it. And in a certain sort of purely theoretical way, it makes sense in that world that you wouldn't own it, right? Because it can just drop you off and drive away. And I actually thought their vision was going to be the world where nobody owns a car, right?

Because in a truly self-driving car world, why would you have a car just sitting there in your driveway when it could like go drive somebody else around and they could pay you for that, you know? But surprisingly to me, Aisha didn't talk about that world. She was like, look, you know, maybe we could get to a world where the typical household owns in the U.S. owns one car instead of whatever it is now, more than one car, one and a half two cars. That would be a nice world. So, you know, I don't know, like certainly lots of other, if you think of Tesla, which is maybe the most salient, you know, self-driving car, car, like

that's clearly a car you can buy. And they're just trying to figure out how to get it to drive itself. It does seem to me, I don't know if it's 2052 or 2100. It does seem to me that when cars really drive themselves, and I do think it'll happen, it won't make sense to have a car just sitting there 90% of the time depreciating, getting older, when it could be driving around, giving people rides. It would be a huge luxury. It would be like a private plane or something, just sitting there on the runway waiting for you to go get in it. I think it depends on place too. You have a densely populated area like Manhattan. Okay, that makes a lot of sense to have cars on demand. But I think in a lot of the Midwest and places

like Loveland, Ohio and Bemidji, Minnesota, these smaller areas, people like having a couple of cars in the driveway. They don't want to wait. Even if it comes in an instant, they don't want to offload that, I'll call it the privilege of being able to just hop in your car and go with that freedom. Well, it seems like as long as there's a market, people will be able to buy cars, right? And then you've been looking at a lot of problems, ways that people have been solving them. uh, within the next like five to 10 years, what's one that you think has a high probability of being solved in that you're excited about? Oh, that's a fun one. Okay. So let's see, let me think through the shows, not self-driving cars. Um, I mean, you know, uh, Keenan, the guy

from Zipline was a little bit coy about their technological solution, but like drone delivery does seem doable, right? Like clearly they have solved it technologically elsewhere. It has become a routine thing elsewhere. And it does seem like one of the ones that would be one of those changes that on the one hand feels like big and weird, like, oh, a drone is flying over and dropping off a package in a parachute in my backyard. But I could actually imagine that being pretty common in five years. Jacob Goldstein is the host of What's Your Problem? I'm not going to tell you where you can find a podcast. You're already listening to a podcast, so you can figure it out from there. You can find it right here, wherever you're listening to this.

Wherever you are. It's Jacob Goldstein. Thank you so much. Oh, it's really fun. Thanks for having me. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool 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. Thank you.