Motley Fool Hidden Gems Investing - Netflix Scores the NFL

Episode Date: May 16, 2024

The streamer now has Christmas football games. First, (00:21) Nick Sciple and Ricky Mulvey discuss Netflix’s play into live TV and the bundling of streaming services. Plus, they take a quick look at earnings from Walmart. Then, (17:12) Motley Fool Contributor Lou Whiteman joins Mary Long to discuss how airlines and Airbnb are experiencing a cooldown in travel. Companies mentioned: NFLX, DIS, WBD, CMCSA, LUV, DAL, ABNB Host: Ricky Mulvey Guests: Nick Sciple, Mary Long, Lou Whiteman Engineers: Dan Boyd, Steve Broido Public.com disclosure: A High-Yield Cash Account is a secondary brokerage account with Public Investing, member FINRA/SIPC. Funds from this account are automatically deposited into partner banks where they earn a variable interest and are eligible for FDIC insurance. Neither Public Investing nor any of its affiliates is a bank. US only. Learn more at public.com/disclosures/high-yield-account Learn more about your ad choices. Visit megaphone.fm/adchoices

Where some see heroes and others see egos, Bloomberg sees the era of billionaire athletes. While others follow the noise, we follow the money. Learn more at Bloomberg.com. The NFL is now on Netflix. You're listening to Motley Fool Money. I'm Ricky Mulvey, joined today by Motley Fool analyst and football fan, Nick Seiple. Nick, thanks for being here. Great to be here with you, Ricky. Always excited to talk about the NFL. We're talking about the NFL in May. I think that reminds you how much it dominates entertainment here in the U.S. Well, it's a huge story for Netflix to get this live sports deal. Netflix will now be the exclusive home of Christmas Day NFL games. Two games this year, at least one game

for the next two years. We know Christmas is a big day for streaming and the NFL. A lot of people are home. A lot of people are with their families. So let's break it down. First, what does this deal mean for Netflix? Yeah, I think this is a huge boost to Netflix's live events. A repertoire, Netflix is getting access to the most popular entertainment property in the US. The NFL really stands apart when it comes to engagement with entertainment properties. Last year, over 90 of the top 100 TV programs in terms of ratings were NFL games. Moreover, this is a spotlight event for Netflix. Getting access to Christmas Day, I think this means Netflix is more or less going to own entertainment on Christmas, even more though than they have previously. Also,

Netflix rapidly trying to grow its advertising tier of subscription. This gives them access to super valuable advertising inventory to sell to advertisers. I don't think it's a coincidence that this deal got announced the same day Netflix was holding its upfront for the upcoming year, this annual event where media companies will showcase their upcoming slate to advertisers. And this is super attractive inventory for Netflix to go out and market. Yeah, we're not exactly doing the NHL in August or July or the MLB in December as we hit the NFL offseason with this news. For the NFL, NFL knows they're pretty popular. They get a lot of money to show games, even from Amazon Prime for Thursday Night Football.

ball. Is this just a who writes the biggest check question, or is there some more strategy in signing with Netflix? I think there's a little bit more strategy than just how much the price paid at the end of the day. I think the amount paid is important. Obviously, the NFL likes to make money, but historically, the league has resisted moving its events to streaming because they want their product to really be in front of as many eyeballs as possible. They proved the concept of moving to streaming last year with Peacock holding two exclusive games. The playoff game that was on Peacock last year between the Chiefs and Dolphins was the largest ever event for internet traffic in the U.S. But I think with the Netflix deal, NFL is really looking to

audiences outside the United States. Commissioner Roger Goodell has emphasized the league's plans to become a global sport. They're increasing the number of games they're holding in London, games in Germany, Mexico City. With the relationship with Netflix, NFL immediately plugs in to worldwide distribution for these games, which should boost its international audience, help it become an even bigger global property than it already is. I'll concern troll for a second, as you mentioned Peacock and Amazon Prime. I wonder if this will become a scavenger hunt in terms of where can I watch the NFL as it moves to more streaming services that you have to pay for. And it's not as easy as flipping through channels

between CBS, ABC and ESPN to find a game. CBS, Fox and ABC, they carried the Christmas games in 2023. What are these more legacy media companies thinking about this deal, you think? Yeah. Obviously, I think they would have liked to have this property. I think it's attractive having this spotlight game on Christmas that lots of folks are going to tune into it. But I don't think it's the end of the world, missing out on two regular season games. It wasn't the end of the world for Amazon to get Thursday night football last year. But if I had to pick a company that should be concerned by this, I think Disney, the parent company of ABC and ESPN, probably not going to be happy with this. Traditionally, they air the NBA's Christmas

Day games, which is the NBA's historical spotlight time of the year. I think those ratings are going to be down meaningfully this year for the reason you just said. When you're watching a live event on Netflix, it's a lot harder to hop in and check on the NBA game at halftime or at quarter breaks than it is historically. I think it's going to hurt that NBA Christmas slate relative to what it's enjoyed historically. And the NBA rights are also up for grabs. And I'm sure I'm sure Netflix is thinking about that as well. So Ted Sarandos, co-CEO of Netflix in 2022, said, quote, We've not seen a profit path to renting big sports. And later, quote, We're not anti sports. We're just pro profit. these are very expensive and netflix has been home to you know series about the drama of sports you think about drive to survive with the formula one first they made a big splash with the wwe which

nick for the purposes of this conversation we will call it a sport you can argue with us at podcasts at fool.com now they've got what is it a boxing match between jake paul and mike tyson which is a heavily sort of eventized event now you have the nfl at christmas what do you think has changed at Netflix with their thinking towards live entertainment? Yeah. So I think there's a couple of things here. First, if you just look at the terms of the deal, it's really not the same multi-billion dollar deal. You see a number of these other entertainment distributors paying. Reports indicate Netflix is paying about $75 million per game for these rights on a three-year deal. So if you assume those numbers are right all in, you're paying

a grand total of $300 million for this. A lot smaller relative to some of these other deals. If you look at it on a per-game basis, it's maybe about 20% higher than Amazon chose to pay for Thursday night football, but I think it's also a much more attractive slot. I think NFL fans across the board like to say that the Thursday night football games are some of the worst football you'll see during the week, and it's on a night where folks have to go to work the next day. I think this Christmas Day game, you could argue, was worth 20% more than Thursday night football. I think the other big thing that's changed, though, is Netflix's advertising ambitions.

They're working to build an advertising platform, need to have attractive inventory to sell to potential advertisers. Live sports historically have been the most appealing vehicle for advertising, and Netflix is working diligently to build up its inventory in that area. You mentioned the WWE, that's been historically one of the highest-rated weekly programs on cable. The NFL, by far the highest-rated live programs in the U.S. So, I think this is really getting access to inventory at a price that I think Netflix feels comfortable with, especially for a three-year experiment. I think there's also an

elephant in the room with Netflix's movie ambitions, where they were making these high-budget original movies, sometimes costing $50 million, $100 million. I think The Gray Man even got up to $200 million. Those are the numbers that are just reported. And they're probably doing the math and saying, you know what? We can probably get more eyeballs on an NFL game for one night then we're going to get through the life of having the Will Smith movie bright exclusively on Netflix. You mentioned the upfront earlier for Netflix. A couple of things happen and I want to see, we can talk about either of these. First is that their ad tier hit 40 million accounts worldwide. That's double from the start of just this year. It's now about 40% of all new signups

and pricing is just seven bucks a month. The second they're launching an in-house ad tech platform. It had Microsoft as sort of a programmatic ad partner. Now, it's also adding the Trade Desk, Google, and Magnite to that mix. I've seen Trade Desk get a little bit of a boost this morning. Either of those, there's one of two options, or you can do both, whatever you want, Nick. Yeah. I think that 40 million subscriber number on the advertising tier stood out to me. I really think this is just the beginning for Netflix as they add the NFL here at the end of year, WWE starting next year. I think they're going to draw in a lot more of those ad tier subscribers, maybe even outside the U.S. as well, if you think about the appeal of these properties.

I've said, WWE has historically been one of the highest-rated cable shows, so getting access to these properties, I think, are undercutting a lot of the last appeal of cable when it comes to live sports. I think it's remarkable that they're launching this in-house ad tech platform just two years into spinning up this business. I think it reflects Netflix's ability to innovate and be dynamic. I think there are brighter days ahead for Netflix when it comes to advertising. At the upfront, you also had Disney presenting. Now, Disney's in an interesting position where they're the challenger. They're competing for these sports rights. They've even launched a new comedy brand to challenge Netflix. They have a streaming business that's almost profitable.

And then you've got Bob Iger up there showing a chart. Hey, for the most eyeballs on TV, it's Disney. We're the clear leader here. So, I mean, what do you think? Is Disney still the leader in the entertainment space, or is it now in this challenger position to Netflix? Well, it all depends on how you define the market, right? If you look at entertainment more broadly, clearly Disney is going to get a few more eyeballs given that they have the movie division. They have a number of cable networks that are going to get a little bit more time spent. I think if you look at the streaming business, Netflix is really the clear leader. They're profitable. They have the most engaged audience. They're able to squeeze more engagement

out of the same content than other platforms. The really big thing for me is they've really dictated the terms of competition to the other folks in the industry. When Netflix went for scale and was spending all out on those movies you talked about, they were able to induce the other folks to follow along right behind them. Now, in the past year and a half, couple of years, Netflix has worked towards showing profit and driving the bottom line, and the whole rest of industry has kind of had to follow behind them. David Gardner likes to say that if you're the lead Husky, the view never changes. I don't think Netflix's view has changed that much, but I think lots of other companies are being forced to follow along.

You're also seeing bundling, which Netflix was a part of before Disney, right? Netflix with this Comcast deal, having Netflix, Apple TV, and Peacock. Now you have Disney and HBO Max joining up together with, I guess it's Disney, Hulu, and HBO Max into these packaged bundles. We're just becoming cable again, Nick. Let's start. What do you think of these bundle offerings from these streamers choosing sides and offering these larger channel package offers? Yeah. I mean, there's an old joke. I forget who said it, but there's two business models out there in the world. There's bundling and unbundling. Clearly, the past seven, eight years, we've gone full in on unbundling with all these various streaming services.

Now we're moving back to bundling. I think the motivation there is to scale up and reduce churn. There are some studies out there that say folks don't really like to have more than three subscription services. So, if you can tie these together, perhaps folks turn out less, they're not going to cancel when their favorite show leaves Disney Plus in between seasons, maybe they'll stick around because content is available on Warner Bros. Discovery and some of these others. I also think you've got other operators. I think Warner Bros. is a great example. This is the parent company of HBO Max. They're in a tough position where they have lots of leverage and they need to find a way to cut costs and drive profits. They licensed a whole

bunch of HBO content out to Netflix, now they're partnering up with Disney for this bundle. I think you have some of these media businesses that thought they were going to be meaningful competitors in streaming and now are realizing a more attractive business model for them is what they've done historically, which is to produce content and license it out to other folks. I think this is an opportunity for Disney to get some scale, which they would like to have. They've already begun integrating Hulu in with Disney+, so this gives them even more inventory to distribute. Hopefully, it will reduce churn for them. I do think it puts Disney in an interesting spot as the center of this hub. You mentioned Comcast trying to run a similar strategy. Comcast

earlier this month announced that they're going to launch a streaming bundle with Netflix, Apple TV Plus and Peacock. You mentioned Disney nipping at the heels of Netflix. I think the two folks that are really butting heads here are Comcast and Disney, both of them trying to become this hub for streaming content. They've been at odds going back a number of years for when Comcast really bit up Disney's opportunity or Disney finally ended up acquiring Fox. I think both of these these companies are trying to become the hub of a number of these other streaming services while I think Netflix is just over here running their playbook and easy as they please. You have a couple of sort of interesting relationships. You have the rivalry between Disney and Comcast with

their bundling. And you also have this frenemy relationship with Disney and Warner Brothers Discovery. Maybe in the whole streaming pack, Netflix is the clear leader there. But I would say Disney is proving to be the alpha in that Disney HBO Max relationship. You got two streaming services. Plus, not for nothing, the Disney brand name is mentioned first as Warner Brothers is really trying to cut costs and, as you said, become an arms dealer. Yeah, that's right. I think Disney is well-positioned to become the hub here if anybody is going to. Comcast is working to do that as well. They already have some of these bundle offerings where you can bundle up your cable relationship. I think we'll see these two battle it out. I think both of them

are going to be around here at the end, but I think we're seeing where our strategies are headed and it's more partnering up together than being on an island with your own streaming service. Let's hit Walmart quickly before the end of the segment. Walmart reported this morning its investors are enjoying a 6% jump as the nation's largest private employer and retailer beat revenue and earnings estimates. headline, Nick, seems to be that Walmart is getting more high-income shoppers and people are getting annoyed with the cost of eating out, which is a benefit for the largest grocery chain. Any big takeaways for you from the quarter? Yeah, I think it's just indicative of Walmart's

positioning in the market. There's a lot of folks that say, hey, I would never shop at Walmart. And then when they get into an inflationary environment, those low prices start looking attractive. One of the things you highlighted for me from the report is Walmart is now doing more same-day and next-day deliveries than Amazon Prime in the U.S. I think Walmart's ability to offer pickup in-store and delivery is attracting some of those customers who wouldn't traditionally be Walmart shoppers to take advantage of some of those services and some of those low prices. I think it reminds you that Walmart is really entrenched in the retail business and really hard to disrupt them even if you're Amazon or some of these

Yeah, they mentioned sort of the inflation story and really trying to say, hey, this is not an inflation story at Walmart. And in fact, there was mid single digit deflation for general merchandise over at Walmart. Nick, I'm going to I'm going to give you a question that might be unfair. Who does more to control inflation? We've got two groups. We've got the Federal Reserve and we've got Costco and Walmart. Who's doing more to control inflation? in the United States? Well, I guess it really comes down to,

are you a believer in microeconomics or macroeconomics? I am of the bucket that the folks on the micro side, the retailers, have the ability to have a little bit more impact. The Fed's tools are crude. They can either cut interest rates or do open market purchases, while these retailers can shake up their supply chains. Or if you're Costco, you can start a chicken farm to keep your chicken costs low. I really think the ability to make cost cuts at a micro level are more influential to people's day-to-day purchases and the prices they actually see there in the grocery store. If you made me pick one, I'd pick the retailer, but the Fed, they're no slouches. There you go. Nick Sciple,

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but about two years out, we started to hear about and see the effects of a post-pandemic travel boom. Revenge travel, if you will. The idea being that people, after having been cooped up, were eager to get back out into the world. Now, it's 2024. Broadly speaking, where do we stand today? Was that post-COVID boom in travel demand a blip or more of a lasting trend? I'll say yes and no. I'm going to throw an analogy at you. We just took the kettle off of the stove. It may no longer be boiling, but the water is still really darn hot. So, technically, we're cooling, but we're still red hot. And that's sort of where we are with airlines right now and with the whole travel industry. Just to use the airlines, their trade group put

out an estimate that the industry will carry 271 million passengers this summer. That's up 6% from last year. And as you say, last year was kind of crazy. So, where's the cooling talk coming from, there's some data to suggest that we're not splurging quite as much. Maybe that family that went to Europe last summer, they're going domestic this year, things like that. So maybe we're just coming down slightly, but it's red hot. And globally, it is a trend. It will always be cyclical to some extent, but backing it out, there's a clear line up and to the right. People want to go places. We're starting to see some companies talk about this in their earnings calls and address these changing trends. Disney, last week,

management talked a lot about this, especially in regards to the parks business. They called out a normalization of post-COVID demand in that parks business, but also said that they're seeing a record level of demand. This drills down a bit more into what you were just saying, but how can both of those things be true? Yeah. I think there is, generally speaking, maybe it was because of the pandemic, as you say, revenge pent-up. But people do seem to want to travel more, even as inflation has risen, even as all these warning signs, we have seen more. So, what Disney's talking about is like, yeah, we're not seeing that spike anymore. We're not seeing just this crazy travel no matter what. But that doesn't mean we're seeing what we typically

see when costs get high. Look, if a family's feeling the impact of inflation, they're not going to stop eating. They might not go to Disney World. So, normally, that's what we see. There's something to suggest that, no, people still want these experiences. And so, yeah, we can still normalize at a high level, maybe. You mentioned airlines at the top. So, I want to swing over there. In that sector, you've kind of got two different stories playing out. And when we were prepping for this segment, you mentioned that it's a bit of a story of the haves and the have-nots. The big four carriers, American, Delta, United, Southwest, they've reported record revenues since the pandemic. Meanwhile, you've got ultra-low-cost carriers like Spirit and Frontier

that have struggled to return to profitability. Why are these ultra-low-cost carriers struggling so much if we're seeing this continued high demand in travel? So, there's a term in airlines, and all the low-cost carriers hate it, but there is some truth to it, where they are the so-called spill carriers. And what that means is a lot of their business is what spills over to them after the airline that you wanted to book is full. So, you go, you try and book one place, and then you end up on them, and that's how they get a majority of their business. And back to what we talked about at the top, where it's sort of just this slight cooling. I think part of what is going on is that there is still plenty of demand.

The Unites, the Deltas of the world, they are filling their seats. They're much better than they used to be on competing on price, so they can match on price. If the price is the same, that's where people go. Where we're seeing softness, if there is softness, is these spill carriers where there just isn't so much business. Right now, everybody with vacation, they're all flying to the same places, so you have ample choice. It's the same idea back to a slight cooling. We're still filling planes. But these carriers are the ones that are feeling what is going on probably a little more than the big guys who can offer more to the customer. It also seems to me like there's an increasing focus on the premium traveler. Delta's revenues

for premium seating were up 10% compared to the same time last year. Delta and American last year rolled out changes to their loyalty programs that made it harder to achieve and reap the benefits of certain loyalty statuses. Southwest announced recently that it might ditch its one-cabin open seating plan. That would probably allow them to start charging for seat upgrades, again, with this premium focus. It seems like maybe we were not so long ago in a golden age for smooth travel for the masses, or a spot where people could status hack a little bit. Is that coming to an end? I think it is. I'll tell you, Generally speaking, the story of the past decade has been, what I said before,

the legacy airlines are much better at flying profitably. There was a while when deregulation happened that airlines like Southwest, they were just smarter. They did a better job pricing, and they benefited everybody else suffered. Delta, United, American, they've caught up. They know how to price profitably. Part of that is charging you for what you want. That's when you get to this Economy Plus or all this, what they're really doing is saying, I'm going to match the discount or on price if you want it, and then I'm going to upsell you a better seat, a window, whatever it is. So, yeah, the era of outsmarting the airlines and getting a great deal, that is probably gone. The good news is, that's great news for investors. It's not so great for

customers. So, I think that is where we are with this business, where it's much safer to be an investor, but you're also not getting that hack your airfare that you could 10, 15 years ago. When you put it that way, outsmarting the airlines, it makes it sound naive to have ever believed that that would have lasted forever. And I will say too, I'm generally always been on the mind with these mileage things. If it was such a great deal, they wouldn't give it to you. So these people who said they were, I don't know, maybe some, but yeah, no, I think they've caught up with the customer. So while we're talking travel, I also want to touch on Airbnb. Management in their recent earnings call called out some similar

trends to what we saw at Disney. Nights and experiences booked in Q1 increased almost 10% year over year, despite, quote, a hard comp for this time last year. Basically, there's still growing demand for leisure travel, but not at the same growth rates that we saw closer to COVID. Do you have any other major takeaways from that report or anything that stuck out to you? Well, so, you know, we talked kind of in the prep about kind of emerging markets and kind of where they're going. And with Airbnb, it's so important, we take it for granted now, but to think of what they've accomplished is basically creating this market, creating the customer who's willing to go into someone's house for their vacation. But the question for them now is, how do you grow

from here? For most of us who are going to be customers with Air, so they've kind of maxed out on the U.S. customer. You can grow by adding inventory. We're trying to get more people on the platform. You can also grow international and growing where you don't have a presence. And I think what you see with Airbnb right now, that's where this natural evolution of the business, it's hard work growing your inventory in San Francisco or Washington, where most people who want to do this are doing it. But you have plenty of international markets today that were kind of where San Francisco was, you know, what, 2008, when the Airbnb founders started renting out their couch. So, you're seeing the business maybe mature and maybe, if not level off,

but just the growth is getting more of a mature company in the West where it started. But that does not even, they haven't even tapped the international opportunity where we're still in the early days with this. Yeah. Brian Chesky on that earnings call is really excited about Asia in particular, it seems like. And he called out that there's a lot of younger travelers going there that are not as predisposed to hotels as maybe an older demographic is. You mentioned earlier that everyone seems to be flying to the same place, going to the same place. Is Asia that place? Is there another expansion market that maybe a lot of travelers seem to have interest in? I think right now, Asia's on a lot of people's radar because you

have so much saturation in the Caribbean, for example. You have probably 10 or 12 different airlines flying to somebody's routes. Hawaii, when COVID hit and no one could fly international, all the airlines just dumped all their capacity on the one nice place that Americans could still get to, and that was Hawaii. So, you are seeing them look to, I'd say, South America to a lesser extent, but you have currency issues there, and Asia as a place where you can grow. It is sort of whack-a-mole, too. For the cruise lines, for example, it's the opposite. They're trying to find places other than the Caribbean, but you might not want to go all the way to Asia. It really is, you always see an evolving trying to get away from where the competition is too

intense. When we think about growth for Airbnb, obviously, expansion markets are a big opportunity there. The company also hits a lot on this experiences segment. Most recently, they've rolled out icons, a new category of, quote, extraordinary experiences by the greatest names in music, film, sports, and more. I'm less interested in this specific launch and more curious to hear kind of what you think about Airbnb's experiences offering in general. Is this a way to kind of stabilize demand for bookings, even in down travel cycles, and offer something that's appealing to people closer to home that still feels like a treat but isn't quite the cost of a trip? Or is there potential beyond that?

Well, I think, you know, we talked about avenues for growth, and this is certainly, I think, one of them. Not just sort of the domestic as an alternative, but also just kind of very simple, but the add-on. You know, I mean, not only can we sell you the place that you stay in the Caribbean, but your snorkeling trip, you're going to do there, too. So, I do think that's how to do it. I don't think it necessarily shields them from the cyclicality that comes with travel, because inevitably, the cyclicality comes to whether or not the consumer wants to spend their on experiences, travel, all of these things. But the more revenue sources you have in good times and bad, the more stable your business is going to be. And I do think that that's the logic. And

it makes a lot of sense to kind of take, I guess, more of the wallet share of that vacation or of that experience. The more of that money goes through you instead of going to someone else, that's going to help you in good times and bad. as always people on the program may have interests in the stocks they talk about and the motley fool may have formal recommendations for or against so don't buy or sell anything based solely on what you hear i'm ricky mulvey thanks for listening we'll be back tomorrow