Motley Fool Money - Motley Fool Money: 10.19.2012

Episode Date: October 19, 2012

Shares of Google plunge after an earnings surprise.  Our analysts discuss Google's big miss and delve into earnings news from Chipotle, McDonald's, and Microsoft. Plus, Gina Keating talks about her new book, Netflixed: The Epic Battle for America's Eyeballs.     Learn more about your ad choices. Visit megaphone.fm/adchoices

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Thanks for being here. I'm your host, Chris Ellen, joining me in studio this week from Motley Full Inside Value, Joe Mager from Motley Full Income Investor, James Early, and for a million-dollar portfolio, Ron Gross. Gentlemen, good to see you. Good to see you, Chris. Earnings Palooza rolls on. We've got the latest results from Microsoft.

Microsoft, McDonald's, and more. We'll get an in-depth look at the Battle for the Living Room with journalist and author Gina Keating. Plus, as always, we've got a few stocks on our radar, but we will get right to the earnings, and we're going to start with Google. For the second time in a year, Google's quarterly earnings came in lower than expected. The big excitement, however, came on Thursday when the results were inadvertently filed with the FCC and made available to Newswire's in the middle of the trading day. Is that a big deal? That's kind of a big deal, because shares fell about 11 percent before trading was halted. It then resumed later in the afternoon. Joe, I'll just start with

you. The excitement aside, what did you make of Google's quarter? Well, the headline looked terrible, and I was about to head out for lunch when I saw this spilling across Twitter, and I was like, ah, no lunch today. You couldn't eat lunch? I did much later. No, I just, I'm a Google junkie. So much later, having gone through the numbers, I think they were actually much better than the headlines would have let on. Analysts were upset that they missed on their revenue guidance, or at least didn't hit analyst expectations of what sales would be. But it turns out that the entire reason they missed was because of foreign exchange headwinds, which is basically a short-term thing, doesn't reflect the underlying business. And a lot of people were worried about cost per click,

which is Google's revenue per click following 15%. But again, after you back out the currency changes, it was only eight. And when you factor in that they drove 33% more clicks. All in all was actually a pretty good quarter, even though the headline, coupled with the, you know, accidental release was just a total train wreck. Ron, it was a pretty good quarter, as Joe says, and yet $18 billion worth of market cap vanished. So it couldn't have been that great a quarter. You know, every quarter, it's all about mobile cost per clicks. Mobile cost per clicks. When are analysts or investors going to figure out what's going on here?

It's not a surprise to see these things. So when the market gets surprised, It makes no sense, and it's just to me an indication that the market is not always efficient. Having said that, the stock was not really cheap and any kind of shock to the system, whether it's a media snafu, public relations snafu, or an operating snafu, we'll bring the stock down. It's getting down to the point where actually we're going to start taking a look at it again. We've had it on hold for a while now, but now it starts to get interesting. James? I'm still trying to see how they didn't want the bed here. I mean, it seems like the ads, 33% more ads, but ads sales growth was 15% versus 39%.

Is that all, Joe, is that all currency, or do they have some just organic slowing? So what's happening is that basically the PC side of the business, so searches on PCs, it's not really growing, but all these extra clicks are mostly just coming from mobile devices, usually smartphones and tablets. The problem is that they're getting a lot less money per click on those because people don't spend as much money on their smart. smartphones as they do on their PCs. And so that's hurting the average, but it's bringing up the overall revenue. So, yeah, I feel like analysts who are focusing on cost per click following are kind of missing the forest for the trees there. Joe, just to wrap up on the stock to the point that Ron was making, when you look at the valuation of the stock now, now that it's had this, you know, 9, 10% sale, what do you think in terms of the valuation? Is it attractive? Yeah, I like it. And I'm a happy holder. I mean, I think they're doing incredibly well. I think the mobile business is booming. You know, they said, yesterday, they're doing a run rate of $8 billion in revenue annually, which is a pretty sizeable

amount. And Google Plus, which we always like to make fun of, now has more than 400 million people have registered. And not, you know, monthly or even daily, but broadly speaking, it's been a pretty good success at getting people more brought into the Google ecosystem. And I think that has long-term value. Thank you. And thanks for reminding people that Google Plus still exists. Earlier this month, hedge fund manager David Einhorn made the case for for shorting Chipotle's stock. And Ron, David Einhorn's got to be feeling pretty good. He's feeling good.

Because shares were down more than 10% on Friday after third quarter earnings came in lower than expected. Yeah. You know, customer traffic is clearly slowed, and I did my part, so you can't blame me. Yeah, I like myself a burrito as much as the next guy. But same store sales were 4.8%. That's actually not so bad in a vacuum. But it's clearly... That's a drop.

It's drop, and it's kind of a trend. We also will have rising commodity costs, rising food costs that could potentially be a drag going forward. We didn't necessarily see it yet. Operating margins were actually up. But when their costs go up, then they're kind of left with the decision. Do they also raise prices to the consumer? So per burrito, the consumer will pay more. Or do they make less profit per burrito?

And that's a decision that they're going to be looking at, and menu price increases are definitely going to be on the table. Again, same with Google. This decrease in the share price gets me back into the I'm Interested Camp, especially when you see the potential for European expansion and the expansion of their Asian concept shophouse, which is going to open their second and third one, the third one in California coming up. If you could show me a situation where I can get the shophouse franchise for free potentially or something like that, that gets me really interested. What is your go-to burrito, Ron? I'm a chicken person by nature. the spicy salsa, not the chunky one. Got it, got it, got it.

Not no guac. Not no guac or no guac? No guac. No guac. Sticking with restaurants, McDonald's profits came in lower than expected. James is the second quarter in a row. This has happened, and to the point Ron was making about same store sales, McDonald's, in their earnings statement, said that looking ahead to the next quarter,

the global same store sales are trending negative. So that's not, hey, the comps are lower. It's the comps are lower to the point where, they're trending negative. Yeah, I was a little bit surprised by that, Chris. This has been a company that's sort of a victim of its own success in a way. It's done so well, and it's kind of like, you know, now nobody wants to give you credit for all the times.

You do brush your teeth, but it's, they are, to their credit, they are spending a lot of money. I guess I don't know either. What I made that up? They're about halfway done with their store remodelings in the U.S., and that's been a big focus for them because Fast Casual is, I was they eat their lunch, but Fast Casual is taking some of their business, and so they're sort of sprucing their stores. That's a long-term thing. So I think, yeah, you're right. They just have to write it out for now. So long-term, you're not necessarily worried about McDonald's, either the company or the stock

where it's going. The stock is not crazy cheap now. Long-term, I'm not worried. Microsoft's first quarter revenue fell 22%. Shares were down a bit on Friday as a result. Joe, is this due to the delay of Windows 8, as some in the media are reporting it, or do you think this is just sort of a larger trend in terms of PC sales overall. Yeah, I don't think this was a Windows 8 thing. No one I know has been like, oh man, I'm holding off on buying that PC

because Windows 8 is coming up around the corner. I'm not really here in that. No companies, no corporate buying delays as a result of something like that? I am sure that that is true. And pre-sales for Windows 8 are up 40% over the top of the corner. Maybe later, against Windows 7.

So that's true. But at the same time, I do think you're seeing a lot of enterprises extending the life of their PCs. In full HQ, I'm running Word 2003 on my PC, and I don't see much reason for us to upgrade. The English language still just hammers out plenty fine on there, and all I'm trying to do is get to the Internet most of the time. And that's part of the problem is that PCs have reached a state where they are high quality enough, where they can get me to the Internet, where all the high-value activity is happening in Microsoft isn't really a big problem. part of that. I can't argue with a lot of that, although I do believe the cash flow that they do generate still makes the stock look inexpensive. One other thing that was maybe troubling is that

their server and software business showed some weakness as well. They say it's because they've shifted the model into long-term contracts, so you don't see the big pops when they launch things. But that's also something to keep an eye on because that's traditionally been a pretty strong business. Yeah, I'm going to twist the knife a little bit because we've been doing a lot of apologizing for companies so far here. The online services business is also still hemorrhaging cash. So basically, online services is Bing, Bing. Bing! Yeah, that about describes the revenue. Do you guys remember Ricochet Rabbit when you're a kid? The cartoon? Sure, yeah. Okay. Bing, ping, ping. I want to go back to the PCs for a second because we saw earlier in the week,

Intel's third quarter earnings fell, and James, the CEO at Intel went so far as to say, yeah, we're not really sure when PC sales are going to pick up. That, to me, is as damning a statement about the state of PC sales as anything going on with Microsoft. At least he's honest, Chris. Yeah, Intel, about a year ago was sort of surprisingly good. Now they're surprisingly bad. Long, long-term, I'm not too, we're still have a lot of emerging market consumers. We still have a lot of demand.

Intel's obviously been losing to AMD on the smartphone chips because of power parity issues, but they are coming closer to that power parity. So I'm a long-term believer in Intel short-term is going to be rocky. Coca-Cola and Pepsi both reporting earnings this week. And James, I know that you would sooner reach for a glass of sand before soda. You know me well, of course. But these are both recommendations. Love's roughage.

Yeah. These are both recommendations in your service. What's the story with the big? Well, the common theme. They both had 1% gains in sales volume overall, which is great. Decent results, especially overseas, but a stronger, dollar meant that that money didn't convert into as much U.S. currency when it was brought back over. It's sort of like the feeling of, I don't know, spitting into the wind and having come back into

your face or something like that. It's good, but it's just not enough to bring the earnings where they need to be based on where expectations have been and where the stock prices have been. I think both of these guys are a little bit rich right now. What do you think of Pepsi's marketing strategy? Because we were talking before the show today, and I can't recall a company as eager to talk about the money. they are spending on marketing as Pepsi is. And to their credit, certainly over the last year or so, when you look at the stock performance, it seems to be paying off for them. And Chris, Pepsi's organic sales were up 5%. Organic, not organic food, just organic meaning X acquisition, are up 5%, which is actually really good. They gained market share over Coke. So I think it is working, but I agree with you. They do talk about it quite a bit. Yeah. Well, I think it's smart. Unlike Coke, they underinvested in their brand for a very long time. And I think Coke's eaten their lunch as a result. So even though it's expensive.

I think it's a good long-term investment for them. Coming up, if you're the CEO of a for-profit education company, you had a really bad week. Details next. This is Motley Fool Money. As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for her against, so don't buy ourselves stocks based solely on what you're here. Welcome back to Motley Full Money, Chris Hill, here in studio with Joe Mager, James Early, and Ron Gross.

Guys, bad week for the for-profit education industry. Bridgeport Education disclosed the U.S. Justice Department is investigating Bridgepoint's compensation structure, and Apollo Group's fourth quarter earnings fell 60 percent. Ron Gross. Not surprisingly, not both stocks down for the week. Bridgepoint education is a stock you've recommended. And we continue to recommend it as a buy despite everything that's going on.

And it's not necessarily because we think it's the best business in the world. Quite frankly, we just think it is cheap based on the amount of profit. and cash flows they produce. The DOJ investigation, very light on details right now, but it has to do with their compensation practices. They've already taken steps to address that by actually letting go. Real students? Yes, they're really good. But they've let go of 450 admissions staff, and they've reassigned another 400. So they're already, you know, the writing was on the wall. They're already having accreditation problems. They already had to take steps. I mean, they literally had to, to save their business. So enrollment, just like with Apollo, is coming down

kind of by design. As you get more strict in the students you accept, you got to tighten up the business, you see enrollment come down. Joe, speaking of cheap shares of Apollo group, trading at their lowest point in more than a decade. Yeah, no thanks. This is one where, yeah, we bailed out on Apollo about a year ago when they had their first, what I would say, catastrophic drop in new enrollments. And similar to Bridgepoint, it was by design. And in fairness, they were just putting people in who shouldn't be there. But new enrollments are down 45% at Apollo over the last few years. That is pretty brutal. And I understand that you're trying to get better customers. Sorry, I mean, students in there. But clearly this model is broken, I would say,

for a lot of these companies. And, you know, Apollo itself is just doing some massive cost cutting and that I think is ultimately going to hurt the educational experience, not just fat. So it's going to have a tough time in the next couple of years. Shares of Johnson and Johnson hit an all-time high this week when third quarter earnings came in better than expected. James Early, what do you think? Sometimes, Chris, there's magic and just not screwing up.

You know, Jay and Jay has for many years there. Exactly. Had these issues with recalls and the, you know, the formaldehyde-laden building shipping crates had crumbled into some of the children's medicine. medicines, things like that. They didn't really have it this time. Drugs actually sold well, and the synthest medical device company acquisition is looking good. And people don't realize that the consumer products, the one that had all the division that had all these problems,

is actually been smaller and smaller as a percent of J&J's revenues by design. Vikram Pandit, the CEO at Citigroup for the past five years, resigned this week. Kind of sent some shockwaves through Wall Street banks as a result of that. And Joe, as we talked about earlier in the week. Not really that much of a surprise when you consider that shares of Citigroup down 89% during his tenure as CEO. While J.P. Morgan's only down five. Right. With that in mind, whether it's on Wall Street or elsewhere in the public market, who is the new CEO on the hot seat in your estimation? Ron? I think I'm going to offer an early retirement to John Chambers over at Cisco. I think Cisco has lost their way. Cloud computing.

they didn't really have a strategy around mobile. They didn't really have a great strategy. They've reorged, gone under reorganization at least three times, and they still just can't seep to find their way. Stock's been decimated. James? I'm going to go with Brian Mornahan of Bank of America. Not a bad guy, but he's had some credibility issues,

and the banking environment is sort of keeping him afloat now, but if it does take a turn for their worst, so will he. Joe? Steve Balmer, Microsoft has missed the mobile boat so badly, and they've thrown so much money at it to no avail. I think if Windows 8 is a consumer flop, there's going to be a lot of pressure for him to be out. Before we get to the stocks on our radar, I'm going to borrow something that Ron has done in the past. I'm going to wish my big sister, happy birthday.

Nice. An amazing older sister, and particularly when it comes to finances, because when I got my first real job out of college, she was the one who sat me down and said, this is what a 401k plan is. This is what you do, and I can't cover. What is big sister's name? Mary Ann. Happy birthday, Mary Ann. And she listens to Motley Full Money over the weekend when she goes for a run. She goes to podcast route, not the radio station route.

We just got a couple of minutes left. Ron Gross, what is the stock on your radar this week? I'm circling back around to a stock I talked about maybe two years ago, and it's KMET, KEM. They're a very small-cap manufacturer of electronic capacitors. Capacitors are little components used to store energy. Sure, I saw it back to the future. The flux capacitor? Exactly.

These things are a commodity product, so that's one thing I'm. I'm concerned about. They sell for pennies up to a few dollars each, so you've got to sell a lot of them, but it looks really cheap. Discount to book value, very low multiple to cash flow, so I'm getting back interested in it. Chris, I'm feeling mushy today, maybe because I'm sitting up to Ron Gross and breathing his pheromones in, but I'm going to go with Disney. Again, I don't know what that means. One reason I like Disney, it's not the cheapest stocks, maybe fairly priced. Long term, I think it is a winner. I just came home from a conference and sat my business cards on the table.

My son sees Mickey Mouse just grabs a business card with Mickey Mouse on. It runs upstairs and so excited, and he's 20 years old too, which is weird. He's three. But the point is, brand is really strong. Another reason they have a whole division I learned that polices the supply chain for the cut the factories to make their products. So I thought that's really nice of them to do. They don't even own the factories. But, you know, most of us don't know how our stuff is made where it comes from.

And we just kind of throw our hands up. But Disney's not doing that. They're actually kind of a great thing. aggressively monitoring this. That's good for Disney. Apple. As a Disney shareholder, that actually makes me feel better about owning shares. Not that I felt bad, but that's always great to hear.

The ticker symbol? D.I.S. Showmager, we've got a minute left. What's the stock on your radar? Sure, Mercado Libre. It's basically the eBay of Latin America. It's almost the exact same model where they do marketplaces and payments. It hasn't really been on my radar to date, usually because I don't look at Latin American

in hyper-growth stories. but the stock looks pretty interesting, partially because it's got a great balance sheet, partially because it's a good takeout candidate, but also it's just a really big growth story and they're doing nicely. And the ticker symbol? M-E-L-I. What do you suppose the Motley Fool money of Latin America is? I have no idea.

De Nirole. I don't know. Drop us an email, Radio at Fool.com. If you have any thoughts on the Motleyful money of Latin America or more importantly, the Joe Mager of Latin America. All right, Joe, James Early. Ron Gross, guys, thanks for being here. Thank you, Chris. Up next, a conversation with journalist and author

Gina Keating on the story behind the start of Netflix and the battle for America's eyeballs. Stay right here. This is Motley Full Money. Welcome back to Motley Full Money. I'm Chris Hill. Few companies have had as big an impact on the entertainment industry over the last decade as Netflix.

And few stocks have engendered as much passion, both positive and negative from investors, as Netflix. Gina Keating is, the author of Netflix, The Epic Battle for America's Eyeballs. And she joins me now. Gina, thanks for being here. Thanks for having me.

Netflix, for those few people listening who may not know, the video service that has 27 million members, the company is valued somewhere in the neighborhood of $4 billion. But I think it's fair to say that over the last couple of years, the company's had some pretty serious missteps. There was the backlash over the price increase. There was the botched attempt to spin off the DVD by mail business and the whole under the name Quickster, which never fails to get a laugh. I want to get into your book and the company's history in just a minute. But first, as someone who has watched this company and covered this company as a reporter over the last decade, where do you think Netflix is right now?

What is your take on Netflix as a company today? It's really interesting the way things come around again because where they are right now in terms of their share price and investor outlook on them reminds me a lot of when Amazon and Blockbuster were looking at coming into the DVD, physical DVD by mail business that Netflix had pioneered. Now, everything is very much in flux right now with streaming and the content landscape and broadband and so forth. And investors pull back from the stock just because they are a pioneer, It's unsure. They're very unsure of what's going to happen with all of those factors. So I think it's very muted, but I don't think that Netflix is any less of a great company than it was back in the day when it was up against Blockbuster. One of the things you write about in the book is the PR team at Netflix and how they were horrified by the Quickster idea. How did it even happen in the first place?

Yeah, the Quickster and the price increase were of a piece. that were supposed to happen together and they had briefed an executive i can't remember uh... if it was a netflix executive or some other uh... tangential company about it and that person went out and uh... blabbed about it and it got all over the uh... social media and people got absolutely outraged that netflix was going to raise prices in the middle of a recession so what they had intended to do was to say hey you know we need a little bit more

money you've been getting streaming for free for the last four years now we have to actually charge you for it. And so everybody who has the hybrid plan only is going to be paying a little bit more money. So it was very botched because they couldn't get out in front of that. And then, you know, they wanted to also say we're going to be splitting the two services so that we can make them better. But it just came out like sort of a horrible two-step bomb. And Reed Hastings decided that he was getting very impatient with his PR team and just went out there and sort of tried to explain it himself and it just added fuel to the fire and people were really angry. So it just,

it was him taking control of something that he's not that great at. You're listening to Motley Full Money talking with Gina Keating, author of the new book, Netflix, the epic battle for America's eyeballs. Let's talk about the beginning of it all. We've had Reed Hastings as a guest on previous iterations of the Motley Fool radio show. Back in 2003, One of our co-founders asked how he came up with the idea for Netflix, and we're going to go ahead and play that clip from 2003. How did you come up with the idea? Well, it's kind of sorted.

I didn't return a movie that I was supposed to, and I got a big late fee. You know, I wanted to be mad at someone else, but I only had myself to be mad at. But it just, you know, it's like the sand and the oyster. It just started bugging me like there had to be a better way. and that's how we came up with a subscription, no-late-fee, unlimited rental model. So that was Reed Hastings in 2003.

In your book, Mark Randolph, who's the other co-founder of Netflix, says that's not actually how it happened. No, it's not. No, also, to be fair, you know, they didn't start out as a subscription, no-late-fees model. It was all-a-cart just like Blockbuster. And what they were wanting to do was they wanted to try out e-commerce. They wanted to be the Amazon of something.

Mark Randolph is the guy who was driving the train on that one. He really wanted to start a business, and he was working for Reed Hastings at the time. They were commuting from Scotts Valley into Silicon Valley every day, tossing around ideas for what else they could sell that would be as big a market as Amazon. And they heard about DVDs. They weren't only being tested in about six markets at the time, and they decided to try it out. So it's a little less sexy, but that's really what happened. I mean, I know you're not a mind reader, but, you know, it seems odd that here are these two guys who start this company, and one of them says, here's this idea of how I came up with, you know, the whole notion of Netflix, and the other one basically says, no, that never happened. Yeah, and I asked him about that, too, because I never had heard of Mark Randolph in the eight years that I covered Netflix. I had to go back to some really early press releases to even see his name.

And so I was really surprised when I said to him, you know, where were you with this whole Apollo 13 story? And he just said that that never happened. It started as a convenient fiction to explain how the no-late-fee's subscription model worked. And, you know, as soon as, you know, it got a little better known, you know, we thought we would just go back. and sort of corrected, and it just never happened. You're listening to Motley Fool Money, talking with Gina Keating, author of the new book, Netflix, The Epic Battle for America's Eyeballs. You know, one of the things I mentioned in the intro, the stock and the passion around the stock,

and we've seen that here at the Motley Fool. Our flagship investing service, Motley Fool, Stock Advisor, recommended it back in 2003 when it was trading for about $11 a share. Obviously, it ran up about a year and a half ago up to 300. Then there was the whole Quickster debacle. And now it's trading somewhere in the high 60s. As you have watched this company over time, how has the pressure of being a public company affected Reed Hastings and the people at Netflix?

Is that something that weighs on them? Or was it really only sort of at the highs and lows of the last 18 months? or so that it's weighed on them? I'm going to say yes and no on whether it weighed on them. Yes, in the sense that these executives and people who work there are allowed to take their pay in cash and stock. And a lot of them invest quite a lot in stock. So internally, there is quite a lot of pressure to, you know, perform, which maybe, you know, is good and bad. Reed Hastings always impressed me very much as a CEO who, you know, he would get angry about the short position on the stock, but he never really allowed it to affect strategy. And that's one of the reasons I wanted to write this book is because I just thought he had a lot of courage.

Lately, I just don't see him being affected a lot. I don't see an attempt really to, you know, to digger around with his, with the results. So I would say, yes, internally, but not, he doesn't really play to the market. that I see. One of the things that you write about with regards to Reed Hastings is that he lacks empathy. You know, he's, on the one hand, he's someone who has created this company and this service that customers just love. And on the other hand, he, you know, he either lacks empathy or, as you said, with the whole Quickster thing, he just sort of went into an area that he wasn't really all that great at in terms of communication and PR.

are. All that being said, do you think there are some parallels between Reed Hastings and Steve Jobs? Because similar things have been written about and said about Steve Jobs. I would definitely say that there's a parallel in the idea that as he got more successful, he got a bit arrogant and really took control of the company. So I would, in that way, yes, but Reed Hastings is not a big-picture creative guy like Steve Jobs was. That was Mark Randolph's role Reed was a brilliant mathematician who turned Mark Randolph's visions and creative, you know, pictures of Netflix into a workable, you know, workable technology. So it's different in that way. He's not the same personality as Steve Jobs.

You know, visionary, absolutely, but not a creative guy that way. I found a 2006 story in Stanford University's magazine, and it's about Reed Hastings. a venture capitalist is quoted as saying, Reed is one of the very few CEOs, I would hand my checkbook to and say, tell us what you're doing and please let us invest. High praise from a venture capitalist, certainly. With that in mind,

knowing what you know about Reed Hastings, do you think there is a second act for him after Netflix? He's a young guy. He's, I think, 52 years old. So as someone in his mid-40s, I consider that to be very young. But do you think that he looks at himself and his career and thinks, yes, I'm going to have another business beyond Netflix at some point this ride will end? Or do you think he just looks at Netflix as this is my baby and I'm going to be here till the very end no matter what?

He told me one time about two years ago that he would stay at Netflix until it was no longer interesting for him. And I think this international rollout is providing a lot of challenge for him because it's so different to go into each market. So I think he'll stay occupied with Netflix for a while. You know, he's very involved in education politics, and I really see a second act for him in that arena, just because he's extremely passionate about it, and that's where I would imagine that he would go. Back to the investing side for a moment,

because you've said that Wall Street is wrong when it comes to betting against Reed Hastings. What do you think the folks on Wall Street are missing? They're missing the idea that Netflix is very data-driven, and they've got 15 years of information, extremely detailed information about consumer behavior, I mean, the likes of which I don't think any other company has, because the website is an instrumented, highly instrumented market research platform. I mean, they have information about us that we probably can't even imagine.

And they use that to predict cycles of consumer behavior and trends in ways that you just can't even imagine. I write about it in my book in the chapter called The Incredibles. So that was a big reason why they were able to beat Blockbuster, why the content offerings that they've had, the TV, the kids stuff, has really resonated with consumers because they kind of can see around the corner in ways that other tech companies have in. And also, Reed is a very disciplined CEO. He doesn't really, on very few occasions, does he let his passions or emotions

drive the way the decisions that he makes? See, that's one of the things I find fascinating about Netflix is that it does have all this data about the people who use the service. Incredible amounts of data, as you illustrate in your book. I mean, even tracking things like when movies are paused in streaming and sort of at what point someone will essentially just give up on a movie and really far more data than I ever would have imagined. And that's the kind of thing. I mean, take a company like Facebook, which every year or so seems to have. some sort of struggle with privacy issues, quote-unquote, with its members. And Netflix doesn't really seem to have that problem. The fact that it has all this data about our viewing habits,

that only serves to engender a greater amount of affinity amongst its members. And that's one of the things that comes out with the whole Quickster debacle. I think it was Mark Randolph that you quoted as sort of observing, like, that people, it's not just the price increase, it's the fact that people feel let down, they feel hurt. You know, here's this, they feel hurt in the way that someone would be hurt by a local record store going out of business because the people who work there really know you. And that's something that I really didn't expect at all. Yeah, I mean, Mark Randolph is really kind of a marketing genius.

He started out in direct mail, and he wanted and knew that you had to create a very emotional bond with your customers. And, you know, he left in about 2004, and the people who came after him, Kenner, Ross, Steve Swayze, some of these marketing guys who were so brilliant, really understood that the brand had to resonate in a very emotional way for them to beat these bigger competitors. And that's another thing that people sort of forget about Netflix, is people get very attached to it because they have a conversation with that company. You know, it recommends something to you, and then you tell it how you liked it. You get recommended other things, you know, and the company is constantly

improving the website for you. So it was extremely emotional. People felt very betrayed. by what happened with Quickster and the price increase. And that was a really good indication of how strong that brand was. I can't speak to how damaged it is, but it definitely was damaged. Coming up, we'll get into the battle for the living room and play a round of buy-seller hold. This is Motley Full Money. Welcome back to Motley Full Money, talking with Gina Keating, author of the new book, Netflix, The Epic Battle for America's Eyeballs.

Moving forward, what do you see as the greatest threat to Netflix right now? Is it a company like Amazon? Is it a service like Hulu, or is it something else altogether? The fact that there are more platforms to choose content from, it definitely doesn't help them, but they're so far ahead, and really their application is just so peerless. It's really pretty amazing. They're on everything.

They're really ubiquitous. So, I mean, the strength of that platform is great. I think the unknown variables in Netflix is what's going to happen with Internet service providers and content. purveyors and how they're going to treat Netflix because that's a real vulnerability for them right now. And I think that's why people are so hesitant about buying the stock. So I think those are the two main things. That's something we've talked about on this show before, the whole notion of the battle for the living room. And when you expand it just beyond movies, the battle for the living

room becomes enormous. It just becomes this melee with all these different companies, because, yes, you've got the cable providers, Comcast, etc. You've got Netflix. You've got Amazon, conceivably, if they want to, with their enormous cash hoard, Apple at some point with Apple TV, could get into the fray. You've even got gaming companies, Microsoft with Xbox, that sort of thing. You worked for years for Reuters covering entertainment businesses. Where do you see all all of this going when you broaden the scope and include all those other companies, where do you see this battle going? You know, I tend to agree with Reed that ultimately, I think the cable industry is in big

trouble, and it's because of tiered cable. It has the same, customers have the same feeling about tiered cable that they did about video stores when they were monopolies, just because there's this sense of managed dissatisfaction. They really don't do what customers want. And I think that consumers want and are showing that they want to be liberated to choose their own, you know, a la carte version of cable. And I think ultimately you're going to get everything through the Internet. You're going to choose your channels. Maybe somebody will aggregate it for you in some way that you're a little bit more free.

And I think ultimately it will, you know, that studios will figure out, you know, we're just going to have to put all this content on there and just charge for it. And that way it won't be so fragmented because it's very frustrating experience right now to have to go to different platforms. to get every season of a show that you want, which is what's happening now because they're experimenting. So ultimately, I hope customers continue to drive it, that you get a lot more choice, and that the content is available everywhere that you want to see it. We're going to wrap up with a round of My Cellar Hold in just a moment, but I have to say, for anyone listening, one of the just little touches about your book that I just love is the fact that all of the chapter headings are titles of movies.

The Empire Strikes Back, the Good, the Bad, and the Ugly. That's just, as someone who loves movie, I appreciated that. So thank you. I don't know if that was your idea or your editors or whoever, but that's just a wonderful touch and appropriate, given the topic. Thank you. Yeah, that was me. I just thought it would be fun. All right, we will wrap up with Buy Seller Hold.

And let's start with Buy Seller Hold, Facebook entering the movie streaming business. Bye. You think that test they did once upon a time with the Dark Night? You think that sort of wedded their appetite for really rolling out maybe a premium service? Yes, and I don't think they're going to be the only ones doing it. I just think, as part of my last answer, people just want to watch movies when they want to watch them and wear, and they're going to pay for it. And I think that could be successful. Newsweek magazine just announced it will stop putting out a print edition and go completely digital.

So buy-seller hold, Time magazine, still being in print in two years. I'm going to say buy on that one. They just got a lot more cash over a time? I just think that that's sort of a flagship publication. I think there's a lot of consumer sentiment around a physical edition of that, and that's very strong. And finally, we've seen plenty of books turned into movies before, so buy-seller-hold, a movie version of Netflix, the epic battle for America's eyeballs. Oh, bye. All the way.

Who are you casting to play Reed Hastings? You know, I always thought of him as sort of a nerdy version of Russell Crow. That's a great call, and our producer, Matt Greer, actually, his hands are raised because he made that call as well. I've never been in a room with Reed Hastings, but I'm just basing it on photos I've seen and photos I've seen and sort of movies I've seen of Russell Crow. It looks like Russell Crow might need to drop some weight. Oh, yeah. No, he's a good-looking man, and yeah, he would be, I think that's a good, a good parallel. The book is Netflix, The Epic Battle for America's Eyeballs. It's really fascinating stuff and an amazing battle that we will watch for years to come. Gina Keating, thanks so much for being

here. Thank you so much for having me. All right, that's all for this week. If you like the show, you can check out our daily podcast, Market Foolery. You can find it on iTunes and online at marketfoolery.com. It's sort of our daily take on what's happening in the market. And let us know how we're doing. You can rate Motley Fool Money on iTunes with Jim just the click of a button. You can also email us. Radio at Fool.com is the way to get a hold of us. That email address, once again, Radio at Fool.com. The conversation continues 24-7 online at the Motley Fool's flagship website, Fool.com. That's it for this edition of Motley Fool Money. Our engineer is Steve Broido. Our producer is Matt Greer. I'm Chris Hill. Thanks for listening.

We'll see you next week.