The Compound and Friends - Dan McMurtrie and Rich Greenfield

Episode Date: February 24, 2020

First up, Dan McMurtrie. He and his partners founded Tyro Partners, a New York City-based hedge fund, at a time when hedge fund closings are much more common than emerging fund launches. Dan lists some of the most important things he's figured out on his journey. He also talks about how one of the most under-appreciated sources of alpha is being nice to people. Later on we bring in Rich Greenfield, one of the most widely followed and respected analysts in the technology, media and telecom (TMT) space on Wall Street. Michael Batnick and Josh Brown got a chance to talk to him about the launch of Disney+, the rise of over-the-top streaming apps like Netflix, why Roku is such a hot stock and what we can expect for the next generation of video launches. One thing Rich is certain of is that while there may be winners among streaming services, traditional broadcast TV is sure to be the biggest loser. You can follow Dan's renowned Twitter feed / alter-ego Super Mugatu here: https://twitter.com/supermugatu Tyro Partners homepage here: https://www.tyropartners.com/ You can follow Rich Bernstein's ongoing commentary via his Twitter account: https://twitter.com/RichLightShed ...and check out his excellent blog here: https://lightshedtmt.com/ Be sure to subscribe to our channel so you never miss an update: https://www.youtube.com/thecompoundrw... Beginning Investors, check out Liftoff: http://liftoffinvest.com Follow us on Twitter: https://twitter.com/RitholtzWealth Follow us on Facebook: https://www.facebook.com/ritholtzwealth/ Talk with us about your portfolio or financial plan here: http://ritholtzwealth.com/ Obviously nothing on this channel should be considered as personalized financial advice just for you or a solicitation to buy or sell any securities. Please see this 3,000 word terms & conditions disclaimer: https://thereformedbroker.com/terms-a... Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey, what's up? It's downtown Josh Brown. We are live from the compound. I'm here with Michael Batnick, as usual. Say hello. We have a special guest, Dan McMurtry. Dan is the managing partner and founder of Tyro Capital, which is a hedge fund. What Dan is going to teach us today is how to start a hedge fund. He started one recently, like within the last few years, which is pretty rare. He's succeeding. He's going to tell us what he's learned throughout that process. And I think you'll get a lot out of this, whether you're an investor or an investment professional. So stick around. Welcome to the Compound Show podcast. Each week, we let you in on some of the best

conversations we're having about markets, investing, and life. Just a quick reminder, the hosts of this show are employees of Ritholtz Wealth Management. All opinions expressed are solely their own opinions and do not reflect the opinion of Ritholtz Wealth. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. Okay, here we go. Okay, that was pretty high energy. I'm going to take it down like four notches because you're pretty chill. But so I want you to just start with like,

you know, what made you want to start a hedge fund? When did you start it? And how far have you come in terms of like employees? Like I know it's relatively new. The why I think, you know, honestly, I didn't know what I didn't know. And so I've had to learn a lot about the business. I mean, I thought that because I could pick stocks, I could build a hedge fund. And it doesn't mean that you can't, but that's not what makes that happen. So we started in 2015, a couple of years after college, way too young. And we made a lot of mistakes in how we started it. Nothing catastrophic, but we just didn't know what we were talking about. And I think going into launching a fund, you need to understand that for the first few years, at least three or four years, you're in business building mode. You're taking no money home. And even if you have a lot of carry, and depending on how much capital you start with,

you should be reinvesting all of that into the business. And you need to be building out redundancies upon redundancies upon redundancies. Because as we're saying before we're going on camera, you know, hedge fund guys think about hedging the downside. But when you're running a business, you have to hedge the upside. What if you have a good year or you get featured somewhere or something and you have 50 or 100 inbounds and you have to field all those? People take it personally if you don't respond, you don't follow up. So you're saying like what if, God forbid, things go really well? Like you're very out front on a stock that turns into a home run.

And then Barron starts putting articles about you and you start blowing up. But you haven't built an infrastructure. So when you say 50 inbounds, you mean the phone starts ringing, emails start coming in, people that want to invest. And you're like, well, no, I'm really just picking stocks. I'm not ready for that. Like what, then what was the point of being in business? And then as you move into marketing and building all that stuff, it's just hours in the day. And especially if you're a one, two, three man team, you don't have enough time if you're a one, two, three-man team, you don't have enough time to do, and serious people are going to want to meet you a minimum of three times, usually a lot more.

Before committing to investing with you. They're going to need a lot of documentation about exposures, attributions, position level stuff. I mean, they're going to figure out if you're doing something like selling puts to have very smooth returns, they don't fall for that anymore. So you really have to be able to have materials

and documentation. You have to have, you know, your audits, your admin, everything needs to foot, everything needs to be. And the other thing is you can't go backfill a lot of that. If somebody sees that you created all that information after the fact, it's a lot less reliable. Has a prospect ever told you, you guys don't know what you're doing?

Yes. Early on, we had a couple of people. Yeah. Yeah. I mean, early on, we had a few people who, I mean, I think they were a little nicer about it. We've actually, no, we've had some people be incredibly rude, but we have had a few people say,

look, I buy the stock picking. You guys don't have a business though. And I was like, well, what does that mean? And a couple of people that said that to me were kind enough to say, look, I'm going to break this down for you and kind of help you a little bit. And so we built the track record for three years. We had very little assets.

We needed a track record. So we had something to market to potential clients. But at the three-year point, we made the decision to bring on a partner and give him equity who had a lot more experience with us than us in running an actual financial business. He'd ran a trading desk before. He had built another fund up. And I think if you're aspiring to be a manager, you really need to make friends with the COO types. Everybody wants to go to the portfolio managers. There's very little relative inbound into the COO, CFO types of these funds. And you need to understand that operational backend.

And it's going to make clients, potential clients a lot more comfortable if they know you actually have thought about that, invested in it, and you've considered what's going to have to be built out if you do make it big, if things are going well. You could have like the most dazzling insights like into TMT stuff like here's why I'm long Verizon, short Netflix. Like you could have all these cool ideas. But if the investor doesn't feel like you're serious about safeguarding their capital, like reporting on how much risk they're taking. Like they're not going to give you money. So before you get investors, before you pick stocks, what has to happen? How do you even start a hedge fund? Okay. So it's not that complicated. It's going to depend on what your starting scenario is. If you're starting with 500 million or a billion, you're going to have a very large

institutional setup. If you're starting subscale, which I don't advise for the record. What does that mean? You're starting under- Like friends and family. Yeah. Well, but here's the issue. So even the people that invest in emerging hedge fund managers, they typically at the smallest level have to require a $5 million check size. Otherwise, it's just too much paperwork, not worth their time. Let me just say, these are family offices that back emerging managers. This isn't JP Morgan. Well, no. So BlackRock has a program.

Texas Teachers. There are institutions that do this. But the absolute minimum is five and usually it's 20 or 25. And they can't be over, depending on the mandate, 25 or 10 or 25 percent of your assets. So it's like a catch-22. Right. You have to have money to get money. So you need 10 of them at once.

Yeah. And they're not going to do that. You have to already money to get money. So you need 10 of them at once. Yeah. And they're not going to do that. You have to already be over the level. So if you're under 50, it's very hard to raise money because even if you have everything else figured out, operations, performance, all of that of institutions that could give you money is 5% of what it might be. As you hit 50, 100, 250, 500, a billion different thresholds open up. You get to the top and then you're talking to Cambridge Associates and stuff like that where a single allocation might be 500 million. But you have to understand who is your target audience, how you're going to reach them. And then there's regulations around how you can do that.

You can't be going and posting your performance numbers online and things. Some people do that, how you're going to reach them. And then there's regulations around how you can do that. You know, you can't be going and posting your performance numbers online and things. Some people do that, but you're really not supposed to. So we're surrounded by people like on financial Twitter that think like, I'm going to start a $10 million hedge fund. $4 million of it is my grandma's. Yeah. I scrape together like in $250,000 checks, the other $6 million. Yeah. And like, I'm going to get the scale because I'm going to

crush it for three years. I'm not saying they can't do it, but like on a scale of one to 10, 10 being extremely delusional. What is that approach in your estimation right now? I did that and I didn't even have the grandma money. And so I'm going to put it at a nine of delusionals. And you still, and you were able to do it, but like so many people you saw have not. Yeah. And the other thing is, you know, you got to keep your costs under control. You got to be very, you know, if you set up a simple Delaware limited partnership, if you're in New York, you're going to have a Delaware limited partnership,

a Delaware general partner, and a New York management company, LLC. You know, when we started, we worked out of a, you know, not even a WeWork, we had a Regis, which, you know, everybody's forgot about was we were 20 years before. And, you know, we didn't have a Bloomberg terminal. And if you're going to go that route, which I heavily advise against, you know, we were young, we didn't have much of a network yet. But if you're older, and you don't have the network to raise more than that, something's wrong, because you before launching your fund, have not built the social network. You don't have the pedigree. It's not even pedigree. It's about social network. There are people who don't have pedigree, but everybody knows they're smart and they can raise assets. And they can get into meetings. But more importantly, once you start launching,

your ability to raise assets and also to have durability during volatility is really based on what people think of you. It's not a quantitative process. If they think you're really smart, you're going to bounce back. They're going to stick with you, generally speaking. And so if you have not shown the social ability prior to launching your fund to build a network where you could raise over 10, you are not going to have, you're not just going to develop that immediately. You know what's so funny about that? So now I'm a quant. I'm going to scoff at you. Are you suggesting that anything matters beyond sharp ratio, sortino, information ratio? Are you saying soft skills and friendships are meaningful?

They're everything. Not on my spreadsheet. I don't see it there on my back-tested returns. So how do you develop those skills and those networks? Yeah. I mean, so for me, I had a really rough period. We launched in August of 2015. So we started to invest up and then everything fell apart.

He was a huge dick and then he had to start being nice to people. Well, that was like the- I don't think I was a huge dick, but I was cocky. When you said that was tough because of the yuan devaluation period? Yeah. So, I mean, we came in and it took us two or three months longer to start our fund than we thought. So we came in with a little bit of stale research

because we had been working on op stuff. And then we started to invest up and immediately things start diving. And we're like, okay, well, we're going to buy the dip. That keeps working. And then market goes down 15%. Then it goes vertical. And so as it's going down, we're keeping the book hedged. It went down. And when it went vertical, we so as it's going down, we're keeping the book hedged. It went down.

And when it went vertical, we ended up basically losing money on both sides of the book. And, you know, we had another thing I would tell you is when you reach out to people, maybe 10% of them are interested in what you're doing. Maybe. But of the people that actually talk to you, of the people who say they're going to give you money, maybe 10% are going to give you money. So we had 10 million that said they were going to invest when we launched. We launched with three. Yeah, that sounds about right. And some of the people, and this is the other thing that's really dangerous. Some of the people who didn't invest were the people that I had the closest personal relationships with and who I'd

already made money for. So what happened with those relationships? At that point, I was not happy with that. And I was pretty pissed off. Bitter. Yeah. And I was a little bitter about it. And I didn't call anybody and freak out. I knew that's about it. If you're a banking analyst going through this, by the time you hit 27, 28, 29, 30, you're going to realize the number of people who stay in this business for any extended period of time is very low. Most people leave. And also the world becomes really small. Everyone knows each other. And if somebody says you're a dick, you have a big problem. Especially being a dick is one thing. But if anybody ever, even if it was your first day of being a banker, if you ever do anything unethical, it is going to be an insurmountable issue for your career. I really don't know how you come

over. It's very, very hard. It is such a small world. Yeah. And it's the same people making decisions year after year. Right. And everybody does reference checks. Everybody asks around. And people knowing you and liking you is a good thing. People knowing you and not liking you is a killer. But I had to learn this lesson, which was because the hit rate is so low on people who are going to even care to talk to you and people who are going to invest, you have to learn that every interaction you have is an opportunity to build a long-term friendship and a long-term relationship. That's what this business is about. And long-term

relationships are really what give you career Kevlar because everybody had, there's all these crazy things that happen and stuff nobody can predict. It's not necessarily performance related. You could get, I know really good managers who've gotten cancer at weird age and they had to shut down

and then they came back five years later. And the only reason they could do that is because they were well-liked and everybody wanted to see this succeed. But you have to learn that when you have a no in a meeting and somebody – especially if somebody is rude, if you can kind of be a manchabat or however you want to say that and be respectful, you can turn a no and an ugly no into a friendship and a relationship. And over time, that may not convert to a client. But everyone knows everyone as we just discussed. But also, they might refer you to

somebody that really likes your style. Sometimes I pitch people and they go, look, we're full up on long, short, fundamental emerging managers, even if that's what they like. But my buddy, he really likes, and I know he likes a couple of things you've done research on. I'm going to refer you over to him. It becomes very, very powerful. So it sounds like everything you're saying, like, I think you'd agree with this. Everything that you're saying is so intuitive. Like it just seems like it's so obvious. Yeah. And I also think that in the real world, that is how people are behaving generally.

They're understanding this idea of ingratiating yourself. Don't burn bridges. But then when you see people online, it's almost like they're deliberately bizarro Superman. They're like lashing out at people at eight o'clock in the morning yeah over a difference in opinion on fucking interest rates like people are so mad about other people's market calls people see someone losing money and they can't wait to ridicule them but nobody acts like that on walk i'm doing this 22 years i know like three people who act like that offline. Online, it seems like everyone. What am I, where is the disconnect that I'm missing?

I think there's a generational difference a little bit here. I think, you know, I don't mean to be disrespectful to anybody. How old are you? 28. Okay. So a lot of the people I know. So we're the same generation. Yeah. Well, a lot of people I know who are- I'm 42. Okay. So I believe you. So a lot of people I know who are kind of 35 and under in finance, there is that culture of kind of trash-talking people and writing people off. Writing people off is a massive mistake because even the best investors ever have had massive losses. One thing Soros talks about – I think Druck talked about Soros was Soros had the conviction in his own ability to just take the loss and go, OK, next one I'll get them. Of course you have to be wrong.

Otherwise you can't play. But young people in finance, I think are, feel that it's so competitive now. Like there's this, there's this psychological dynamic where, you know, I just see, I know so many people where they just go, that guy's an idiot. And they trash talk that guy or they go, or they go, you know, they don't know how to manage money. And I was like, well, what they're doing, you know, you know, some people look at you guys and go, well, they're, they're like doing quantitative allocation. What's special about that? I'm like, well, they're brilliant marketers and they know how to run a business and they're doing right by their clients, which is, which

puts them at least 80th percentile for, you know, money management firm. And they don't understand. We're definitely not George Soros. And they don't. I would say that's accurate. But they don't understand what you're doing. Yeah. They're trying to interpret it. Well, I can pick stocks better than Barry can allocate based on a model.

Oh, that's definitely true. Yeah, true. And I'm like, you don't understand. It's an orthogonal argument. What are you talking about? This is not how this works. One thing that I think is overlooked oftentimes is people, they see like the glamour, like they're going to like buy Lamborghinis and stuff.

But hold that to the side for a second. Yeah. How does being a hedge fund manager affect your social life? Like, do you take this work home? Like what does your weekends look like? Yeah. I don't think I've had like a day I didn't think about work since a year before launch. And if you don't enjoy the game, it's going to eat you.

There's just no way around that. It's not a profession. It becomes a lifestyle. It's who you are. But there's mitigating factors to that. Like's not a profession. It becomes a lifestyle. It's who you are. But there's mitigating factors to that. I'm a long-term guy. I'm really interested in understanding what is going on in video games over the next 10 years. And so it doesn't really affect my social life in that when I'm talking to people, I'm not like, I got this hot stock for you.

I'm asking them like, well, tell me about your job, your business. I'm actually interested because I actually want to hear what's going on. And that's another thing I think hedge fund guys mess up is they think they know everything. And I always want to like, my favorite conversations are with like some RV sales guy in like Ohio who is telling me, you know, how that market's worked over 20 years. So that guy knows a lot of stuff. And if you approach it that way and you, but a lot of how you have to structure your life is around managing psychological risk, particularly in markets getting volatile or when you're underperforming or when you're overperforming. I mean the most dangerous time in markets is when you're crushing it because you're going to start doing less work. You start managing risk less.

You also may start treating people poorly when you're way up or way down. Any of these volatility events. I want to get into that. I have this theory that when you see people who are treating others poorly, even perfect strangers they've never met, like when you see people online just like doing their best to upset other people and trash them, they're probably going through a low point in their own lives. Yeah. If not like a low point financially, maybe like in terms of their own insecurity or like,

and they're like venting and taking it out. They're projecting. Right. You would, you would agree with that. Yeah. Well, I think a lot of people, a lot of analysts now, they went into this industry thinking, I'm going to make all this money and it's going to be awesome. Models and bottles or whatever.

And it's not that there's way, There's way too much supply of analysts. Sell-side layoffs. Yeah. Research costs dropping. And so they might be in a – they lose perspective. They don't realize they're in the top 1% of the top 1% of human beings and their life is awesome and it's the best time ever to be alive. But in their mind, they're like, I'm working 80 hours a week. My boss doesn't let me do what I want to do.

He won't listen to me. And then there's this guy who's posting out this thing and I spent six weeks working on that and my boss was addicting me do what I want to do. He won't listen to me. And then there's this guy who's posting out this thing. And I've, I spent six weeks working on that and my boss was, you know, addicting me about it and this guy's wrong. So I'm going to crush him online. I probably be the same way. And like, I just know personally when I was going through tough times and I, you know, I wrote a book about struggling on wall street. Um, I know that i was more caustic and and angry yeah and definitely more of that would leak out online and maybe that josh brown will return sometime but i just i find it remarkable how many people have the word hedge fund in their profile or analyst or pm yeah and act like they have fucking nothing to lose by burning all these bridges and you say to yourself

like how is this person going to run a business on the street after they've behaved this way for two years? I mean, that's the thing is, you know, if you're at Millennium where they explicitly don't want you to socialize because they don't want one charismatic person. They're not hiring you. Well, they don't want one charismatic person to be driving all of the traders behavior, you know, which if I get in, that would be, you know, plan number one. But, you know, this is ultimately a social game as is any other business.

And, you know, a point I maybe skipped over earlier was when I had this really rough time starting out, I went to a mentor of mine and I was like, this really sucks. Like this is not all what I thought it was going to be. It's terrible. And I've actually never had a problem with a client. But potential clients can be the worst human beings on the planet. And you got to be prepared for some really odd and bad behavior as you do that. And I wasn't.

And so I was just, you know, whining. And that's their prerogative, though. They have the check and you need the assets. And at the end of the day, I'm a vendor. You get to do that. Yeah, I'm a vendor. I'm just selling them something. And I didn't really understand that until it was a lot more like when I was a kid and I waited tables than it was like working at a firm.

So my mentor's advice when I was going through this rough times, he said, look, and this is the advice I give to anybody who's doing a startup or going for anything is because, look, you have a specific outcome in mind. You want your you not only want your life to work, but you want your life to work in this exact way, right now, this way, this path. And he's done very well and invested in a bunch of startups. And he was like, look, I've invested in all these things. Never in my life has anything that worked gone the way I thought it was going to go. And when you go to people, especially as a younger guy, and you're pitching them something, they can tell if you want something from them, particularly if you get an introduction to a famous, big hedge fund guy, they are so used to everyone in their life wanting to use them wanting something from them. And it's actually very rare that somebody genuinely wants to build a friendship. And I asked a fairly prominent manager, who's much older than me, I said,

Hey, can I buy you a beer? You want to go watch the game and just talk about stuff. And he was like, nobody your age has asked me to get a beer in 20 years. And we've become really good friends. But the advice my mentor gave us, he said, look, how many people reach out to you? How many people are you socializing with that want to just kind of hang out that you don't see any way to get anything out of? And I was like, well, a lot. He said, I want you to just start taking those meetings. Don't worry about getting anything out of it and do every favor you can. And if you see something that's relevant to somebody, forward it on to them, just start connecting people. So he read the book that changed my,

he read the go-giver clearly. I'm not sure, but yeah, it's my Bible being exactly what it preaches. Right. And, and the other point he made that I now believe very strongly is if you're an actual long-term player, being a nice person and being a helpful person in connecting people and doing stuff like favors cost you nothing and being nice costs you nothing. It is the dominant long-term strategy. And so many people are worried about getting ahead. They don't realize they're just selling puts on themselves. So I started doing that. And every single good thing that's happened in my life in the last five years has been the result of like a random coffee or a happy hour. And I made it part of my job. I said, every day I'm going to have a coffee or a happy hour or something like that, or I'm going to go

meet people or hang out, hang out people, hear what's going on with them. And if there's like an email or a call I can make to help them out in some way, I'm going to do it. And then six months, nine months, 18 months later. Yeah. But that's why you're so consensus. Now you talk to too many people. That's probably, yeah. You have to isolate yourself with non-consensus ideas. Right. My hedge fund is actually just a 60-40 allocation and nobody's figured it out yet. Too many things with financial advisors. Yeah, exactly. Listen, you're awesome because I think you're an example of – look, I have 100 friends that started hedge funds in 2005.

Right. No problem, right? Yeah. Now it's harder and you've still found a way to do it. I think it's like universal advice for anyone trying to do anything in finance, whether it's advisor, fintech. If you're starting something, you want your network to be as big as possible

and you want people to like you. So people can get in touch with you. What's your social security number? Yeah, yeah. Where do you want people to follow your stuff? Like at super, are you at supermugatu? Is that the actual handle? Yeah, at supermugatu, tyropartners.com. handle? Yeah, at SuperMugatu. Okay.

TyraPartners.com. We're going to link to all that stuff. Okay. Listen, thanks for coming up. Let us know what you guys think. Are you being nice or are you burning bridges? Dan would say try to do the former and less of the latter. Leave us comment.

Leave us feedback. Make sure you subscribe to the channel, and we'll be back with you soon. Unless somebody liked the last Star Wars movie, then just burn the bridge. Hi, it's Josh Brown. I'm here with Michael Batnick. As usual, we are live from the compound with Rich Greenfield, which is our special guest today. He covers tech, media, telecom. He is the founding partner of LightShed. He is a researcher, an investor. He's got a lot of insights into the streaming wars. We're going to talk about what investors need to know about streaming, digital content, everything that's going to happen in 2020. Stick around. Let's see what's going on. Okay. So Rich, thanks for coming by. You're not far from here. You guys

are in the 50s? We're in the 50s. We're at Midtown East. All right, so we'll see you every day. Live from the shed. Live from the shed. So first of all, let's just get into what LightShed is. You were an analyst on Wall Street for many, many years covering technology and media. 24 plus years covering media, stocks like Disney, Time Warner back in the day to what now is Facebook, Twitter, Snapchat,

and literally everything in between. You've seen like everything happen in that period of time. I've seen the early days of Goldman. I remember when Disney bought ABC and when Time Warner bought Turner, let alone now where AT&T is buying Time Warner. So seen a lot of consolidation, a lot of breaking apart and sort of the natural ebb and flow of businesses. I mean, music's hot. Right. I remember early, you know, 15 years ago, music was collapsing. Right. Now, now Spotify is like a hot brand. It's like legal Napster. Warner Music just filed to go public. Right. So at multiples of what it got taken private at. So at LightShed, you guys are writing research and I know you're putting out a lot of stuff and you're still advising the same institutions, hedge funds that you always were.

Our primary business is research, subscription business for institutional investors. Obviously, we have a public persona that we use Twitter and all forms of – whether it's CNBC, podcasts like yours, Josh. Yeah. podcasts like yours, Josh. We're looking forward to sort of highlight the themes and things we believe in as kind of a flywheel for our, you know, also to learn for our subscription research product. Okay. So let's get into like the streaming companies, because it seems like 2019 was like the big, the biggest year so far for a lot of launches. Were you surprised that Disney got almost 30 million subs in two months or is that what you expected? Well, first of all, there is, you know, if you had gone back a year and said, what were people expecting, you know, from a Disney service

in its first year, let alone first month and a half, right. You were probably in the single digit millions. No way. Absolutely. I mean, look, Netflix had never added more than 7 million customers in the US in a year. Disney added 26 million. Now, some of that was international. Let's just say 22 million of them were domestic. They added 22 million in six weeks. So let's just be clear. Seven million was the biggest number ever in a year. And they did 22 in six weeks. So, OK, now part of that is, you know, you got to break that apart. Right.

I mean, part of it is the market's been primed for streaming over the course of the last decade. Netflix made it a thing. Netflix is not new to streaming. Right. I mean, they've been streaming for a while, even originals. I mean, House of Cards was what now? Seven, 2013.

Yeah. I mean, we're now seven years into the Netflix doing originals. I mean, House of Cards was what now? Seven, 2013. Yeah. I mean, we're now seven years into the Netflix doing originals, let alone more than a decade into Netflix. You know, so Disney's not exactly early to this. Do we know how many of the 22 million are paid or not? We know probably around five million plus of those came from Verizon, which means they were essentially free as part of the Verizon Unlimited plan, at least for year one. So the vast majority were paid on a global basis. So Disney was an obvious winner, but there's this idea all the time that there has to be a loser.

Does there have to be a loser? Well, it's funny. Disney is a winner when you talk. If we're talking discreetly about streaming, for sure. But remember, the bigger streaming gets, whether we're talking at Disney Plus or whether we're talking HBO Max or whether we're talking Peacock at NBC, there is a necessary loser on the other side. Broadcast. Which is broadcasting cable network television. I mean ESPN is losing – ESPN lost 4.5 percent of its subbase. It was losing 1 percent of its subbase a year ago.

So cord cutting has dramatically accelerated. I think the interest in linear live TV is collapsing. I mean, look at the Oscars. Not that Oscars is the be all end all. But as an example, I mean, live events was supposed to be the one thing that was kind of sticky. And, you know, you look at the Oscars and, you know, where half the audience that was at 10 years ago. I mean, these are numbers in terms of the declines. You're really seeing consumers abandon linear life. Nobody's watching the Oscars later. Like if you're a fan, you're watching it that night.

It's not like an event you DVR and get back to. Yeah, but the bigger problem is the best content. I shouldn't say the best. Best is such a subjective word. But the most ambitious content that you, your family, your friends, none of that ambitious content is happening on linear TV. your family, your friends, none of that ambitious content is happening on linear TV. I mean, think of it.

What's the last show that was zeitgeisty on broadcaster cable? Lost? How I Met Your Mother. Us? Maybe Modern. This is us.

So this is us four and a half years ago. But we have to struggle to come up with that. So The Loser, like obviously CBS, ABC, NBC. But also the cable networks, right? I mean, all of these cable networks

are- FX. Look, and FX has done a great job. Nobody watched those shows comparable to the – like if you had a hit TV show in the year 2000, everyone watched it. It was must-see TV. It was – you were watching it on broadcast or cable television. That's where the conversation was generated. Yeah.

Now those shows are happening on Netflix, on Amazon. Mandalorian is on Disney+, not on Disney Channel. Amazon Prime has shows people talk about. Jack Ryan, Mrs. Meisel. I mean, all of the shows. Fleabag is on Amazon. Cheers being – everywhere I go, people are talking about cheering you. You was a show that failed on A&E and now is on Netflix and shifted over.

No one talked about it when I was on cable television. Now, everywhere I go, people are talking about that show. And so all of the shows that are dominating the zeitgeist are really happening on these streaming services. So when all of the shows you want to watch are on streaming, it sort of makes sense that not only is viewership declining for linear live TV, but on top of that, people are cutting the cord because you're just using this less. So why spend $80 to $100 a month for video service that

you're not really watching? So let's talk about some of the newer services that are going to come out. Let's assume the average middle-class household is okay with giving Netflix $13 and Disney $7. Let's assume. And then let's assume- Remember, the average household was paying $80, if not $100 for cable. So now they just get the broadband pipe instead. Sure. They're not watching Starz.

You were getting the broadband pipe either way. Okay. It's not like you're saying, oh my God, I'm going to cut the video cord and now I'm going to sign up for broadband. You were getting broadband anyway. Maybe you pay a few dollars more for broadband, but Verizon just cut price in New York. I mean, if you can get for, for $39.99, you can get really good broadband from Verizon now in New York city and you don't have to take

video. Right. They basically say, if you want YouTube TV or you want a video service, go ahead and edit, but you don't, they're no longer forcing you into that kind of double or triple play bundle that you're used to. You don't have to pay for Bravo, ESPN, all this other stuff. You want to just have Netflix and Disney Plus and Amazon and whatever. It's bring your own video service. And I think that's a huge change in how customer wallet is being redistributed. Before, you know, you had to get this huge bundle. And so people say, oh, my God, the streaming wars are going to be so much more expensive.

You're going to spend so much more money and you're going to get less than you had before. Well, let's just be clear. You were paying for a lot of things you didn't want before. That's right. And all the things that you really want to watch outside of sports are not in that bundle anymore. It used to be 800 channels and nothing's on. Well, but, but even more right now, the shows that you actually want to watch aren't in that bundle. You actually can't watch Mandalorian. You spend $100 a month on the cable bundle for Spectrum in New York City. You can't watch Mandalorian in that bundle.

You have to go out and get Disney Plus. The bundle was socialism for shitty channels that cable companies owned as like a side project. Right. The cable vision owned some channels. I feel like they just were there because they were there. It was a great business. You woke up in the morning and whether people watched you or not, I mean, every one of your listeners who right now,

who has a cable service or satellite service, they're paying $9 a month for ESPN, whether they watch it or not. They're paying $8.50 for the Yes Network. Sorry, for MSG. They're paying $6.50 for Yes Network. You know, the amount of money that everyone is paying for these sports networks, even if they don't watch them, is incredible. How could that have gone on forever?

They had it for like 20 years. Look, the internet disrupts businesses. And we've seen this industry by industry, whether in the media world, I've seen it in music, I've seen it in publishing. You know, you walk outside, you've seen it in the taxi industry with Uber, you know, everywhere you look, the Internet disrupts inefficiencies. And I think this was a classic example of where people were being forced to basically buy a lot of things that they don't want. I mean, how many people do you know subscribe to Netflix and don't want to? Right. I mean, it's so easy to cancel. You're sort of crazy if you pay for Netflix and you don't want it and you don't use it.

You know what? That's weird. Everyone has that one show that they like. And if it comes back, they stay. I want to ask you about some of the newer ones. So CBS, I think is DOA, but maybe you know better than I do and i'm wrong nbc looks like where's the audience they want they want to go ad supported does anyone want to watch streaming with commercials i don't think so like what what are your thoughts on like some of the newer ones that are going to hit now i guess i take it from a kind of a macro level of the the legacy tv bundle is dying so time is going to time and money. Time and wallet is going to be redistributed to many platforms.

You know, the Internet is usually winner take most. You know, certainly if you look kind of category by category, I'm not sure why it sort of has kind of happened that way. But there's lots of room for second and third players. I think people are going to have a lot of subscriptions. Remember, you know, you can sign up for something like Disney+, watch The Mandalorian, and then cancel. And then come back later when season two. When it comes back. It's so easy.

If you want – the reason why CBS All Access is now expanding to include some of the Viacom content, they're probably going to call it Viacom CBS All Access or something like that. Great name. Consumers are going to love that. You would sign up for Star Trek, watch Star Trek for a few weeks. I might do that and then leave. I might do that because there's think about it before to cancel your cable service. I'll forget it. You had to literally call up and return the box.

No, no. You had to be tortured on the phone, transferred around for two hours. You probably were offered a deal so incredible you actually don't leave. But if you actually did get to the point of actually being able to disconnect, then the ultimate insult, Josh, which is what you just said, you had to actually unplug the equipment, walk into a store, wait online to hand off your equipment. Or now it's literally click. And as fast as you can click that button on your phone, you've canceled service for the time. And then adding it back is another click.

And so that's a huge change. People are going to get more savvy about how much they're paying who, what duration they're paying for, and then coming back to things when there's a reason. You're saying like people are going to manage their content more than they used to. That makes the business side of this much tougher, right? That's why if you're Netflix, you're creating content every single day. It's why HBO is going from HBO to HBO Max. They need more. You need to keep people engaged every day, every part of the household, because it's too easy to churn. And so I think a lot of these services are going to grow and have users. So the question is, how good of a business will they be?

And I think that's going to be determined by who invests in services that you want to actually keep and pay for the entire year. To your point on commercials, though, I would push back a little bit. I mean, look, Hulu has got to 30 million subscribers. And they're running ads. And they have 70% of their subscribers take the ad version because it's cheaper. Now, it's a low ad load. Is Hulu like netflix for boomers uh i can't say that we need the okay boomer shot in like right there it's

good that you asked it and didn't emphatically state it it's just asking okay you know the hulu um you know hulu is basically in terms of what's driven it historically. Hulu is essentially a real it was a cord cutter's dream, right? You could watch last night's television with a lot less ads or no ads without having to use a DVR or anything like that. I mean, it was all the content from ABC, Fox and NBC. Now, you know, Fox is not making a lot of content anymore. NBC is going to move their content to Peacock. Obviously, linear TV, as we talked about, is sort of dying. And so the question is, what is Hulu going to be when it grows up? I think you see signs if you watch the Oscars the other night. They're clearly

moving towards making this more of the FX network. So FX is sort of shifting. FX is going to make content that never airs on FX, the channel. It only airs on Hulu. So it's, you know, they're really morphing Hulu into a destination for premium kind of FX like programming. You know, we'll see. I think, you know, it's very much a to be determined how well that works. It's definitely they're going to try to change it from last night's television to something new in terms of original programming. You know, the jury's still out. I think, you know, look, the lift of Hulu transforming the way we're talking about is very different than Disney+. I mean, Disney has an incredible embedded brand and you're basically saying, hey, instead of buying DVDs or worrying about the Disney channel, everything in the Disney channel

for $6.99 a month. So I want to ask you about three others. Is Apple serious? Are they going to make acquisitions to get bigger in content will they figure out what they're doing and then just go crazy and and take the whole game over or are they going to just kind of seem reserved the way they are right now forever it's always important to remember that you know netflix started with a show called lily hammer yeah with steven uh steven stevie. I remember that. So, you know, it was a Norwegian show and, you know, that was the kind of the first big original, I shouldn't say big, but you know, quote unquote, there was a, you know, there was an opening and a, you know,

red, a small red carpet, the length of this table for the event. And that's where they started. Yeah. That was in 2012. Very modest. Let's see if people watch it. Let's see if people talk about it. Look where we are now. Yeah. Apple, you know, they started with a couple of shows that kind of rip off of Carpool Karaoke that no one watched. The Planet of the Apps show that they played around with a couple of summers ago. Everyone starts somewhere. Yeah.

I think Apple's in this for the long term. And I think there's a lot of disbelievers and doubters. Well, so that my point is, if you're a Hollywood student, if you're CBS, you have some capital, you have a great library, but Apple could spend $10 billion a year if they feel like it. It wouldn't even show up on the balance sheet. And like, wouldn't you just sell now rather than torture yourself and compete with – and we'll get into Amazon next. Look, the problem with this is I think Netflix has basically proven to the world that you don't need to buy studios. Netflix didn't go out and buy Sony or Lionsgate or – You don't need to buy libraries.

You don't need to buy – you literally just hire the people. Yeah. The people are literally acquirable. Amazon did that last night without the Scott from Sony. They just hired Mike Hopkins. You can literally pick the talent, not just the executive talent, but the, you know, Shonda Rimes. She produced for ABC and Disney.

Now she produces for Netflix. Ryan Murphy produced for Fox. Now he produces for Netflix. So can anyone pay that talent the way that Bezos or Cook would be willing to? Probably not, right? The ability to compete with the legacy ecosystem, it takes obviously technology and distribution. Both these companies have that. And it takes a big wallet.

And they have that too. So they become – Almost unlimited. Yeah. limited yeah now you know it's not i would say on we've seen over the last few years it's not that simple right because amazon's spending six billion plus a year on content and i don't think anyone would say amazon's been anywhere even if they're spending less than netflix they certainly have not been on a relative basis they're you know they're not half as successful as netflix not even close not even close so you know i think part of that may be why they're bulking up the executive ranks and why they're getting, you know, why their ambitions continue to grow.

But I wouldn't count either of these companies out. Remember, they're looking at it also through a very different lens. You know, for Apple, it's do we sell more devices? Do we build a subscription layer on top of those devices? You know, for Amazon, it's do you end up spending more over the course of a year through Prime? This is very different lenses that these companies are looking. We're used to the three of us are looking at this when you think about the way a media executive would think historically. It's did this generate enough eyeballs to justify the amount of ads we can sell and did it help us with our –

1980s. This is a whole different, you know, kind of understanding of how you're looking at an evaluating success. You know, for Netflix, they don't actually care how many people watch an individual show, right? It's does this increase happiness where you end up churning less or does it bring in somebody who wasn't a subscriber to be a subscriber? So it's not about viewership. Can you explain Roku to us? I know it's like one of the hottest stocks in the market. I know vaguely what it does.

Look on our, we make predictions every year. Our 2019 prediction was Roku. This was when Roku was at $30. Our view was Roku should be acquired by Walmart because it was such an incredible platform to help it compete with Amazon in the living room. Where's the stock now? 100 something? 130?

Yeah. Didn't get bought. But what is going on there? Is that going to be a thing for a long time or are they going to get bought? Look, if you were to sit here and tell me three years ago that Apple was going to put an Apple TV Plus app on a Roku device versus eliminate Roku or replace Roku. I think the view was right. Apple's going to kill Roku.

They're going to steamroll over them. They have unlimited pockets, as you were just talking about. They'll just kill them. Yeah, when does Apple go on anyone else's device? Amazon Prime. Amazon's going to kill Roku. Like, why do you need Roku? That would have been what I would have said.

That's what everyone thought yeah and here you have roku's big enough and has enough distribution you know if you have a tcl television it's a roku television if you want to be embedded on that device which millions of people have you need to be in the get millions of people onto roku you know i think it's manufacturing i think it's sort of, look, there's definitely something in the ecosystem. If you look at Netflix, look at Spotify, and even on the tech side now, look at Roku. Focus, right? Like, companies that only do one thing. All Roku does is make sure that they had very easy to use devices, got market share, you know, moved from devices to the software for televisions. In the TV. Correct.

Now, in Europe, Google's done a much better job with Android TV is much more, you know, Roku's far behind in Europe versus what Google. But in this country, Roku did a very good job of penetrating those TV manufacturers and getting their operating system to be that layer that controls what apps are there. And so, you know, Disney plus couldn't launch without having a roku deal that's unbelievable right like you're not going to launch any of these services and require people to go out and buy a different device so why doesn't anyone buy them because the um well i think the challenge now is the valuation earnings and the valuation is now a

massive i mean this is this is a very different this is a $20 billion company, not a few billion dollar company. They should have listened to you last year. They should have. What about the premium services like HBO and Showtime? So HBO obviously lost Game of Thrones. Showtime is losing Homeland, Shameless, and Ray Donovan. Like what's next for them? It's hard to believe Shameless has been on for as long as it has.

the you know i think both of them and let's start with hbo because hbo is becoming hbo max in may the goal is to broaden the service right so there'll still be hbo for the the purists who want just hbo i think ultimately the distinction will disappear but you're going to have a lot more content so friends in the west wing and big bang theory reruns will all be there right deep warner brothers movie catalog i mean warner brothers television is one of the most and the West Wing and Big Bang Theory reruns will all be there. Deep Warner Brothers movie catalog. I mean, Warner Brothers Television is one of the most prolific producers ever. That's going to be on HBO Max? Correct.

All that stuff? All that stuff. I didn't even know that. You're going to see rom-coms from Hello Sunshine. I mean, you're going to see so much diverse content on HBO Max, far beyond what you're used to. Is it going to be $10 a month? It's going to be the same $15 a month you're paying HBO.

If you pay HBO $15 right now. You get both. You're getting the same. You're just going to basically be switched over and you can sign up for HBO Max. And it's the same service. It's just much better. Yeah. So for a consumer, this is a no brainer.

Now, again, I come back to if you get a service for the same price, that it's way more to watch and way better, meaning you're going to use it more often, what's the negative? You're going to watch even less linear TV. It's going to hurt your interest in even having the bundle. So, in other words, like every single factor is a raid against people flipping on the TV. The incumbents. And watching broadcasts. That's why this whole idea of streaming wars is a total misnomer. Like the reality of the streaming companies, the war is on TV. It's a war on TV.

It's not a war between streaming companies. No, because people want to stream. People want to spend more and more time streaming. They don't want linear television. So you just gave us the title for the video. Listen, Rich, how do you want people to follow your stuff? You're great on Twitter, by the way. It's where you and I talk.

Rich Lightshed is on Twitter. What's the handle? At Rich Lightshed. At Rich Lightshed. We'll put a link to that. What else? Our website is lightshedtmt.com where we publish for subscribers to our content. And we're building a really exciting new business.

We love reading your stuff. You guys are really smart. And we're in a really exciting new business. We love reading your stuff. You guys are really smart. And we're in the financial business. We're not in the TMT business. But we need to understand these trends. So we really appreciate you telling us what's going on. There's a lot of disruption to invest around right now. All right.

Hey, guys, let us know what you think. Let us know what your thoughts are about Rich's ideas for 2020, the streaming wars, the war on TV. We love your comments. We love your feedback. Make sure you subscribe if you have not already, and we will be back very soon. Thanks for listening. Check us out at thecompoundnews.com for daily investing and market insights. You can watch all of our videos at youtube.com slash thecompoundrwm. Talk to you next week.