Yet Another Value Podcast - Creek Drive Capital's Kevin Mak introduces the business case for Sphere Entertainment $SPHR

Episode Date: December 22, 2023

Kevin Mak, CFA, Founder of Creek Drive Capital and Teacher at Stanford University of a course called, Financial Trading Strategy, discusses his thesis on Sphere Entertainment Co. (NYSE: SPHR). Link to Kevin's $SPHR thesis: https://drive.google.com/file/d/1_jGx22O8NWRlb8zZZmuqMwfa-Ae3Y55o/view Twitter: https://twitter.com/KevinLMak Chapters: [0:00] Introduction + Episode sponsor: Alphasense [1:17] Sphere Entertainment Co. $SPHR and why it's interesting to Kevin [3:36] Kevin's views on $MSGN and why that's relevant for $SPHR [8:56] How Kevin values $SPHR [15:20] More important from a revenue perspective: Residencies or Daily Airing of "Postcards" [17:13] Sustainability of the movies at $SPHR / how much better is $SPHR than a quality IMAX? [26:35] $SPHR customer demand [29:10] $SPHR music residency economics / logistics / creating the buzz [38:30] $SPHR customer draw as technology improves [40:52] Outside revenue streams (ad revenue on outside of the Sphere) / cost to create an ad for the Sphere (Billboard comp) + economics of the Sphere [47:51] Main difference between Kevin's $SPHR analysis and sell-side analyst targets [49:58] Corporate governance and naming rights [52:39] Capex [56:04] Valuing the franchise model and pushback on multiple Sphere's - how do you find the right markets for Sphere + why did London turn down the Sphere [1:03:25] Convertible debt / $SPHR valuation [1:08:12] $SPHR final thoughts Today's episode is sponsored by: Alphasense This episode is brought to you by AlphaSense, the AI platform behind the world's biggest investment decisions. The right financial intelligence platform can make or break your quarter. AlphaSense is the #1 rated financial research solution by G2. With AI search technology and a library of premium content, you can stay ahead of key macroeconomic trends and accelerate your investment research efforts. AI capabilities, like Smart Synonyms and Sentiment Analysis, provide even deeper industry and company analysis. AlphaSense gives you the tools you need to provide better analysis for you and your clients. As a Yet Another Value Podcast listener, visit alpha-sense.com/fs today to beat FOMO and move faster than the market.

This episode is brought to you by Alpha Sense, the AI platform behind the world's biggest investment decisions. The right financial intelligence platform can make or break your quarter. Alpha Sense is the number one rated financial research solution by G2. With AI search technology and a library of premium content, you can stay ahead of key macroeconomic trends and accelerate your investment research efforts. AI capabilities like smart synonyms and sentiment analysis provide even deeper industry and company analysis. Alphasense gives you the tools you need to provide better analysis for you and your clients. As yet another value podcast listener, visit alpha dash sense.com slash fs today to beat

FOMO and move faster than the market. That's alpha dash sense.com slash FS. All right. Hello. Welcome to yet another value podcast. If you like this podcast, we need a lot, if you could rate, subscribe, review wherever you're watching or listening to it. With me today, I'm happy to have one for I believe it's the second time.

My friend Kevin Mac, Kevin is the principal we decided at Creek Drive. capital. Kevin, how's it going? Wonderful. I'll be you, Andrew. Doing great. Well, tore my pack over the weekend, not doing quite as good as it could be doing it. But, you know, neither here nor there. But before we get started, quick disclaimer to remind everyone, nothing on this podcast is investing in advice. Please be sure, consult a financial advisor, do your own work, all that type of stuff. Kevin, the reason we're having you back on for the second time is I'm super excited for this. MSG sphere, the sphere company. You know, this is if you're online at all, you see the big images of a giant happy face,

just looming over Las Vegas strip. That's the sphere. They spun out of MSG entertainment almost a year ago at this point. The sphere is just starting to hit full profitability. Actually, I'm going through the whole thing. Why am I going through it? You're on talking about MSG sphere. I'm going to toss it over to you.

Why is MSG sphere so interesting? I think the biggest reason why it's interesting is because everything surrounding it is very congruous. You've said it yourself, everybody other than people that have been living under a rock, know about this thing. Yet the actual interest on the investment side is next to nothing. On top of that, the actual equity itself is strange looking for five different reasons. It's a spinoff.

It's a operating segment with another business that is almost completely unrelated to it. It is run and owned by or majority controlled by James Dolan, who has a bit of a checkered past and has baggage with that. And it has no operating history. And so there's no shortage of opinions and no shortage of ideas about this company. But very few people are, A, willing to make a bet on it and be willing to sort of do the work on it. And so for that reason, we dug into it pretty deep and have found some very interesting results that I've been working on for the last two months now. Also, by the way, I love Vegas. I'm a huge Vegas enthusiast.

So being able to fly to Vegas, diligence this thing was certainly a side perk. and also just it's a passion of mind to know the Vegas I love Vegas as well so Bobbycraft Minger of Planet MicroCrap my editor will see if he's actually

listening to these podcasts fears the last time I was in Vegas was for Planet MicroCap in April and when we were flying in you know this fear lit up in what like August July when I was flying in like I could see you know obviously it was it's not like it

was built overnight you could see it but I was kind of looking I was like oh I don't know like before they turned it on but I was looking So I'm excited to go next April and actually get the diligence. I'm with you. I love Vegas. It's not just for partying, gambling.

Like, the food's incredible. Yeah. You mentioned a lot of things. I think the most important one is so the one I want to start with last is because they only operated for two days in the most recent reported quarter, if I'm remembering. Yep. So I think the reason most people I talk to who are so interested in this is this is almost a blank slate, right?

You could paint any type of economics, any types of assumptions. Like for modeling driven people, this is really interesting because they can, you know, if you flex 400 shows to 500 to 600, you gross margin from 40 to 60, like you get crazy results because there's all this place leverage. So let's save that for the end. I do want to touch on a couple quick points for people who are looking at this. The first thing I think people forget is MSGN is inside of this is inside of the sphere. So why don't we just quickly talk about your views on MSGN that's inside of them? Sure. I like the word quick because they are relatively quick. I would say the MSGN, it's the regional sports network for the Knicks and the

Rangers and some other smaller regional teams. And it is basically this operating subsidiary and it's in the space of all of these regional sports networks that are not doing well. And the big problem ultimately is their revenues are falling and their costs are going on. The MSGN specifically has an agreement with MSG sports, another Dolan controlled company, to pay for the licensing broadcast rights for the Knicks and the Rangers. Every single year, they're forced to pay a higher rate due to contractual escalators. At the same time, they take that and then they turn it into a product, sell it to the cable operators, all those people, the addition networks, all those people.

And that gets to sent out to individual subscribers. But because of cord cutting, more and fewer and few people are subscribing, so your revenues are falling, your costs of paying for the license fees going up. And so you're eventually going to lose money. As of right now, this year, MSGN should produce about $100 million, roughly. of EBDA type of revenues are cash flows, but that's down from 200 million three or four years ago, and it's expected to continue to fall. The revenues are forecasted to fall by 5, 10% per year, and that's probably on the tuning side of things. And so that 100 million EBITL line is going to go down pretty quickly. I'm clear where it stops, which is does it go to zero or does it go to negative

100? And in the meantime, they have a giant deadline on MSGN for $900 million. And so you're producing $100 million of I betah, that's declining, $900 million of debt, and that's kind of where you're upside down. There's been some discussion highlighted in multiple places, Value Investor Club being one of them, which is to show that the MSGN debt line is not a recourse to sphere. So in theory, in theory, if you're truly just enterprise value-driven, or expected value-driven, you could just throw away the entire business, give away the $100 million of EBITDA, but also get rid of the $9 million dollars of debt.

you will almost definitely come out ahead in terms of value. And so Sphere could do that. It is unlikely, but not impossible, that the CEO, James Dolan, would do that. For a variety of reasons, it's part of his media empire. It's part of his vertically integrated business. And there's other sort of side and issues that have been brought up about how banking relationships and things like that are way more important than worrying about this. I would say that I've spoken to no less than two dozen people that are professional investors in this space, and half of them are convinced that they're going to throw away the debt, and half of them are convinced that they're never going to throw away the debt. So I'm strongly in the category of we don't know and nobody really knows.

And there's a lot of side ways that MSGN could be sort of pocketed or moved around so that it's not too damaging to the business. for the sake of my analysis, I would say that I've largely ignored MSGN and said that I'm going to assume that this thing's worth about minus $500 million and move on from there. And that's just because I think that there's too many outcomes that are too hard to forecast. That was a fantastic summary. So just at the end, you mentioned kind of where I was, so you're assuming that's negative 500 million, right? So if we just said, hey, the sphere of that building is worth $2 billion, MSGN's there minus 500 million. So the whole company would be worth. worth $1.5 billion in your model. Great. We'll come back to that in a second. No, look, I think that was a great summary. You know, it's really interesting. It's funny because so MSGN from memory spun out of MSG sports in like 2013. And at the time, they had a 20 year long contract with the Knicks and Rangers that was it started, if I remember correctly, about $100 million per year and it escalated by, I think, like three to five percent every year. And at the time,

it was actually considered the crown jewel because, you know, RSNs, RSN fees were going up 20% per year and RSNs were having this issue where every three years they'd have to go back to the sports leagues and be like, hey, we need to renew our rights. And sports leagues would be like, well, your whole business is you show our games, like you've got nothing else. So we're going to take all the economic profits from you. And, you know, it's just funny how that crown jewel of that super long-term contracts has become kind of the death now. As someone mentioned it on one of the most recent earning calls, regional sports networks have gotten worse and worse economically and all the ballot juice has gone to the national contract. So it's been interesting. I think you did a great

summary, you know, the worry here is, will they walk or will they try to bail out? There's other things too, right? Maybe they go to JP Morgan be like, hey, if we give you $500 million for that term loan, will you just waive the rest of it, right? Like, kind of let us basically buy out to serve as our own distressed investor. But no, that was a great summary there. So let's go to, I guess we can start talking about the sphere overall, right? So the sphere over, now that we've done MSGN, the only real other asset in there is the sphere. Let's start talking about how you value the sphere. There are a lot of different revenue streams that are going to come in off this sphere. So why don't you just start talking about how you model and how you start to value this

thing? Sure. Okay. So the quick synops of sphere itself, it's a giant spherical building in Las Vegas holds up to 20,000 people, 18,000 seats, 2,000 standing room. And it has the external part of it, which is the exosphere, it's the part that most people have seen. How much it was how much it was cost to build it was, I think, in the amount of $2.3 billion. which was about a billion dollars more than the originally expected to spend. A, you know, construction caused overruns always happen. COVID. COVID wasn't there.

Yeah, exactly. They built right through COVID, which I'm sure was extremely expensive. And then now that you have this facility, your job is to fill it up and to generate as much revenue as possible. There's two main interior revenue streams that come from it. One is they do live concerts. And U2 is the current, you know, first residency that's in there, packing the place basically three times a week, Wednesdays, Fridays, and Saturdays. And then they've also filmed their own movie, produced their own movie, directed by Darren Arnaowski, who's an Oscar-nominated director.

And he, and that movie's called Postcard from Earth. And that movie runs something in the realm of three or four times a day whenever they are not doing a concert or a book. So you have two sort of revenue streams on that side, which is the concerts and this movie. And let's talk about those first before we go on to the other side of things. The concerts, what's interesting and where things go are, is that it is an extremely well-purpose built a facility. What people seem to forget is that a typical concert happens in a large building that was designed for hockey and basketball. That's what they're organized are made for. They're not made for concerts. It's an afterthought. of, oh, I guess we're not having a hockey game or a basketball game this Saturday.

So let's throw some seats and some speakers in there and a stage and call it a concert. So, you know, this is purpose built and as a result, it's way better. The experience is way better. The sound quality is way better. And also all of the interior, basically, stuff is built for concerts, not for the things. So when you set up a concert in Madison Square Gardens, you need to move in all your lighting. You didn't move in all your screens. You didn't move in all of your speakers.

You don't have to do that in spirit. It's basically ready to go. You just stand there and plug in your guitar and go. I believe Taylor Swift, there are all these stories about she gave all of her truckers, 100,000 bonuses and stuff. And the reason she needed a ton of truckers is because, as you said, like when she would go from Kansas City to Chicago,

she had to literally take all of her lights, all of her sound, everything. And she had to throw it on trucks and drive it from kids. And they usually have two or three kits so that they can keep one ahead of them. I think that's a Taylor's. Swift thing. I would be surprised if like, you know, the B level artists are doing that. But yeah, as you said, like she would send Kansas City to Chicago, but she would have her be, like, before she had Chicago, she'd be hitting, I don't know, Milwaukee. So if you go to Milwaukee,

kid A's there, kit B's in Chicago, and then Kite A would head over to Jersey. Yeah, absolutely. And then Sphere, you don't have that. Like, it's all purpose built. Let me ask you a question on that, though, right? Yeah. So, well, I guess I'll let you finish your model and then I'll ask you to do that. So, so there's a concert side of things. And, you know, you need to pay, obviously, the performer quite a bit of money to come in play, assuming they're a big act. But the thing just oozes economics in terms of fixed costs and having all your fixed costs covered and having that operational leverage. With 18,000 or 20,000 seats, you know, you can sell a ton of tickets. You don't necessarily see it, but a typical arena that holds 18,000 people for auctioning, you can't sell 18,000 seats because by the time you set up the stage, you've already blocked off three thousand.

seats that are behind a stage versus sphere, you have 18,000. That's an extra 20%. The largest cost of a concert is the fixed cost of the performer. And so once you pay the performer, whether the performer's performing in front of 5,000 or 20,000 people, it's the same amount of effort for them. And so get that leverage. And yeah, you can say, well, a 50,000 person stadium is even better leverage, but you can't sell those seats for very much because they're sitting, you know, 600 feet away in the bleachers,

right um versus this setup uh so you know the the taylor swift tickets i looked at over the summer would beg to differ on the you can't tell that much but i do you're right but i do you're special yeah um but yeah it's just so the concert business is very valuable uh and it's very profitable and we can talk about exactly how that how that comes to be later on and then the second part is that the movie um so they've been smart in that they've produced their own movies for a variety of reasons a their format is unique to literally anyone else in the world so you don't have anyone else using the stuff. But it's a fixed cost production. It's been somewhere between $60 to $80 million

filming this first Aaronovsky movie. And once you've paid it, you're done. And every single ticket you sell is 100% your revenue. And they are selling millions of dollars of tickets every single week for this thing. And within the first year, they are going to have more than the sheet of payback. And anytime they show this movie beyond that, it's just your free profit. And so, like, once again, from the microeconomic hat, they just have so much availability to get that operational leverage and make tons of money. And I saw that on day one when I first started looking at the business at a surface level. And then I started looking at what I'm saying. And that was once again, the inquiry.

It's the fact that I'm like, this thing, if it's busy, if it's actually popular, it's going to make so much money. And absolutely everyone was saying this thing is going to lose a ton of money. And I really wanted to dig into there and figure out what's going on. So let me stop. Let me move from there, the two interior things, the exterior things. What don't we stop there? Because the exterior things, I think you're going to talk advertising and naming rights. But what don't we stop there?

Because I think these two are like really good to discuss. And these are actually going to be the main drivers. I mean, advertising is interesting. Naming rights is chair at top, right? That's right. These are the main drivers. I think this is a great place to ask questions on these. So let me start.

Which do you think is going to be more important? the residencies or the like daily airing of the postcards because I of the purpose built movies because I have my own view but I'd be interested in yours. It's a great question. I would say that the movie is probably going to be more important, but that it doesn't have to be and that the residences is where they have a bit of a safety net. And now a quick break to remind you that this episode is brought to you exclusively by AlphaSense, the AI platform behind the world's biggest investment decisions.

Alpha Sense gives you the tools you need to provide better analysis for you and your clients. As yet another value podcast listener, visit Alpha-Sense.com slash FS today to beat FOMO and move faster than the market. That's alpha dash sense.com slash FS. I agree with you. And in a similar way, like Netflix, when they spend $200 on a Martin Scorsese movie, Like, they're generally going to lose money or break even. I mean, the accounting with Netflix is weird, but that's like the buzzy show to pull you in, where they make the money is where everyone watches, you know, all the episodes of Love and Blind, which cost them like $20 to produce, right? Like, to me, what I kind of think it is, not that they won't make money of the U-2, but in the most successful version, they'll make money on the residency, but the residences keep the buzz going around the sphere.

And the real profit and the real thing you need to figure out is, hey, are the movies going to be a success? Because, you know, as you said, I think it's 5,000 seats per movie. They show maybe three of them a day. They show them every day. That's 20 shows at super high margins. Like, if that's a success, that's going to create a ton of money. If nobody's going to those, then, you know, the thing's sitting basically fallow all the time. So let's start on the movies.

Just a few questions there. You know, did you ever do Sleep No more in New York City? No. Okay. So Sleep No More was this huge warehouse and a five-story warehouse. and a five-story warehouse, and it was an interactive play. Oh, you walk around and with the actors around, right? Yes.

I've heard and read about it. I haven't seen it. Lasted for maybe 15 years. It was really cool. One of the coolest things I think in the city. It wasn't for everyone, but if it was for you, it was really for you. And it was really neat. It's closing in the next month.

Now, I think it's closing because it was a five-story warehouse in New York City and rent went up on them. But, you know, one thing I worry about these really unique attractions is they're buzzy, right? The hottest club in the city. It's buzzy. people want to go there. People want to do the experience the first time. But, you know, after a little bit of time, the experience starts dying down. And it's not as cool. And I worry with the shows, right? Because in October, these shows were selling a ton of tickets. I worry if you and I come back. I mean, I kind of think I looked at the tickets for you and are filming this December 19th. I looked at the tickets today tomorrow and the next day. And it looked like they had a lot of seats open. I'm not 100% sure. I was just kind of eyeballing. But I worry that if you and I were doing this podcast in six months, we'd say, hey, Like, yeah, a ton of people went the first six months when there was a ton of buzz, but now there's no buzz and, you know, the thing is lying empty. I think you mentioned IMAX. It's kind of like the IMAX that all the kids go to. I worry that the sustain, about the sustainability of it. So how do you think of the sustainability of kind of selling out these huge tickets? Sure. I love your anecdotal check because it's the first thing that I get it from everybody is, hey, I went on ticket master and they're not sold out. They have infinite tickets for them. You like?

To be clear, like, you know, it's 5,000 per show, three shows a day. If they sell out, they're going to start opening a fourth show or fifth show a day. They literally have to just bring people into the room, press the play button, and print the money. On that, I think this is where one of my sources at Alpha come from. We have written custom scripting sock to basically retrieve all the ticket master sales data every single day. So I have a daily view on all future sales for the show. And I track that on a backlog basis and a historical basis as well. So backlog is in like future 30 days, six days shows that are pre-sold.

A big thing about this is it's not like a concert where people are, you know, desperate to get a ticket for three months from now. There's going to be tickets always available day of. 70% of the tickets are sold in the three days before shows or and I think 30% of them are sold on the day of the show. So you're always never like, you're never going to be anecdotal to be able to browse and be like, oh yeah, this is really hot. Since October's launch, ticket sales are up, okay, and also prices are up. so the first week or first month of buzz hasn't materialized it's actually gotten better even like even last week and this week you're tracking and it's kind of at the same levels of the October November sales it's higher okay yeah um and so that's where

that's that's like that's literally where that is right now and we can talk a little bit more about that that that game in a little bit um the word I like to use is that the audience in Vegas is temporally homogenous. Every single week, every single month, it's a brand new group of people. It's not like New York City where you have, you know, 15 million locals and you saturate that group. And yeah, you have tourists as well, but, you know, and also, I mean, you just said it yourself that that show ran for 15, sleep no more, ran 15 years. They can get five years at a postcard. That's great. I don't think it's the format of the experience that is driving the, like, it's important, obviously, but it's not the key driver. In the,

the next five years, they are going to make another 10 to 15 films for the sphere. And I guarantee you that one of those 10 films will be better than what's available postcard, probably six or seven of them leave out than postcard. Postcard was the very first film ever made for that place. And it is not in any way the, I think, a good exhibition of the best way of using the media. It's the first way that they did. I'm extremely excited for the types of content that they make and like building building some really interesting movies.

I have a slight mini dream of even going back in time and reproducing or remastering some films. You know, some people say the obvious, oh, Star Wars something like that. I'm thinking something even simpler, like the movie Gravity. I don't know if I were George Clooney and Sandra Bull, like in 2012. I did not see it. I know

the movie are. It's set in space. So you could just, yeah, go ahead. I've heard this argument, right? And I have not seen Postcard and you have. So you've got, but you know, if you went and saw gravity at this movie. Like, I'm sure it'd be cool. It'd be a huge screen, right? But how much cooler than it would be for eye masks? Because I think, like,

the thing with Postcard is, it's how interactive it, not interactive, but it's how much like the sensations are coming. Whereas gravity, like, you'd have to go, I guess you could, but. You would feel like you're in space the whole time. You'd be able to look up and look around you and just see stars instead of just. Would that be

that interesting, though? Because like, the point of a movie is you're focused on George Clooney and Sandra Bullock, right? Sandra Bullock's on the screen. Actually, George Clooney is on the screen. I'm going to It's on the two of them. So, like, you're going and seeing it, how much better is it than, like, a giant IMAX at that point, right? Because if I want to turn to the right and look 90 degrees and I'd just see a bunch of stars, like, that's cool. But I'd rather just go, like, see a custom-built, like, star show than gravity, you know?

So, I mean, I think the question is, am I going to be going three times a year to the sphere to watch movies there? No. It's more of every single visitor to Vegas for the next 20 years. It's going to want to go to the sphere to watch something. So Dolan mentioned this on one of the calls, too, right? I think his stat was like more than 20 million visitors go through to Las Vegas. Forty million. Okay.

So you mentioned the homogene. And you said New York, which I am insulted because New York's got a lot, but it's got a lot of tourists coming through. Yeah. No, no, it does. It is 50. It's more than Vegas. 50 million. Yeah.

So if I just did 5,000 seats, right? So let's just assume one a day. And I am assuming it sold out. But because they do two a day, let's say it's 60 percent. 5,000 is probably fine. 5,000 seats times 365. Like, that's 1.8 million. views, right? So you're kind of assuming, just to get the 5,000 number, and I think some of the

bulk hears, or even your base case has more because you're doing like two or three shows per debt, you're assuming 5% of visitors are going to go pay, how much is planet now? About 100 bucks. They're going to pay 100 bucks to go sit through this thing. I understand it's a homogenous and like lots of people come through, but 5% of the visitors going to see this does like, that tickles me as kind of high. I, I, I, I'm not sure. I, I, I would say it doesn't. It's a 120.

It's, it's the sphere. It's, it's the thing to do. Like, when you go to Vegas, you're looking to spend money on attractions, right? And, like, it's one of those, you're looking to go see a Cirque to Slay show, but there's eight of them. So you got to pick one of those eight, right? You want to go see the sphere. There's only one of them.

There's an eight of those, right? So, like, I think we can, we can agree that there's going to be some number of people that go to see it, the exact number, whether you think you think 5%'s high. I actually think it's closer to 7% is what I'm modeling. I don't think it's crazy. That's a crystal ball problem. Cirque to Solet. I like that because I do hear you. You go, you spend $200 to see like a sexy acrobatic show, right? That's what Cirque Solet is. But it is much smaller, right? How many, probably 150 to 200 people fit into the Circus Slay stadiums? I hadn't seen one in a $3,000 to $5,000. It's bigger than that.

Eight shows are running, too. But it is, it is like, people pay more to see, like, actual in-person things versus to see screenings of things, right? Like, I think about Hamilton. You go on Broadway, you'll pay, for a while, it was like $500 a ticket versus Disney Plus. They just stream it. Or Tara Swift, you pay $1,000 to see it in person versus you can go see it at AMC for 10 bucks. Now, I understand that's a movie, but, you know, postcard is a big movie.

So isn't there something to circus say, like, I actually. like this comp to some extent, but I'm also kind of thinking, hey, seeing something live in person versus just seeing the film. We've just got a issue if people will pay more for the in-person experience. I think that that is not, I think that that is something that is a little bit dated that view. Okay. No different than the similar dated people of like, why do the kids these days spend so much time watching people play video games on Twitter? Oh, well, that, that is ridiculous. Like, you could play the video game yourself. Why are you watching some other like that? You can play football. And then I'm going to go watch the football game. Yeah, you can play

football. You watch the best in the world play football. I definitely hear that, but I just think like we've got 20 years of like AMC tried to, AMC has tried for years to do, what is it? That fuse events where they bring the opera. I mean, people will pay what, 500 a ticket to go see the opera in New York City. And AMC will bring it to you and you can go pay 20 bucks to see it in at their theater, like nice company seats at big screen. And I don't think they ever even sell out, you So I just feel like there is something to seeing people in person versus we naturally let me switch it up. Yeah, I get that.

I think that that's something that we have to agree to disagree on, which is I'm willing to say that the data that is coming in now, I just find it, I don't think that a year from now, people are like, the sphere is old and crap and not interesting anymore. Five years from now, seven years from now, maybe, but a year from now, definitely not. That would jump ahead to our discussion of multiples. So I'll save that part for the And again, I'm not locked into anyone Like I'm all over the place on the sphere

I sure The only part of the sphere I don't love is James Dolan But let me just switch another So again, I've read all your articles And I know you hop the Rockettes a lot of time And the Rockettes are another interesting one to me Because the Rockettes is It is literally an annuity, right?

You run the Christmas spectacular every year You get $100 million of revenue from it It's not like there's a lot of cost Yes, you have to do the dancers and securities but you can find dances in New York City who are willing to work quite cheaply. They make a lot of profit on that. I think it's $100 million revenue

at like 60% margins. It's great. They have pricing power. It's fantastic. You use that cop, which I think is interesting. But the other side of that coin is, again, having followed this for a while, they've tried to like launch the Rockettes

into something other than just the Christmas spectacular. Multiple times. The most recent was in the mid-2010s. It was like the spring or summer spectacular. And it failed absolutely miserably. And I think some of that could be attributed to the product just wasn't good, but I think some of that also could be attributed to like, hey, the Christmas spectacular is like an American tradition and some people go see it every year. There's no demand beyond that. And I kind of just like, with the spear, I guess this is bleeding into the same old question, but I just worry like, right now it's really big. But in 18 months, are you really going to be able to sell out all of these things? Is there like just a limited demand for it, you know? Sure. I totally get it. I think that's also where the beginning statement I made. was I can see the live part being a very good sort of backup crutch and even when it's a backup

prutch it's still an exceptionally profitable one and just to throw some numbers around for the audience so we can hit it the gross margin from a two concerts probably in the realm of about a million bucks a night a million bucks a day and the gross margin from running the movie right now is probably about 1.2 1.3 million uh yeah about 1.1.1.1.1 two, one with three million dollars a day. And so it's not a huge difference. And at the same time, we're talking about you two on a Friday night versus watching a movie on a Tuesday night. So the difference is not day and night difference. And if you can get something that's even more interesting on the movie side of things, that's where things go crazy. Because the U2 slash live

performance thing probably caps at about a million and a half gross profit in a given evening versus if you have a crazy sick movie that everyone wants to see, then you could be. making $2, $3 million a day, which would be insane. Yeah. Let's switch over to residents. Let's just talk residency because it is interesting, right? Like, you two, I think this is what it was designed for, right? When Dolan is a huge music fan, he's spent money on music ventures before, you know,

I think half the reason he continues to own the Knicks is because it'll get him like, he did, he got his band onto Jimmy Fallon once. Like, he's a big music head and he bought this because he wanted to be. Residency is what it's designed for. I guess my question is, you're going to make some money on the residences, right? But I kind of feel like all the economic profits are going to get sucked out by the artists. And I'll tell you why. There just aren't a lot of artists who can go and fill like 18,000 seat stadium at 200 bucks a pop, 20 nights in a row, which I guess that actually is the first question.

Because of how unique the sphere is, as we talked about with the lights and everything, I don't think artists can come through and do like a one or two night show. like they do when they're moving all their equipment around. I think the cost and design are too expensive to just justify, like, coming in for a one-night show. Am I thinking about that incorrectly? I think a one-night show would be certainly tricky and probably, I mean, you could do it, just it wouldn't be great.

Creating the visuals is non-trivial in terms of pricing. So, yeah, absolutely. I would lean towards that. The caveat I would do is that I could see them doing some pretty interesting sort of like I would say indie band like type things where you know three or four indie bands come in they each play for 35 40 minutes people are paying 100 bucks a ticket

and the visuals are just generic as in we've like you know 1990s like when amp we've created all kinds of interesting psychedelic cool looking things that you'll just watch while you listen to the music um could you yeah or I wonder if you could even just like because this sounds so good just kind of not use the lighting system at all and just as you're saying listen to like Barbara Shrys, and just get up there and like croon, you know,

and you'll hear it imperfect. So I guess you could do that. Anyway, to continue that line, like you two is a huge kit, right? And I worry that there are only 25 artists in the world who could sell 18,000 seats tickets 20 times, 10 times in a row. And because of that, like,

they're going to suck all the economic profit out. And I don't think that kills the thesis, right? Because if you go back to what I originally said, I feel like the artists drive buzz and then all the profit actually comes from if you can get the movie side of it right. But I worry that they're going to run real quick into, like right now it seems like they're going from you to, I think John Mayer and the Grateful Dead is the rumored next residency, which that's big.

Oh, no, Fish is next and then after Fish is is dead in company. Both of those are huge, though. I'd say they're probably a little bit of a step down from YouTube. But, you know, it seems like you start running out of shows to throw up there pretty quickly. I don't think so I mean when you say there are also huge steps up

like someone like Harry Styles is almost definitely going to do it I mean through the connections that they have with MSG and stuff and you know there have been plenty of rumors

talking about that as well Lady Gaga is a possibility Beyonce is in talks with it I think also Beyonce is an interesting one because I feel like Beyonce and Taylor Swift would be your dreams right

but I almost feel like they're too big right where they can go and generate this nationwide buzz and go into cities and spend, you know, a thousand dollars for a ticket, two nights in a row, and then move on. They're interested. That's interesting because it drives so much buzz, but I wonder if they're too big, but maybe they are the right people. And for them, if you're like, hey, everyone fly to you,

do the same show 20 nights in a row, take a huge share of the economics, don't have to travel, all this sort of stuff, like pretty damn profitable for them. Yes. And when you say a huge share of the economics, I think that's an important thing to think about, which is that although it's a huge share of the economics on a relative basis, as it relative to what they would typically get from an arena show in a city, on a percentage basis relative to sphere, there's a lot of money left over. And this is one of the big misconceptions, I think, is, you know, if you Google it, you know, residencies in Las Vegas are lost leaders. And even Dolan himself on one of his conference calls, he said, the residency business is,

well, I'm not going to call it a lost leader. And as soon as he said that, one keyed into this is a loss leader, even though he said it wasn't. You know, when you think about Adele playing at Caesars or whatever, it's a 5,000 person auditorium. The most you can sell ticket for is like maybe 300 bucks, 350 bucks. You have to pay Adele a million dollars to show up. So 5,000 tickets at 350, you're left like 1.7 million dollars in revenues per night. Adel takes a million of it. You only have 700,000 left. You still have to pay $250,000 to like, you know, get everything up and running and get crowds in and out. There's not a lot of money left. But you've got the crowds going in and out to hit the slots on

But when you, yeah, and that's where they make their money, right? But when you have a 20,000 person place like sphere and you can charge 350 or 400 a ticket or 450 a ticket because it's the sphere and not just some decrepit theater at the back of Caesar's palace, you now have a $9 million revenue line to work. So pay Adele $3 million or $4 million instead of a million to show up and sing, and you still have $5 million left to pay for the sphere and everything like that. And so that's why I'm like, yes, there's, it makes so much sense for the artists to do this, but there's still so much money left over on the table for Spirit to be taking a good chunk of it. Let me just, so I do, just to go back to the buzziness of the artists, right?

Like you two, I think, could still sell out a nationwide show. John Mary, the Grateful that I think they've done well. Harry Seisle certainly could sell out nationwide shows. I just wonder, like, is there anything to, let's say Beyonce chooses to do a 20-night residency here versus going to continuing like a world tour or something. Does doing a world tour generate like more buzz or more passion around fans that were kind of that kind of don't get quite captured in the economics the same way that doing a residency for like people who are traveling to Vegas right now maybe some people would travel to Vegas for Riazzi, but does it have any like side brand effects that

she's not capturing? Does that make sense? I think the answer is the obvious answer is yes. It's different traveling to 20 different cities or 10 different cities, two nights per city. versus doing Vegas 20 nights. The answer, I think the, I think a pretty resounding answer is that you will make more money doing Vegas. Another easy thing to say is that it is way easier to do Vegas because you're not flying

and sleeping on buses and in private jets every single night. But, you know, it's just so much more straightforward for that artist to do Vegas sphere than it is to tour. And so the answer isn't that you have one or the other. The answer is that you do both. You know, right now you do a 20 or 30 night stint for eight months while you take a break and give your cruel break from being on the road

and then two years from now you start another road tour. That's how I see it. You too, you mentioned those I think it's Wednesday Fridays and Saturdays. You could imagine Taylor Swift Thursday Friday, Saturday is like, hey, you could do

probably if she wanted to price up 50 million of revenue in a weekend doing three shows a night like that, right? And then you've got Monday through Thursday to relax, recuperate, all that type of stuff. So you could have to see that. And I can also see them doing like they can do a big artist Thursday, Friday, Saturday.

And they could do a small artist one or Tuesday, Wednesday. And when you say, I don't think there's enough people that are willing to do this, I'll keep going to the fact that they're selling 15,000 tickets a day to see a not-so-great movie at a hundred bucks a pop. So a pretty good artist. Like, I would say that an artist that wouldn't sell out a 15,000 person in theater arena, in a local city, certainly not for five nights, can definitely do sphere. Because the sphere has its own aura to it. I mean, I went to you two. It was great. I found some of the headlines that were kind of mocking them kind of funny and true, because U2 obviously has their fans and

the detractors. It was like beautiful visual show at the sphere interrupted by Irish pop band. And actually, it was set multiple times, which was like the visuals almost took away from the band, because it was just such a beautiful visual spectacle that the band became a little bit of a second act to it. I think U-2 did a very good job weaving those two together, really. I'm not a huge U-2 fan. I enjoyed the concert. And then there's all this other stuff,

just like the EDM scene in Vegas is absolutely massive and huge, and we haven't even touched that yet. And so start bringing in the Calvin Harris's and the Martin Garrick's into Sphere and putting on shows there. And those crews are so well-versed, in doing what I want to say dynamic production. They travel all the time.

They go to different clubs every weekend, and they just are given a light board, soundboard. They build their digital files, and they set up and show a kind of different, but similar show every single weekend at different venues. So they're kind of plug-in-plug. That's a great point.

That's an absolutely fantastic point. Obviously, they have a deep background in, like, I think Calvin Harris did, they've got a deep background in Vegas. Let me just ask one more point. And we'll talk sustainability later, and I want to go to the outside, but just one more point.

So you're very bullish on postcard. can tell. You're very bullish on the movie. Like, I do. Okay, so, volous on movies. I'm bullish on movies. Bullish on movies. Ignore postcard. Yeah. Bullish on movies. I do. And maybe they can just keep refreshing and keeping it up to date. And we'll speak more to like the long term valuation here. But I just keep thinking back to the 90s, right? When I would go see the IMAX movie at the aquarium or something, right? And now they hadn't put any money into it. Like it was probably an eight year old IMAX movie. But I kept thinking like, oh, this was like the height of technology when it came out. And they hadn't updated the, the product, but you know, the technology aged really quickly, right?

It was like, hey, it was the height of technology when it came out, but I can go to the IMAX down the street at the movie theater or like a lot of times my TV screen might be better these days. You know, right now, this is like the height of technology, but, you know, if I, if we run this forward five years and you think about TV screens getting better, AR getting better, VR getting better, like, how comfortable are you that going into the sphere, you know, paying a hundred bucks to go in the sphere is still going to be this big draw if we just keep going down the line a little bit.

I'm glad you mentioned that, and I don't want to get too much into this because that's like a technologist podcast versus a finance and investment podcast a little bit. But you just think that this is a little bit of a gimmick. I kind of see this as the natural evolution. And when you said ARVR, like Apple and Meta, you know, they're going to be pushing their headsets hard. They need content. They need killer apps to run those things.

and the movie like Postcard and future productions are the types of things that Apple and Meta are going to want to push into these platforms. They don't want to just be like, hey, you know, buy our headset and you can watch a movie and it's going to be big. It's buy our headsets and watch this really cool movie that James Cameron did in 3D immersive, not through or in one 270 degree immersive, right? Movies are, I can see a world, I've said this before, where immersive video is basically the next step out. after HD, you know, and it's not, this is a cool Epcot Center type of gimmick. It's, you know, 10 years from now, we will be looking at everything in the immersive space. Camerasia's on the football field will be done in immersive and you'll watch it on your Apple or your meta or whoever else's VR headset and you'll be able to look around a stadium from your living

room, right? And so Sphere is just a better version of that, which is very specific to that world. Yeah, you can do it at home with your headset, but it's better to do it in the sphere. That's where I see the sort of video source. Let's talk about the outside of the sphere real quick. And this is, you know, if you were on Twitter at all from, call it July to, it's not recently more today, but you would see the sphere. You know, they had the big smiley face looking around or the big eyeball looking around. They've done lots of takeovers with the NBA advertised, a lot of the NBA in season turn in a lot, tons of advertisements. And so there's going to be a lot of revenue streams from those.

Why don't you quickly address how you think about these kind of outside revenue streams, we'll call them? A lot of it's gravy. As you said, also with the naming rights, things like that. You know, I've modeled that they're going to make something like $40 million, $50 million a year in ad revenue. It could be $100, $150. It could be $25. It's going to take some time. It's already doing quite well.

In Q4, calendar Q4, we're at something like $15 to $20 million already. So that annualizes to something like $50 to $60 million. is it going to pick up or is it going to diminish hard to say it's getting a lot of coverage when you put an ad on the sphere you're going to end up with a lot of virality on TikTok and all that stuff you know someone's always going to want to be the first person to post that on TikTok and you know naturally people want to see it and are interested in it is it still going as viral because this might just be me and it might be because our friend Matt Rosen on Twitter who's been on the show before I think you might follow on I'm not sure but you know

he used to be big into the sphere and I think he exited to wild bet on a few other things that work for him, but he would always be posting it, so maybe on a scene. But I just feel like I'm seeing less viral images of the sphere. Like, have people started adjusted and getting used to it? Or do you think, do you track that they're still going to the viral? I think I don't track how viral they're going, not in any kind of spread or anything like that. I think that it's always going to be hit and miss in terms of who does an interesting ad and who doesn't do an interesting ad. The video game manufacturers like Xbox, stuff like that, they're pushing hard to, you know, create really cool stuff. They had some really cool ones.

Yeah. And so when you have Pandora or Target doing an ad, you're like, okay, this isn't going to be that much. I think also, you know, you've always got these big company marketing execs that are looking for a new toy to play with. And so similar to like Super Bowl ads or whatever, it's not something that they necessarily have to justify. It's on their $200 million market line. They spent half a million dollar million dollars on the sphere project. So they have something in their slide to show that they're doing something interesting and different versus we bought another $8 million of Facebook ads. Here's our ROAS, blah, blah, blah, et cetera. So I think that on the base case, it's always going to do quite well. But I on an extreme case, I think it can really do quite well. You know, Billboard ads in New York City do very well in Times Square. I think that that's a reasonable comp. And so, yeah, it's that. You mentioned Billboard. I'm glad you because the one thing I worry about, I'm with you, but there's two things they worry about.

And A, it's so big that right now it's novel, but I could see, you know, 10 months for now everywhere is like that shitty thing that's like just average, like white pollution everywhere. Like, it's no longer novel and people are actually kind of annoyed by it. So that's one. I worry, like, right now you pay a premium, but 10 months from now, like, nobody wants to take it because everybody's just so frustrated by it. I don't think that's going to happen, but it is in the back of mind because I have heard some Vegas residents. You saw the guy who's golfing and the eyeballs basically looking at him, and it's a cool TikTok viral thing.

But I imagine if that guy's golfing every day and he's got this eyeball, he's like, he's so pissed at the view. That's what. And then number two, you mentioned the Times Square Billboard. Like, how much does it cost to make one of these ads for this beer? Because even Dolan said, hey, you don't just go slap an ad up there. Where a billboard, it costs like nothing, right? You slap it on there. It's Times Square.

People are moving through. They change them like crazy. You know, I think they actually want for 10 seconds and then it goes to the next one. For this, it's like a full day takeover. It seems pretty involved. You have to get like artists and designers and stuff. Like, it's not quite as easy to change, which I worry, like limits a little bit of the billboard comparison.

So the gross margin that they're publishing for the very limited amount of time they've done so far is 80%. And the ad cost is about half million dollars. $400,000 for $450 for a day, $6.50 for a week. I'm sure they give some discounting here and there. We'll get more clarity on it later on. I think it's clearly incremental and extremely high margin business. 80% margin means that it's costing $100,000 to build the ads.

So to your point, it's expensive to build that ad for $100,000, but when you're charging $450,000 or $500,000 for it, it's definitely worth it. And they're getting a lot better at building the ads and building tools to build the ads, which I think is worth pivoting a little bit too, which is talking a little bit more about economics, about how it's kind of misunderstood in terms of the business. This year, what the rough forecast is for me and realistically the street has caught up to me for the most part, is that the sphere's revenue as a four-walled facility is going to be about $600 million. And the gross margin on that's going to be about 70-ish percent.

So they're going to come away with $450 million or $450 million of gross profit. So to your point about, well, what happens if revenues fall by 50% for postcard, you still have a big nut to work with on that? And that's the entire enclosed cost of running the sphere. Now, what's throwing things off, there's a fact of two things falling things off, the MSG Networks part we are to talk about, which is potentially going to be losing money in the future. And then there's the sphere studios. So they have this facility in Burbank, California, which is a production studio. They use that to beta test the software, to build tools, to do all that kind of stuff.

And that costs on an SG&A basis about $350 million a year. only about a hundred million of that is actually required to operate the sphere on an ongoing 365 day basis. The rest of that is building growth for future spheres, for future technology, future stuff. I'm shocked that that hasn't come down, by the way, but it hasn't. And so, you know, if you're a private equity shop and you're like, I just want to cure play cash count this thing. So I'm going to buy the building for a couple billion dollars, you know, and then just

run it with, you know, just bands or run it with just, um, you know, mediocre movies. You can be pulling out $300,000, $300,000 of, of, of EBITDA a year. And that's at a considerably diminished revenue line than where we are right now. And I think that that is what scares people a little bit, which is that, you know, well, first of all, the entire industry, the entire street was like, this thing is not going to make money. The last year, they've been all saying this thing is not going to be profitable. And, you know, my work is where I was very, very different from where I was saying, no, this is absolutely going to make money. And so far, guidance has proven me to be right.

But it's still one of those things that we're comparing apples in oranges, which is the sphere itself is almost definitely as a building going to be extremely profitable, how they manage the expense line and what that expense line can contribute to the future is where things get really interesting. Yeah. And look, I think this is why the opportunities are unique, right? Like, I've taken to, I like things that are N of ones where they're unique. There's nothing else like it in the market, whether that's an event that's unique or a company that's unique. Like, this is absolutely an end of one. The only other publicly traded kind of stadium is Madison Square Garden, which owns Madison. And that's just like a traditional stadium that's, you know, it's the only stadium in Manhattan.

So, of course, there's like scarcity value and it's got all this. Like the sphere, there's nothing else in the world like it, which is so interesting because as you said, like small, as we said, small changes to model. It's huge fixed costs, huge operating leverage. I guess let me start. Let me address three things you ask there. When you look at analyst numbers, this is a pretty decently coverage stop, right? Morgan Stanley has an analyst. JPMorgan has an analyst. I think a few smaller boutique firms covered as well. What do you think the main difference between your very bullish buy rating? Like I think

what of your article said? I think this is worth $90 per share. Analysts have a $25 target. What do you think the main difference between your target and analyst targets are? I've done the work on the unique economics of the business. They have not. Very, very clear. I can't. It's the most clear situation I've seen in my life that look at comforts, where these analysts have just taken some random cops that they feel like are somewhat applicable and then applied it and haven't thought about the actual business or how it works. The numbers are comically wrong. I'll, well, name them. One of the analysts is saying that the food and beverage attach rate on a ticket is 63%. So, like, if you spend $200 on a ticket, you can spend $1205 on food sale. Like that model just does not make any

cents whatsoever, right? And then, you know, the margins, the street was sitting at 50%, 55%, I was sitting at 70, 75%. In the last six weeks, the street has come up to 69%. They're probably still going to go a little bit higher. The street doesn't like the company. I mean, in general, the market doesn't like the company. They don't like James Dolan, San Juan, too. They don't want to give it credit. And that's a great spot from Trurton to be like, look, and what I've said multiple times before as well as people is usually when you're disagreeing with analysts, it's because your crystal ball is different than their crystal ball. You know, I'm going to disagree with you and me and you are disagreeing on like revenue outlook. You know, the next six to 12 months, you know,

how many people are going to actually show up a postcard? Is it going to fall significantly or is going to hold steady? And no one can prove that right or wrong, right? The issue is that today, right now people are going to go to postcard. There's a certain number that are going. I know how people are going to go. And I know how much it costs to run the sphere for those people. And I know that they're going to make $800,000 of gross, $800,000 of gross margin today. You are saying they're going to make $100,000 of gross margin today. There is an actual truth to this that can be proven. Me, I looked at the secure website for two seconds.

I wasn't saying anything. It just looked like there were a lot of blue. Let me ask corporate governance. You said, hey, the street doesn't like Dolan, which I would agree with. There's a lot of reasons. And I guess the two things, the three things I want to ask are naming rights, right? I think the naming rights could be huge, you know? He's kind of been

wishy-washy on the call when asked about him. I agree the naming rights could be huge. People will say, hey, but if I look at his history, Madison Square Garden, not named. Radio City Hall, not named. The form in L.A., which they own for a while, not named. It doesn't seem like he likes naming these buildings. And you mentioned a private equity firm could cash flow

$250 to $300 million or something. I just think, like, I don't think he runs this like a private I'm kind of worried he's not going to look for those naming rights. So I'll ask that specific question, and then we can use it to build it into like, should there be a James Dolan discount here? Because again, he was going to build up for $1.3 billion. It ended up costing $2.3 billion. It sounds like you think even that $2.3, he'll get a pretty good return.

But I think a lot of people look at that cost over running like, oh my God. Sure. I, you characterize it correctly. I think on the naming rights could be huge. Will he sell it or not? I mean, they partnered with his other business partner, Azov, who is. huge in the space and their responsibility is to sell the sponsorship and naming rights to the entire building. So I think there's an element of he's taking it off of his plate. Obviously,

you don't have to approve anything, but I think that they have a big sales team that is actively trying to do this. My guess is they're not getting the exact price they want and they're being patient about that. I've heard other people talk about Apple Music, meta, being good options. you know, once again, it's this immersive media space is probably going to pick up. I mean, there's a lot of investment happening in it. Does it land here or not? Who knows? I look at that as pure upside as well. So I don't model that as being an important part. But if they do pick it up, you know, it's $30 million, $50 million a year, which is, you know, an extra $5 to $15 per share kind of thing. It's pretty big. It's big. Just on, you mentioned private equity firm could pull $250 to $300 million

I was out. And the two things, the three things I worry about the corporate governance discount, which we just kind of address it. We don't have talked about it. I obviously I'm a little concerned about like six months in. What is the, what do the attendance numbers look like? Because I think right now there's still a lot of buzz, but I do worry like, I don't know. It's just hard for me to get my mind around like 5% of the visitors to Las Vegas going to see the show. And maybe it's hard for me because like I've gone with friends and it's hard for me to get them to go see one magic show with me. I don't know. But those are two. I think we've addressed those. I think you've addressed those really well. The third point. I wanted to ask is, this kind of goes along the IMass rock, but right, the sphere costs $2.5.3 billion. This was a big, big investment. If you've ever gone to a football stadium, like a year after it's been built, it looks pristine. It requires no DNA, right? If you go maybe six to seven years, it really starts showing its age. And then after 10 years, it really starts showing its age. And I guess my worry with the sphere is, this comes back to, I think your multiples I've seen you use when you value this thing is like somewhere between 12 to 15 times, right? And It's their adjusted operating income line, which is their EBITDA number.

I worry that DNA is really real. And this year and next year, it's not real because this thing's brand new. But I worry six years from now, we're going to be looking like even Madison Square Garland, they just did a $1.2 billion capax upgrade. I worry six years from now, they're going to have to put in a lot of capx, a lot of maintenance capax is going to spin up. And especially because this thing is so unique and so technologically advanced, I worry that people are going to be surprised by, hey, it's not like we're just like repouring steel and

concrete. We actually need to go hire like the best electrical engineers in the world to come spruce this thing up to keep it fresh to keep that buzz going. So how do you kind of, I guess I'm asking both, how do you think about the long term DNA, which will be real for this? And how do you think about applying a multiple, an EBITDA number that is kind of ignoring that real DNA there? Yeah, I would say that I, it's not explicitly. stated, but I would say that it's somewhat baked into the, you know, it's going to cost $20 to $50 million per year

kind of thing of maintenance, CapEx type of thing to be there. And even that, it's such a unique building that it's hard to say where it exactly lands. I would say that I have looked at the technology side of things. I've talked to a couple people in the A.B.

It shouldn't be that bad. Like, some people that aren't in the A.B. space are like, oh my God, it's big screens. You know, it's going to be a big problem. But the way they have built it, everything's an individual pixel. It's a lot on the outside. On the inside, it's individual pixel elements that are part of an array. When things burn out, it's actually, it's, you know, when you're a 4K TV burns out, you need to throw away or that doesn't burn out. When it has dead pixels, you can't fix those. In Spheres, it's actually comically to just pull off the dead pixel and replace a kind of form, right? So on the technology side of things, it'll be pretty straightforward. On the physical fixture side of things, you know, seats, cushions, like, I don't know. I did think about that myself as well, which, like, they haven't. really, really, really long escalators in there. And my experience with escalators, everywhere is that they're never working. So I can see that being pretty messy.

It's funny you mention it because every time I've been to Vegas, you know how the strip has like the, you can walk up. Yes. I think half the escalators every time I see is there out. Yeah. The 50 million number you mentioned is interesting because most stadiums, I think, depreciate over 20 year life. Now, they're probably 30 year assets.

But again, you've got to spruce these things up. But if you use a 20 year life on the 1.3 build, billion initial number that would come to about 60 million of maintenance capex annually instead of 50 million but it's just an interesting number on the initial number like do you think this was a 1.3 billion dollar project or a 2.3 billion dollar project because that could be like kind of a doubling of the difference in maintenance cap x I don't know if I'm thinking about that quite correctly I had so many notes but we've been going for an hour I guess where I want to end is this cost as I just said it ended up costing about two point actually

I'll come back to that let's start with the blessing James alone has been clear he does want this to be just the sphere. He wants there to be multiple spheres. They had land in London. I think London denied the request for a sphere. So they wrote that off. It seems like it seems like they are in talks with Qatar, Qatar, Qatar, Qatar? It seems like they're in talks to build one there. They've been pretty clear that they want to do a franchise model with this, right? So I'm so interested in this. I just want to ask, how do you think about valuing the franchise model? Like, does your investment thesis work if they never build another one? What you think the likelihoods of it are? Because I've never seen a franchise model on like a building

before, right? Sure. It's a really interesting thought. So just what are your thoughts on if you needed, how it works out all that? Yeah. So I think if they don't build in their sphere, then it generally should mean that that that Burbank facility is not nearly as important as it is right now. You'll still need to make us. We're asking. So you think that G&A number is coming way down if we don't get another sphere? Correct. Yes. I do think that. You know, you do need that building to still build content for the next band and stuff like that, but you just don't nearly as many people or all kind of stuff happening there. So that's one side of it. And that's what I'm talking about. Like, that's paying for the growth. I would think that, you know,

the clearest way to do it is somebody else fully finances it. They're like, you know, in guitar, Dubai, we're studying. We're going to build a sphere. We're going to pay for all of ourselves. We'll pay you something between around $50 to $100 million in franchise slash licensing slash rev share to be able to use your content. And that's where I actually see the most of the for the business, which is that they've, like, if you, you could build your own sphere in your own city without touching MSG sphere or touching a sphere company, but the problem is you don't have anything to put on there. You don't have a movie. Then you have to shoot your own movie. If you want to shoot your own movie, you don't need a camera. So spear is developed the only

16K isomorphic camera available in the market. And so that's why all of this, the remoteness comes from the item. And so that I think is $50 to $100 million per year per additional sphere. Now, realistically, the franchisee is not going to pay 100% of the bill cost. They'll probably pay most of it, and Sphere will probably have to kick in 20%, 30% of economics just to sort of help them out. But I would just imagine that that $50 million a year would just go up from there. And obviously ballpark from spittballing that $50 million a year, but it's probably somewhere in that ballpark.

And so the more that Sphere has to pay, the more they're going to want in their royalty fees. So I look at all that as upside, which is like, The unit economics of sphere Las Vegas worked exceptionally well as of right now. And that's what you need to sell multiple spheres. If Vegas didn't work, then obviously you're not selling a single sphere outside. So there's a pretty good probability of that. And also, if you sell a second sphere, then the chances of selling a third sphere become much higher as well, because it makes sense. Let me do two pushbacks on the multiple spheres, because I think if you get multiple spheres, the stock goes kind of parabolic.

Because as you said, if you can get a second sphere, the odds are you're going to be able to find a third sphere. and franchise revenues from this could be pretty crazy. But let me do two pushbacks. Pushback number one. Like, I was skeptical of the 5 to 10% of Las Vegas going through sphere to see postcards or movie, right? Las Vegas is a really unique market in terms of tourism. I guess Orlando domestically would kind of fit the bill with that too.

But there aren't a lot of these tourist markets here, right? And I worry that if you start expanding, Now, they have said, hey, we can do a 2,500 seat sphere, but if you do a 2,500 seat sphere, unless you're going to sell the whole sphere, which maybe they could. I don't know, the economics get a lot less interested for them. But I worry that, like, the reason this is working is because Vegas is such a unique market. Like, could or you put it in there, I think they've got the tourists to feel like even a 5,000 seat sphere consistently. So, like, I just worry that it's hard to find the right markets for this.

Now, the world's a big place. Maybe there are, you know, you only need six of them. But I worry about the markets. I'd say South Korea is a very good spot to put one, and they're talking to them about it, with the sort of K-pop scene and all that kind of stuff too, right? And, you know, yes, yes, I think nothing else will approach Vegas sphere type numbers, but doing $250 million revenues instead of $600 million a year of revenues, where you're doing two or three concerts a week, and, you know, one movie showing per night instead of three a day,

you start getting to $200 million of revenues, $200,000. the million revenues at the similar type of margins, because you're just showing a film, and then you're kicking back 30% of the after tax profit back to sphere company or something like that, right? So I have two more questions. It might be three more, but I have two more to wrap this up because I realized why did London turn the sphere down? Because they had bought, you know, a big piece of land. They took, I think it was an $80 or $100 million write down on the one. Why would London turn this down? Because it does seem like you could drive a lot of revenue. They had approved. It's like they were ready to go for it. I mean, the, the head

The headline reason was light pollution and the people that lived near Stratford were opposed to it. I mean, that's a lot of nimbism literally everywhere. There's also discussion like political pressures back and forth. I mean, also, I don't know much about UK politics, but above London mayor level, they were saying that Michael Grove was saying that he was going to reverse the Sadiq Khan's decision. And then there was a discussion there about that. I, you know, that I don't think that they were ever fully, fully aligned. and that sort of how it landed.

I don't think I can speculate more on it. No, it makes sense I just, you know, I worry. I think I saw the light pollution was one of the reasons. And as I said earlier, like, I worry right now the light pollution is viral and people love it, but six months from now people hate it. And like the London turned down is a sign that they saw some Vegas, a lot of Vegas residents who are like, we don't like having a giant eye in our backyard every day. Yeah.

I think you have to cut through the nimbism. I think it's always, you know, first one through the, through the wall gets bloodied, and I think it's not nearly as bad. A, it's not nearly as bad as people make it out to be, and B, it doesn't, it certainly doesn't need to be as bad. Like, there is a lot of, there's a lot of compromise that's available in the world. What I mean by that is, you know, you can turn it off every night at nine o'clock. You could even, in theory, not like the exterior only during, you know, show times. You know, the exosphere part of it isn't extremely important. You can dim the LEDs to be 20% intensity instead of 90% intensity. That's all really

thoughtful. I think it's really beautiful that you can donate the space to artists and be like, look, you look at it as a giant billboard that's ugly and gaudy. Let's run it as an artist piece. And the only people who get to show things on it are local artists that are coming up with interesting to read stuff at 20% intensity. And now it becomes a beautiful part of your skyline. And now a quick break to remind you that this episode is brought to you exclusively by AlphaSense, the AI platform behind the world's biggest investment decisions. AlphaSense gives you the tools you need to provide better analysis for you and your clients. As yet another value podcast listener, visit Alpha-dashcense.com slash FS today to beat FOMO and move

faster than the market. That's alpha-dash-sense.com slash FS. One of my questions, which I don't want to ask because we've been real, But Dolan mentioned, hey, we're going to do 50, 50% of the time. It's going to be sponsorship that generated revenue, 50% of time, arts and community, which I thought was really interesting. But don't want to ask that. Okay, two last questions. Number one, the converts that they just issued.

So, you know, two weeks ago now, they issued some converts, 200 plus million in convertible debt, which I, nothing on this podcast is financial advice. I actually think it's a really attractive piece of paper. Sure. Nothing on this podcast. I would have loved. I would have loved to pick a long as, yeah. Bulls and bears are both pointing to that.

as a sign, right? Bulls are pointing to that. I think they did provide a little bit of extra financial metrics in the commentary around it. Huge numbers with it. Yeah. So bulls are pointing and saying, hey, look at these numbers. Bears are pointing to say, hey, this fear should be like hitting the inflection point now. And they just had to raise an extra $200 million of dollars, $200 million debt. Like, this thing is burning up a lot of cash. So I think both bulls and bears are pointing at that. What is your view on the converts? The balance sheet is a little stressed. When I say Converse, again, nothing on this podcast is financial advice. I'm not asking for your view on the Converse.

I'm asking on your view for the reasoning behind the Converse and what that says about the stock, just to make that clear. Got it. Okay. Sounds good. September 30th, their balance sheet, their quick ratio was barely over one kind of thing. They had a lot of construction costs that they are paying on a 90, 180-1 basis after completing construction in like bid September. And so my rough view thought on it, you know, we don't have the explicit details. is that they probably had payables due by December 31st, that they literally didn't have the cash to cover. Whether that's the full $100 million or $2.50 million, probably not, but it's probably a chunk of it. The other side of it is they probably want to have some cash

so that they're ready to put down a check as a deposit for buildings three number two or three kind of thing because they're probably going to make some sort of financial contribution to that. So I think overall they just needed a little bit more flexibility on their balance sheet, and that's why they needed it. But the business itself is, at least for this quarter and for the foreseeable quarter is pretty cash flow positive. And there's no weird things in that all of their revenues are pure cash receipts. It's just, it's a consumer business, right? So it's not some weird working capital timing problem.

That's going to be a massive issue in the future. As long as they keep putting butts in the seats, then they will, and covering their SG&A, which they're currently doing, they should be generating free cash flows. Last question here. If I did, if I adjusted for this convert, ignore MSGN, don't put any corporate discount or money going to MSGN or anything. If I adjust for this conference, I think about $60 per share is the stock price that would imply a $2.3 billion enterprise value. Again, there's some adjustments, but I think that's about roughly right. And $2.3 billion, I throw that number out because that is how much it costs to build the sphere.

And again, I do think people rightly are putting some corporate discount on this. But if I threw that $60 stock price at you, Sphere at cost $2.3 billion, would you say the sphere is worth more than that or would you say it's worth less than that? I think 60 is roughly fair. You know, you read my thing that I said 90, but that was also what I thought that MSGN would be completely nonrecourse, and I've done more revision on that. I said that I'm going to, you know, discount MSGN. And so now I'm sitting somewhere in that 65, 70 range. And I think that that heavily discounts growth, as in the multi-spear options. And I think that that also heavily discounts the sort of content, which is I really think that they're going to make some really

amazing movies in the future and it'll be a like it'll be a destination to watch that movie like you know the next top gun for example being like okay we're going to make top gun maverick too and it's only going to be in sphere like people will travel there just as much and when you're like why would tom cruise do that postcards is going to do 400 million dollars a year and it's not a very good movie so if you put in a really good movie to sphere you could do 750 800 million dollars of revenue by that movie no problem because this is i mean as you said the numbers are starting to disprove me, but before Sphere even launched, I was talking to a friend who was like, said the postcard numbers you're laying out, right? Like, hey, $200 million for postcard.

I was like, dude, a blockbuster movie, like a blockbuster movie these days does $200 million, right? Like, you're starting to get into average Marvel blockbuster movies. And again, those are selling in, you're doing globally. Globally, right? So you're filling lots of theaters. And I was like, I don't see it. Now, they're starting to prove me wrong, though this does come back to my Like, what happens with the movie? When you say they're starting to prove you wrong, I mean, Postcards started down $75, $80 million. No, no, yeah. It's definitely going to do north of $250 million in a year.

I think for me, the two mental models that I am struggling to break are, one, like, I'm just really worried about James Dolan. I've been burned before, James. And then two, you know, again, just to come back to the first point, which I think you successfully address, but it does so worry me is a movie comes out. and the first weekend, it's all sellouts, it does $100 million. The second weekend, it's 30%, you know, it does $30 million, and then it tails off from there. Now, this has managed to do it for three months, but I just worry like four months from now. Again, I just come back, hey, we need 7% of the strip or 11% of the visitors to go to this thing. And it's just hard for me to see that consistently, but so far it's pretty wrong.

Anyway, this would be great. I mean, obviously, people can tell, hopefully they can tell I've thought a lot about it because I love this company. I've thought about it long, and they can tell you've thought about it this a hundred times more, because I asked all these questions. Any last thought you want to drop on the sphere or anything? No, I'm very excited to see how it goes to keep following me on Twitter. I seem to be posting pretty unique insight and information by the ticket master data, all the kind of stuff.

So happy to keep conversing with people and happy to evolve with it. I would say what's interesting on my side is that postcard data, because we have the ticket master data and we're looking pretty far out, I feel like we have an edge there, which is if that does turn, then probably be one of the first people to know that. But also, the fact that it isn't turning also makes us one of the first blue note, which is also why we're so polished on it.

Just to go back to the ticket master data, you mentioned a lot of the seats are sold in the like kind of, let's call it the five days before the show starts. Obviously, you're tracking further than that. But like, what would make you start thinking that if 70% of the seats are getting sold, again, I'm going to say five days ahead of time? Like, and you're tracking up to 30 days in front, like, what would make you get bearish on that? Because would it be like a sustained drop in the five day performance?

Or would it be, oh my God, like the past three days, the 30 day outlook has gotten way worse. So we're starting to... So we're tracking all the way out to like 200 days in the future. And obviously the data for 90 days plus isn't that valuable. I was guessing 90 days plus you're getting like one or two sales, right? But I think it's an element of being able to see that, being able to forecast the quarterly numbers before they come out, and then being able to see those quarterly trends. It's good to be interesting. I don't think for a year it's going to matter. I really don't. But beyond a year, it will start to matter. So, oh, I am... Cognis is a

of some seasonality, which is, you know, if I see, you know, Q1, January and March, you know, dip compared to Q4, I'm not like, okay, this is, you know, the death dial of this thing. It's more like, you know, conference, you know, convention season is lower kind of things like that. We're talking right before Christmas and New Year's. Have you seen any dip in like the Christmas to New Year sign? Christmas is huge. Christmas. I can see it on both ways, right?

There's a dip this week. And that dip actually matches on YouTube tickets on C-PIC as well. So this week is just a quiet week, I guess. But then next week, their show is. are already three-quarters sold out across them. So it's going to be a big week for them. We are right at the end of their Q2. I believe it's their fiscal Q2. Fiscal Q2. So you've obviously I agree, did it. What are you tracking for the Q2? Do you think the street is just way too low on this? Yeah. I think the, I think the street was saying minus 25 million was the Q2 adjusted

to operating income. That's before the company gave guidance and said it was being profitable. And that was the like crazy factor for everyone to be like, oh my God, like they're going to be profit. We think it's minus 25 million. There's a hundred million dollar difference, right? I've always been saying that this quarter should be somewhere between 10 and 25 million AOI. And we're probably going to land somewhere in that 15 range or so. I would be shocked if it's lower because they guided two months into the quarter, not after the quarter. Normally people give guidance like a week after the quarter ends and they already know the number or it's most of it, right? They're they're like, we still haven't operated the last month of the year, the last month of the quarter and we're

already saying it were profitable. You need to be pretty above zero to say this. And obviously that is, as we talked about, with a huge SGNA burden that I think most people think comes down one way or the other over time. Though, you know, if you look at the Dolan boards, there's 14 people making, you know, it won't come down as high as that private equity firm we talked about. Anyway, Evan, this is great. Anybody who wants to follow him on Twitter, I'll include a link to his Twitter in the show notes. So you should mention that earlier, but we'll get you there. And really appreciate you coming on. Looking forward to time number three. Okay. Awesome. Thanks, Andrew. Talk to later. A quick disclaimer. Nothing on this podcast should be considered an investment. advice. Guests or the host may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.