Editors’ Note: this is a transcript version of the inaugural episode of The Razor’s Edge podcast, which we published yesterday. We hope you enjoy.

Introduction

DS: The inaugural episode of The Razor’s Edge covers the streaming industry. Disney is poised to make a big push with the launch of Disney Plus later this fall. AT&T is looking to max out HBO. Netflix, once the upstart is now at risk of being disrupted. And even in the month since we recorded this podcast, more has come out as Apple has thrown their hat in the ring in a big way.

I’m Daniel Shvartsman, co-host of the Razor’s Edge, along with Seeking Alpha author, Akram’s Razor. In our conversation, one of the things I brought up as a shareholder in Disney is that Disney depends too much on its legacy businesses like movies and cable, and I’m worried that they’ll have a hard time really diving into streaming. But Akram argues that the company is able to stack the deck, while still keeping their legacy lines humming, at least this year.

AR: Look at what they’ve done in the box office. You’ve had the digital remakes of Lion King, Dumbo, Aladdin. You’ve had two — three Marvel movies, right? You’ve got Star Wars, you’ve got Maleficent, you’ve got Frozen, you’ve got Toy Story. So what is Disney doing, they’re preceding Disney Plus, right?

DS: On the flip side, when we get to Netflix, Akram makes an interesting comparison to a formerly disrupted model, when arguing about how Netflix should evolve.

AR: You almost want to make the argument that they go in the direction of cable, like you just have stuff running. So I’m kind of flipping through and discovering it. And then if I want to go find something specific, which has gone viral, or my friends have referred me to, I’ve been reading about, I click that on-demand button, the way cable works today.

DS: There’s a ton to get to, in the streaming industry. We only touched a part of it. But I hope you enjoy the conversation. Quickly if you want to get more of this, subscribe to this podcast on the Investing Edge, our new podcast channel, wherever you get your podcasts. And if you can leave a rating or a review, it will be greatly appreciated as well. Okay, let’s get started.

Podcast

Listen to or subscribe to The Investing Edge on these podcast platforms:

Welcome to the Razor’s Edge, Seeking Alpha’s newest podcast show. I am Daniel Shvartsman and I am your host, along with Seeking Alpha author, Akram’s Razor. Each episode, we’re taking an investing idea or theme that Akram has been looking at for his personal investing, or for the Seeking Alpha marketplace service he runs, also called The Razor’s Edge.

We’re looking at the ideas, we are stress testing them, we’re trying to figure out how they might go wrong, we might just talk about whatever is interesting to people in these names, or to the market at large. And also to kind of get into some of the research that might go into an idea or into an area to understand what leads Akram to the conclusions and to sort of the analyses he takes. The idea is to share some current investing ideas for your consideration, but also get into the ins and outs of deep fundamental market research today.

Our first topic, Disney and Netflix and streaming, everybody is streaming and Disney Plus’ pending launch later this year is the elephant sized mouse in the room. How do the company stack up? And how do the other players or pretenders fit in? How do we as investors gain an edge in an area that everybody is watching, literally? And how do we avoid investing in thesis based on anecdotal stuff like that’s a great app or that’s a really cool movie. Those are among the things we plan to discuss on this episode of the Razor’s Edge.

But before we begin, a quick disclaimer and disclosure. The Razor’s Edge is a podcast on Seeking Alpha’s new, The Investing Edge Channel. The views discussed belong to either of the host respectively, but not to Seeking Alpha as a whole. And nothing on this podcast should be taken as investment advice. We’ll disclose any positions in any stocks discussed at the end of the podcast, but I can say upfront that I am long Disney, and that Akram has no positions in any of the stocks we plan to discuss. And we’re recording this on September 9, 2019. So Akram, welcome on.

AR: Hey, how’s it going?

DS: Good. Good to have you.

AR: Thanks.

DS: I want to get into this quickly. But for people who — we spoke on a different podcast a few weeks ago for Behind the Idea, but just for people new to your work, would you mind just giving a quick sort of background who you are as an investor? What sort of your approach is and what brings you here?

AR: Nothing crazy, a typical finance background, worked as a prop trader, long short hedge fund manager, and kind of these days more independent trading on my own. Back to the short selling, I mean, I’ve done a bunch over the years, been publishing on Seeking Alpha since what, probably 2010. Got in — probably, I’d say around 2013-2014, I got more refined into the activist game of doing deep dive primary research, typically on tech companies. But I mean I’ve traded a wide range of almost any sector you can think of.

But as far as activist publishing, instead of really focusing on frauds or accounting-related stuff, I tend to go after interesting technology companies, from a viewpoint of looking at the business disruption, competition, and in many cases, trying to differentiate on the fact that a lot of growth names tend to just get whatever you want to call it, momentum, lazy investing, and there tend to be opportunities.

So I mean notable ones I’ve done last year Nvidia, Mobileye in 2015, Jumia this year, PagerDuty this year, a little Dropbox this year, something like the SaaS sector in general. But yes, I mean I guess, I kind of try to go where things are interesting on at least, when you publish on shorts, particularly IPOs in general, there tends to be a huge opportunity to differentiate if you’re willing to do really deep dive work. Longs not so much, I mean, I did publish a long on Pinterest earlier in the year. I’ve done one on Target, which wasn’t public; Starbucks last year, which wasn’t public. That’s not really tech, but like those are the things that occasionally will interest me outside of the stuff where you can do really deep research. But I mean, yes, that’s about it in a nutshell.

DS: Okay, so let’s — we have here Disney and Netflix, which — tech with Disney, we kind of think about them broader, what’s bringing you here? What’s sort of interesting to you about this dynamic, especially as we get really close to Disney actually being a streaming player?

AR: I mean, I’m a content buff in general. So — and I’m a huge Marvel fan. So I mean, Marvel is actually the first write up of a stock I ever did. Back in the pre-Seeking Alpha days, Daniel, Yahoo message boards. Yahoo Finance message boards, if you remember those, where they disappeared to. But in 2002, yes, like just like two or three years into trading the market, wet behind the ears, I had a portfolio that was like Marvel, IMAX, Apple, your standard, Whole Foods.

DS: Consumer tech.

AR: Yeah, buy what you love. I’m always shopping at Whole Foods. I was an Apple buff. And when Spiderman came out, the original Spiderman in summer of ’02 Marvel was a $3 stock, even after the movie was a blockbuster success. And I mean I don’t know how well you know the Marvel story. I mean, like I don’t know if you saw recently, Marvel’s hit $20 billion in box office gross.

DS: Right. I mean, I’m aware — one of the things that I opened a Disney position last year, and one of the things that kind of turned my head was, I don’t watch the movies very much. I think I’ve only seen one or two of the last set. I — it’s just never been my — I’m big on Star Wars, I have to admit. And I think it was like that realization that this is just one arm of Disney, and they can kind of keep rolling and keep sort of building on it. So I did have that, and I want to sort of stress test that. But yes, so I’m aware of the loose outline of Marvel being just a dynamo success story.

AR: I mean, the Marvel story is probably one of the craziest stories in investing history, if you really look back to it. I mean, if you — I mean, I don’t know if you collected comic books, but I was a bit of a comic book geek in the 80s. And Marvel at that time — that was like right around when people started viewing comic books as kind of like an investing paradigm, right, where you buy issues, you hold them, and they’re going to appreciate, right? And like, I think it was it was maybe 1988-1989, Ron Perelman comes in, he acquires Marvel, and basically he kind of had figured out that like hey, this is a interesting business. People are buying these comics as investments. So I’ll buy this company, and maybe $80 million, $90 million, he paid. And he listed it, and what did he do? He increased pricing drastically, and massively increased volume, right?

So you would have people buying some limited edition Batman, one to read and three to store, right? And when you think of like short selling and bubbles, right, like it’s no surprise that what happened, this thing got out of hand and it got to the point where comics got so expensive that nobody was buying them to do what, read them anymore.

DS: Right. They became kind of a object in and of themselves.

AR: Yeah, like a tulip, like crypto currencies, whatever you want to talk about it. You had Beanie Babies and comics and baseball cards, right? Actually after Marvel took off, and like he bought the company for $80 million, $90 million, and I think it hit a $1 billion market cap or whatever on the public markets, once he listed it. He went out and he bought a Toy Biz. The company was actually called Toy Biz, but it’s a toy manufacturing biz. And he bought — what else did he buy? He bought a trading card company. So Marvel became this kind of like mash of this bubbly type stuff and collectibles.

And that market blew up to the point where their stock went from like, I don’t know, $40 or $35 to like, $2,right? The market collapsed, the bottom fell out. And he had a plan, essentially speaking, to finish off like he bought a partial stake in the Toy Biz, and to merge it together. And there’s a whole book on this. It’s fascinating. Carl Icahn comes in, tries to block it. And actually Icahn and Perelman end up losing to who, Isaac Perlmutter and who else, Avi Arad, right?

DS: Okay.

AR: They were on the board, they managed to kick both of them off and take control of the business, which was ironic at the time, and it’s a crazy story. But Avi Arad basically had plans to take Marvel where, into the movie business. But this company was on the verge of bankruptcy. Then it ended up going into bankruptcy, and emerging from bankruptcy, even though Avi had put together the original X-Men. I don’t know if you watched the X-Men cartoon series.

DS: I remember that cartoon series.

AR: Yes. And he done Blade, do you remember Blade?

DS: No.

AR: Do you know how much Marvel made on Blade doing $100 million at the box office, $25,000.

DS: Wow. That’s a lot.

AR: So like, it was this crazy mess. And at the time like, they approached Sony, because like, the news recently, which is ironic, Sony and Disney splitting over Spider-Man. And they approached Sony, and they offered to sell Sony their entire library to make movies; Iron Man, Captain America, everything that was available, right, for how much? $25 million. That was 1998. And I don’t remember the name of the guy, but he probably goes down in history as one of those epic investment fails.

DS: Well, and just for context, I mean, we’re talking the 90s. I remember the comic book movies of the 90s. And you’re talking about Batman Forever and Batman and Robin or whatever.

AR: Yeah, the DC Universe was dominant. Marvel just had like a little bit just starting to creep in, based on Avi Arad’s vision to basically take them into film aggressively and monetize the franchise that way. And the Sony executive was like you have Spider-Man and a bunch of other crap that nobody’s interested in. So why the hell would I pay for it? How about I just give you $15 million for Spider-Man and a 5% royalty. And that was the deal. And they ended up making this Spider-Man movie couple of years later, huge success. And so begins the Marvel story.

And I mean, I remember getting into it, and like just being so gung ho long, and I’m just like, this thing’s it was at three, I’m like, it’s going to go to 40. And I mean, I think I sold that, like $15 or something initially, the first time and then I came back into it afterwards. I got excited about Daredevil, you’d be following like the films and then one would flop and you’re like, ah, we don’t have a new Spidey yet. And they had bad deals with the studios. And even though like they had gotten their act together, the balance sheet had a lot of debt, it got cleaned up, the convertible notes were converted into equity. They exited the toy business, which was low margin, they’re in this high margin licensing business.

And then, I think it was like in 2005, they decided, you know what, let’s go at this alone, and they went to Merrill Lynch. And it’s funny, because very few people talk about this story. And they secured, like a $500 million plus revolver to make their own films, finance them themselves. And those films, that money was secured by their entire library. And they took that money and they applied it into making what, Iron Man. Iron Man flops. Merrill Lynch owns Marvel Comics, its entire film library, big gamble, huge success.

DS: And this is, just to sort of jump forward for a second like, we talk so commonly about, I think two things that seem to have changed. I’m skipping, but are that, comic book movies now are — you start with Iron Man and Spider-Man and they’re now tentpole successes, and they’re now really big deals. But then also, intellectual property is just — or yes, that’s how that the idea of, you can build on our franchise potential in our — that’s obviously central to what we talked about with Disney, but that wasn’t as common as a topic. But like I imagine in your original Marvel write ups, you’re not talking about intellectual property, you’re talking about where they can make some movies, right? Like that’s — these are things that are kind of evolving.

AR: Well, you were looking at a huge library, the ability to monetize it from licensing, the fact that each incremental successful movie increases the value of that library. And allows you to negotiate better deals with the studios. That was the initial. And that thesis played out from 2002 to 2005. I mean, the stock went up like 6x, 7x. But what they ended up doing is managing to take it to the next level by doing Iron Man, then turning that into a huge success. And then along comes Disney and buys Marvel, because look, if you look at the MCU and the size of the projects, and the timing, and how well orchestrated it’s been and whatever, I mean, it’s a huge financial risk for a company like Marvel to have tried to do. They couldn’t have done it by themselves.

Even with that revolver, and what they did, as far as like catapulting Iron Man, as that first basically the beginning of the phase one of the universe and setting up everything else that came after it, they couldn’t have hit the timelines, the schedule, the breadth, and whatever, without a financial partner like Disney. And that’s why once Disney bought them, it’s like this, the rest is as we say is history, which is funny when you look at it today, like Sony is essentially in dispute with Marvel — with Disney because Disney is being greedy. And the current deal is, Disney gets Feige and Spider-Man in their universe. They get a 5% cut of the gross on the Spider-Man movies. But they keep the merchandising revenue, I think 50% of it, maybe 60% of it, I’m not exactly sure, but because they own that part of the business, which they bought from Sony a while back or whatever.

And now what do they want? They want 50-50. I’ve heard they’d even be willing to go for 30%. But like what’s in it for Sony really at this juncture. Like it’s — like Sony, for them, this is it? Like this is like their core franchise, and they’re looking to build around it. Marvel has a huge vast library to integrate. And I guess for them, it’s like well, why would we lend you any of our characters. We’ve got so many. You’ve got Spidey and maybe you can do something with Venom, but you don’t have an integrated universe. So we’re going to demand more money.

I don’t know, maybe one day that that studio ultimately is housed under Disney. But I mean, if Sony is acquired by anyone other than Disney, the rights of Spider-Man will revert back to Marvel, which would mean Disney would own it.

DS: So we’re talking about a ton of leverage for Disney really, because there’s — because like Spider-Man is kind of locked in.

AR: That’s an understatement when it comes to the box office now. With Fox — with the Fox movies underneath them now, what do they control like, 50%, 60% of the box office. I mean, like I can only imagine what it’s like negotiating with them if you’re the cinema chains. I mean, Disney owns the market. They — what motivates because of streaming, because of social media, and like, because of Netflix and Instagram and YouTube. Like what really gets people back into the movie theaters, other than these huge big budget type of productions, the artsy stuff, that they are making in?

DS: So — but so let’s go there then first, because I think when we’re talking about Disney, and we’re — again, speeding up time a little bit, I know you’ve already said you don’t have position in these stocks. But one of the things that I think as a Disney long that I’ve been concerned about is Disney is about to roll out Disney Plus. And we’ll talk about — we can talk about the pricing, and then we’ll talk about how that literally racks up with Netflix and with anybody else there.

But one of the challenges for them is that they have the box office, they have this cash cow, and figuring out how to, like at some point, you’re talking about the Marvel Universe and how big it is, and it used to be just Spider-Man and a bunch of trash. And now all of a sudden we’re getting excited about Thor and Black Widow and Black Panther and all these other characters that weren’t as obviously central to the universe. But at some point, I guess the question — there’s the question of what can be too much. But then also, how does Disney succeed in the streaming game, which seems to be where they really need to succeed. If they have this cash cow, like how do you see them managing this?

AR: I was long Disney for a while — I mean, look at the last 12 months, Disney is up like probably 30%. Netflix is down like 20%. And Disney was, like on the surface, a pretty obvious long, it’s kind of crazy how it moved on its Analysts Day, like 14% move or whatever it did that day when they announced pricing for Disney Plus. And like how the stock has been like, I mean, you often don’t want to buy something and be like Avengers is coming out. It’s going to crush it. Captain Marvel is going to crush it. Spidey this, all that, that Star Wars. I mean, they’ve had a clear strategy for this year. I mean, look at what they’ve done in the box office. You’ve had the digital remakes of Lion King, Dumbo, Aladdin, you’ve had three Marvel movies. You’ve got Star Wars, you’ve got Maleficent, you’ve got frozen, you’ve got Toy Story.

So what is Disney doing, they’re preceding Disney Plus. So like I think the budget for Disney Plus content last I read is like these new originals in the Marvel Mini Series, like Black Widow or whatever is not crazy. It’s like a billion dollars. But what they do have is that every single kid on planet earth, like if they’re going to want to watch old Marvel movies, old animations, and the ones that just got released in the last 12 months, what does every parent have to do? They have to get Disney Plus. I mean, it’s a no brainer.

DS: So you think that they’ve stacked the deck enough to kind of…

AR: I’d say, that’s the definition of what they did this year. Like why wouldn’t you break these out, like why are you breaking out everything you got box office wise? It’s a really good question for next year, if there’s going to be a massive box office hangover. Like, I mean, I’ve dabbled with the idea of shorting cinema chains. But I mean, it does seem so obvious. But like if you look at — like they’ve done all that they can in terms of increasing revenue by upping the seats and making them more comfortable and premium pricing and all these things.

On the flip side, they’ve got Disney now to negotiate with on the windows. And I mean, you’re talking about a situation where like, if you’re Disney, and you’ve — and you’re looking for content and subscribers, well, you’re going to — you’re not going from the from the box office to pay per view to license to X, Y, and Z to this window to DVD. I mean, it’s going to be box office to Disney Plus. And I would say they stacked the deck this year heavily to have such a huge library in there when Disney Plus launches all their favorites that every single person is going to have to get Disney Plus because like, I mean, there has been so much this year, I can’t even imagine everyone, like with the level that people have been going to the movies, it’s obviously been a great year, but relatively speaking to historical norms, you couldn’t see them all.

I mean, I’ve been to the cinema more times this year than I’ve been maybe in the last five years. And it’s because I like I do love the Lion King, I did want to see Aladdin, I have to see every Marvel movie. So it’s — but I would say I’m the exception to that. And there’s going to be a lot of people who are going to consume a lot of this content on Disney Plus.

DS: Well, so the other important thing there, I guess, is that because Disney still has legacy contracts, as far as I remember with Fox, especially also with — whether it’s with HBO, or whether it’s with Netflix to license out the content for a few years after. And so by kind of gaining this exclusivity with all this good new content, you give every chance of Disney Plus getting off on the right foot, right, that sort of…

AR: Yes, correct. I mean, some of these deals expire 2022, 2023 and whatnot. But yes, you want to seed it. And like this is this is your new monetization from before $200 million in DVD revenue. Every time you had a major Pixar or Disney animation that kids wanted to see and buy and whatnot. So I think that — I mean, I think they’re going to see massive subscriber additions well above what people are expecting. Like I can’t see how — like everyone is in — they ran this promotion across the website, like for every single day last week, I don’t know, if you followed that, I mean, I think I pinged you to sign up, where if you opened an account with their like — what is it called, their loyalty rewards.

DS: Yeah, D23 or something.

AR: Yeah, if you opened the D23 account for free, you could lock in Disney Plus at $4.60 for the next three years. And it literally took me like four days to get that thing done.

DS: Because of that demand?

AR: Yes, and it was insane. Like they came out and said sorry, but like, I mean, the demand — they haven’t released the numbers on that. But I can imagine it was pretty damn good.

DS: So that’s sort of everything builds towards this Disney Plus launch, which happens I think in November, and they’ve got a — especially they’ve sort of stacked the deck we’re saying. And so in theory they should get off to a really strong start. And I guess it’s worth — like what can go wrong here? And you’re already sort of hinting 2020 might be a hangover in the box office. What can go wrong here? Like what is the — I mean, for one thing you’re not long Disney, so I guess you have some sense of that. But what would you be…

AR: I mean, I’m not long Disney because the market has been crazy. And I’ve been focused so much on shorting technology stocks. And I made 20% in Disney in six months, and I’m a happy camper. I haven’t spent enough time on the theme park business, which had — and the cable business, ESPN. So like, both — like the theme park business has had a really nice run. And that’s been like no different than a lot of stuff on the consumer side, where pricing has been strong. Ticket prices have gone up and new rides and revenue and whatnot, and their market share in that space is great.

And I think the comps on that business not as good as they’ve been running after the last couple years. It’s like, I mean, this is a complicated business. It’s a huge company. ESPN, I haven’t like — it looks like ESPN has made progress, like they’re more focused on gambling. They’re on bundling. There’s elements to the fact that like the doldrums of ESPN, they’re kind of turning the corner a little bit on that. But that’s been a huge — I mean, that’s been the cash cow of Disney, right, I mean, for the last almost two decades. I mean, like ESPN’s cost to the cable companies has just been going up and up and up and up and up for 30 years.

So it’s had the best pricing power up until recently, the last couple years. And like that was a big drag on the stock. The box office is it’s been what it is what it is, they’re getting more market share, and then they’re better positioned. I’m not really worried about them. I mean, there’s a hangover in general, but Disney is going to get their share. They’re going to have their Marvel movies. And it’s going to be like the only thing that people get super excited about. And that’s fine for them.

It’s the theater — and their bargaining power with the chains when they’re not producing as many shows, as many major movies as they did this year. It just goes up. You need to have that — like that’s going to make or break you, is the success of those Disney films. And I just think like, they’ve done a good enough job like I don’t see the demand falling off. Like significantly, I don’t think we’ve hit some sort of — like people are tired of comic books, these movies have evolved, they can be comedies, they can be art. It’s not what it was like 10 years ago.

DS: Right, because I think what just — what’s tricky for Disney, is ESPN is more obviously we go with the box office too is the — you’re not — you had said this is replacing the $200 million, they would make off a DVD. But they’re also at some point, it feels like this is going to take a big chunk out of — that was cable revenues, both advertising and the subscription fees and the box office. And that’s where they’ve got to kind of play that balancing act. And I think that’s — the guy from BTIG Rich Greenblatt or Greenfield, that’s I think, I haven’t read his work recently. But that’s been the drum he’s often beat with Disney is how do you make sure that you’re — are they really committed to streaming — and we will get to Netflix next. But that seems like the big sort of tension for them.

AR: Well, the box office is so lucrative for them. They’re going to tear this. That’s why you don’t see them. I mean, if you’ve looked at the numbers on content spent for last year and going into this year, like Disney is spending $1 billion on originals for Disney Plus is nothing. I mean, Amazon $7 billion, Apple $7 billion, HBO has been at like $2 billion. They’re taking them up. AT&T $14 billion on content, Hulu $3 billion on content. I mean, these are other pieces of –I mean, Hulu is obviously part of the Disney pie. You’ve got this like QB launching, you’ve got Roku channel, obviously the favorite stock in the market, Roku streaming. And everybody talking about that versus Netflix. And you got Netflix. Netflix spent what $15 billion, $14 billion on content last year.

DS: Right? They’ve got it. I mean, they’re sort of leading the charge as far as content spending these days.

AR: Look that’s where you can actually maybe make an argument is, what does this like — there was 500 scripted TV shows last year. People have been talking about peak television for a while. And if you look at where we’re at this year, we’re going to crush that. I think the data last I read was the first half of 2019 is like 330 shows already. And Apple has not launched yet, Disney Plus has not launched yet. You got Pluto TV, you got Roku channel, like which started in like, January, as far as trying to up their game on having content that’s ad supported and free. You got HBO, the whole senior team left since Game of Thrones that was running that company, because AT&T wants more hours, like they want to follow this model, which I don’t get, to tell you the truth, because HBO to me is premium content. And like they built that brand equity, to the point were like, I pretty much watch everything on HBO.

It’s gotten to a point now where I start watching a show on HBO, and I’m like, damn, they’ve got too many shows. So like, I’m not following them enough. But like I started watching Succession. I started watching, what’s his name, Danny McBride’s new show. And these are great shows. I’m like, why do you need — I don’t think I’ve watched anything new on Netflix in the last four or five months.

DS: So I want to — with Netflix, I think what’s interesting to me, when you say that number 330 shows we’re talking just U.S. English language shows or what’s that– what’s the denominator there?

AR: I mean, I haven’t seen the breakdown, but I’m assuming it’s U.S. scripted shows, yes.

DS: Okay. Yes, because…

AR: So we’re not talking reality TV, I don’t think we’re talking documentaries or movies at all. We’re just talking scripted TV, these series. And I mean like, these shows don’t last long anymore. It’s like — it’s one, two, three years, they get cancelled. I mean to have another Game of Thrones — I mean, let’s get on to the topic of Netflix. Netflix had its first subscriber drop since, I mean what — since 2011, since they raised the DVD — the pricing on Netflix streaming and tried to spin off the DVD business. Right, when that first collapse happened, because remember, I wrote an article, which anytime I write anything negative about any company, Netflix, the stock story is over at the end of 2010.

And I instantaneously, like people would send that to me on Seeking Alpha, like, you got this wrong. I’m like, go read the article. I made an argument that Netflix is not going to be the Walmart of DVD content. Like it’s not going to work in streaming. I don’t want to go watch really old episodes of Cheers at a crazy valuation. And when I’d laid that out, I mean, I had come to Netflix, from being long Netflix, when it was a DVD company, and short blockbuster and Hollywood video. And I’d had really good success on that. It was like one of my early experiences in short selling.

And Netflix was what had convinced me to go that route, but when I saw them do their deal on streaming, I’m like, this is just not going to work like, okay, STARZ was stupid. They cut a bad deal. They took some money upfront, the content providers, the studios who have sub-licensing in that didn’t have it covered in the contract. Netflix came in the back door, it took off, it got some subscribers. But like it didn’t have the quality content. Like outside of what you got from STARZ, it’s like, where are you going to go with this. And they started signing their deals and pay money, but you’re like, this is not sustainable. And they did pivot. They went into original content. And like when the stock was cratering, when Icahn came in it was like right around the time they did House of Cards, and then they changed their whole manifesto to we are HBO.

So I always try to tell people when they criticize that thesis, I’m like, go read it. I said they need to become HBO of streaming. And I’m short this stock. And I’m long the content providers. Content is in theory king. That was the view. Being a distributor in digital is really not something that I viewed as could turn into what it is as a superior advantage, the way they were arbitraging the post office and the fixed overhead. I mean, blockbuster made all his money on late fees. That was the business model of those companies. And once you had no late fees, and you could mail things in, you just destroyed it. And they had a huge fixed overhead and physical presence in paying rent and whatever. It’s that kind of Amazonesque disruption. But I just didn’t see how that could play out and how everybody in content would sit back and let Netflix continue to do what it’s doing.

And I think part of the reason Netflix turned into what it is, is licensing is so complicated. And the people doing the licensing of content of the many layers are still out there to monetize it in like different buckets that Netflix coming in and paying top dollar. Like they underestimated the long-term damage that would do to their businesses, as they got bigger and bigger. So they’re taking the money up front and Netflix eventually got to scale. And they started creating their own content to the point where there’s so much — we went to a point where I was, all right, like there’s so much new content on Netflix, like, it’s interesting, I don’t really care about old content. I don’t need to watch an old movie on like 50 different cable channels. I’m going to go to Netflix.

But now it feels like it’s kind of flipped. Like if you deal with the Netflix user interface, unless I’ve really discovered something on it. There’s just so much content that like I go back to cable and just flip through the channels, because I can’t make a decision. It’s that Paradox of Choice element where I’m just like, I don’t know what I want to watch. So, I watch The Breakfast Club on Showtime 13.

DS: So let me — there are a few things with Netflix that are interesting to me. One of them, which I sort of hinted as I like Netflix as a consumer specifically for their foreign language stuff. I live abroad, and for me, I think the way there’s just like usage — usability things that they do really nice. The UX is really good around that. And then they have some interesting stuff. But what I want to…

AR: Yes, but for discovery, how do you do it? Are you — you get on the internet, and you’d say, new Netflix shows, and then pull a review and sit like that’s what I was doing. I mean, I love documentaries, like True Crime, Serial Killers, Fraudsters, like Netflix has had some great series, The Financial [ph] and The China Hustle.

DS: Yeah.

AR: The one with Valeant and Dirty Money and whatever. Like it’s documentary heaven. So I’ve always loved that element of it. But it’s like, I mean, I’ll take you take a show that I really liked, that I didn’t discover for a while, GLOW; The Gorgeous Ladies of Wrestling. I mean, that’s a really well written show. And I can’t imagine how many people have watched it. But like someone told me about it. And I resisted watching it so many times for so long. Then I finally watched it. And I went through it all in like your typical binge style. And then you’re like waiting for one day to be reminded when it’s on TV again. I was really into the OA, I was very annoyed they canceled that.

DS: So here’s like — this I’m going to go back to your article like I pulled up while you talked, article from 2010. You said one of the ways you could go wrong, which I think ultimately if somebody’s going to say that, that thesis was wrong was because Netflix management figured it out. That was basically your argument and what you’re presenting for Netflix to me that…

AR: But Daniel, I mean, you’ve got it in front of you. Go long, short, Netflix, go long Lionsgate Films. In 12 months one came twofold [ph] and the other ended up falling 50%. Now I’ll tell you what, I didn’t get the huge benefit of that because I was getting my face ripped off over like that four months stretch where it went ballistic?

DS: No, I’m not necessarily — what I…

AR: No, I get it. But I’m saying like, I looked at that. And I was like, the content producers are going to do really well, because of what’s going on in streaming and the demand. And the need to get that like this is the first place to go. Lionsgate had a huge library. It wasn’t — like they brought artists in, and they had whatever. And it was an easy monetization path for them. And I would look at Netflix and I would be like, what happens when the STARZ deal expires? Like I need to be like — Reed Hastings used to say, this is not a place you’re going to come to watch Avatar. It’s a place where you’ll come to watch like an old episode of Cheers. Okay. And they changed the manifesto to we are HBO, we’re creating premium original content.

DS: So here’s what I think is the question for you then is we’re in a period where content is everywhere. I think, one common idea is that we’re going to get sick of the fact that now we have to buy all the different streaming things to get everything we want. But if you had to give me the company who can best solve the — how do I find something I want to watch? Wouldn’t you bet on the company that has solved other technological challenges around streaming and changed — successfully pivoted two or three times before? Like isn’t that what — if I’m a Netflix bull that’s sort of what I’m saying is they’re spending but they will — you’re saying the challenges, there’s so much, that seems like a decent problem to have that I can figure out?

AR: Okay, so here’s how I think about it. Like we can make an argument today that people are going to — the show’s created in this window from like, let’s say, the last two years, and let’s talk about maybe the next 18 months, okay. People will be discovering these shows a decade from now. There will be like hit shows that will go viral, that were created in this window and I’m like oh, my God, dude, WC, what’s it called? I mean, that’s a good GLOW. And it will have had like three or four seasons, because the deluge of content is insane. And I can only imagine what’s going to happen to Hollywood, once this stops, right? It’s going to be — I mean, talk about a boom to bust. Like it’s going to be a bust on epic proportions. Because right now, there’s like the old school STARZ, like a Jennifer Aniston or a Reese Witherspoon, they’re still cashing in on big checks from Apple because they want to see content with identifiable people.

And then your average actor, it’s been like — they’ll not be getting paid huge money. But there is so much work that it’s been a good business to be in. But it can’t be consumed. And we’re not even just talking about like TV series and movies and whatnot. Like you literally got to look at it from the context of social media, YouTube, Instagram, it’s hours in a day, and we’re well past that. Like that’s where I look at a Netflix today. I’m still paying the subscription fee, I may come in and consume something.

But the interface with cable has actually made me want to go back to like to watch old shows I’m familiar with, like, I watch old Seinfeld episodes. I’m watching old movies on — like, it’s actually kind of increased the value of the familiarity of old content. Because there’s so much new stuff like, how do you efficiently discover it sifted out and enjoy it, and we’re going to hit a point where there’s going to be a lot less. So from a profitability standpoint, I mean, I guess that could be good for these guys. But like, how long before Apple quits. They’re just getting into this game. They want subscribers, they want recurring revenue.

DS: And that’s the other question here too, is just how much — I guess this is basically addressed, but how much demand is there? How much will people continue to open their wallets? You mentioned Netflix sort of hit — had their first dip in subscribers in a while.

AR: Okay, so — and what was — by the way, what was notable about that quarter with Netflix had its first dip. Because I mean, I thought about shorting it. I didn’t, right. What was notable about that quarter? Game of Thrones, Avengers, right, like, there was two things, two big things that have come to a conclusion that, and Netflix didn’t really have anything new. And they had their Kevin Spacey debacle with House of Cards. Like, they’ve done pretty well on these old Marvel TV series, but it got too much and like, clearly like, the ROI on it for them didn’t make much sense, and obviously the beef with Disney and whatnot. But that had been stuff that had like core viewership. And they saw a subscriber drop. And it’s not exactly surprising, because it was — it’s kind of stale. You’re looking at it, you’re like, there is a lot on there.

I’m sure if you spent the time and like Googled everything, pulled it up like, you’d find something worthwhile to watch. But it wasn’t — they don’t have that big box office type that like that Game of Thrones, everybody wants to watch it together. It’s an event, Avengers. It’s an event, get out there see it. And I would say that played a huge part in that window probably on their subs, that and the combination of the content. So there’s a logical argument that like, that was kind of a temporary headwind. But it didn’t take much. As a reminder, that in terms of how fresh your stuff is, which is why you’re seeing them do the Scorsese film, their beef with the studios over what is streaming and what, like, the window that you can put it in and the movie theater, they’re doing the breaking bad movie. So I think they realize they have way too much content and they now want some tentpole style stuff.

DS: Well, it’s interesting, because I was just thinking what you said about them wanting to be the HBO, but at the same time they are also the content giant in terms of volume. And then yes, they added ROMA last year, which I forget if it won best picture, but it won a lot of Oscars. And then you have Scorsese this year, is going to be — it looks like their big Oscar push. And it’s just interesting that they’re playing these prestige games, while also being notorious for having the long tail of content. And if that may be because the prestige then allows them to sign the creator of How to Get Away with Murder, or all these other tentpole figures in the producers, because ultimately, that’s a price tag.

AR: I mean, I think they just cut a deal with the Russo Brothers, didn’t they?

DS: Yeah, I think that’s right.

AR: They’ve cut a deal with — they had that limited series from the Coen Brothers. Somebody wouldn’t like it. I liked it. I mean, I prefer Fargo, the TV series. That was great. But yeah, I don’t think — I think we because we’ve got into a point of so much, like it’s all pretty good content. The level of content in aggregate has improved drastically. But that like really high quality stuff, like HBO is still doing it. I don’t really understand AT&T’s strategy with HBO, because I look at it, I’m like you guys are spending a lot less. And you’re still — you still have the demand. I mean, you need to figure out the global bundling, and individual streaming subscribers, but like you don’t really need to spend much more on content, because you have the brand equity for as being HBO, that when you launch a TV series, I’m interested in it.

And if you have six or seven shows running, like it stays relevant in my mind. And like when I go to see what’s on HBO, and I’m just scrolling through that, that’s fine. When I go to Netflix, and it’s like a million in one different options from reality TV to cooking shows, I mean and I do like some of that content to documentaries to their original TV series. It’s just very hard to keep up and figure out what you want to watch, unless it becomes something that is like, that gets the buzz and like enough people tell you about it, you got to watch this show, and like you get into it, or like you read enough critical reviews. And you’re like, okay, I’ll try this out. And like, that’s essentially how I discovered GLOW.

DS: So let me just jump in with a sort of big topic question that I had in mind, which is really just I think is that it’s so — these are so tangible to us. You talked at the beginning, sort of invest in what you love, and sort of the whole, that’s Peter Lynch is usually credited with that. But how do you balance that out when you’re dealing with these streaming companies that again, we interact with a lot. Disney, we’ve known all our lives. Netflix is omni present, HBO like how do you — what do you do to kind of check yourself or to make sure that you’re not getting too into one specific, tangible feeling for it when you’re actually managing money?

AR: Look, I mean, it’s hard to break this down from an investor’s standpoint, because a lot of this content is wrapped up now in giant companies. So like Amazon, Apple, like I mean, I’m not going to go by Apple, because Jennifer Aniston and Reese Witherspoon’s new show. It’s not good to move the needle. And the same thing in terms of new shows for Netflix, I think one where that’s gotten way out of hand recently is Roku. I mean, Roku is being compared by many people to Netflix in its early days, and it’s ad supported and the shift from linear TV advertising to streaming. They benefited as they’re small, they’re independent. They’re not in any of these walled gardens. And they’re kind of — they’re like Switzerland. They’re hosting all these OTT apps. I mean, people don’t even remember the fact Roku was spun out of Netflix. I mean, are you aware of that?

DS: I was not aware of that, no.

AR: Yes, it’s the original OTT team that developed the Netflix app. And they doing the hardware, Netflix didn’t want to do the hardware. They spun them out. I think it was called, like Netflix, OTT something, and they renamed themselves Roku. So like when people talk about oh, with Netflix by Roku, like Netflix is not going to want to get into advertising to support it. It’s just not their business model, right. And so when I look at a Roku, Netflix trades right now at like five times sales, five and a half, six times forward revenue, right this year, and we’re halfway through the year, three quarters of the way through the year.

Roku is trading probably at like 30 times platform revenue for 2019. Like they’re guiding to a $1 billion or so in revenues. $650 million or so is expected to be the advertising, I put no value on the hardware business. It’s a loss leader. So I look at it and I say I’m going to compare this to Snapchat or Pinterest. Like you got $26 million active subscribers. They have how many? What’s your gross margin, and you’re getting 30x like nothing’s getting 30x. And Pinterest is growing at the same rate and has higher gross margins. And you’re likely to face like very rapidly rising content costs.

So when I look at that, and I look at the opportunity to own Netflix, at this multiple with them being let’s say more rational with how they spend their money, as the hyperscale fan — what do you want to call them tech giants come into the game, you can make an economic argument that it makes more sense to own a Netflix here. But the way the market works, the stocks not going to turn until the subscriber metrics improve or they have pricing. Netflix does have room still to take pricing up. I mean, one of the reasons I was like a little bit critical of a Netflix and long Starbucks last year, when it was like $58 is I’m spending like $15 a day at Starbucks.

And I mean, it’s different margin profile, but like, I’m spending what, $9 a month on Netflix. The cable bill is still really up there. I mean, like I guess, if you got every channel, you’re paying, like, close to like $200. And — but there’s something for me with cable where I prefer the ability to flip through channels. And there’s like the UX problem — I like the Netflix app, I like how you can interact with it. But it’s discovery. Like if Netflix was like 10 TV channels, and they were running stuff, I’d be like Netflix this, Netflix that on top of being able to go into an on demand manner. Like you almost want to make the argument that they go in the direction of cable, like you just have stuff running. So I’m kind of flipping through and discovering it.

And then if I want to go buy something specific, which has gone viral, or my friends have referred me to, I’ve been reading about, I click that on demand button, the way cable works today. I go watch an old episode of whatever, that like HBO has put out Veep, or Succession or whatnot. I don’t have to watch it when it airs. But I consume it in that manner. So I think maybe if they can optimize figuring out like, this is just from a personal interaction with it, like solving that problem, because like they’ve lost me big time in the last year, from like a mindshare standpoint.

DS: Right, that’s — yes, it’s just interesting, because that to me seems like such an opportunity for either them or for an entrepreneur to work with them. It still seems like us, not the worst problem you can have as compared to the competition.

AR: It’s not the worst problem you can have. But it’s like — it’s been a year of where there’s so much noise that the stuff that was familiar has done really well. Like I want to see that the remake of Lion King, I want to see the remake of Aladdin. I want to watch the conclusion to Avengers, the conclusion to Game of Thrones, like stuff that has been invested in over time, right. That’s how like, if you look at Seinfeld and friends, like Friends has been one of the most successful consumer shows on Netflix. And I mean, if you consider, will there be a show like Seinfeld again, which makes several billion dollars after it stopped airing. You could argue that, okay, there’s so much content now that what having Seinfeld is actually valuable again, still.

Because it’s like, people are going to want to watch it. And that makes it like, there’s a scarcity, because you’ve created so much. And it’s not that it’s not as good as Seinfeld. But like, people don’t want to invest the time to something like that, versus going back to something that they’re familiar with. Getting people to invest new time now, that’s the struggle, because it’s like, you start a show, and it’s like I was watching, Better Call Saul. I’m watching Ray Donovan, and like it’s gotten to the point now, where you’re like, you look back, you’re like, oh, has there been a new season of that in the last two years? Did I forget about that show? Where was I on that show? So how do I discover new stuff today?

DS: So here’s — let me — I can’t answer that question for you. It’s up to — I guess you can — and that’s the other — another content boom is just all the coverage of TV shows, which is still…

AR: Like Quibi’s idea, tell me what you think of this, is essentially short form 7 to 10 minute TV episodes, being able to be consumed over mobile. Does that work better? Is that where we’re at?

DS: If your argument is that we’re too busy to watch full content? Yeah, I mean, it’s…

AR: I mean there’s a question of being too busy. And even if you have the time, once you have that time, how much easier is it to just pop open your Instagram, look what’s going on there? Watch some, like clips or video on YouTube, versus trying to figure out what new series you want to invest your time in.

DS: Right, so let me bring it back for a last question to investing from here, which is, we’re talking about streaming? What are the sort of numbers? Or what are the things that you are going to be most watching as you look at these companies, as you consider whether to get in or get out? Like, where are you going to be — what actual numbers matter?

AR: I mean, I have my own Netflix. It’s been like — it’s like Nvidia has been for up until maybe the last week, a dead money stock for most of the year. It’s not one of these sauces which by the way, that stuff has just now had its reckoning, but it’s been like dead money. You look at it, it’s 20% down over 12 months to like, maybe 23%, 24%, Disney’s up like 30%. Roku is up, what 7x, 800%. So like, there’s — I mean, I personally at this level would be long, Netflix, short Roku. Now I was not a Roku bear. I was long Roku earlier in the year. But I mean, like did I think this thing was going to turn in what it turned into in terms of momentum in the stock market. Like I do run into people and they are like, oh, Roku’s the next Netflix. Like, yeah, that can’t really happen in a world where Netflix already exists, okay.

And everybody has gone into streaming. One of the biggest issues before was like, why was everyone so slow to react and like it was because the previous model was so lucrative. But like now, it’s like Apple is on the way and Disney. And like, literally coming in months, Amazon is spending a ton of money. There’s — Hulu is going to up their content spend. I mean, HBO is looking to create significantly more hours and then HBO Max App and whatever. Like, it’s — I look at Roku and I’m like, all right, that’s 30 times sales sorry, guys. I’d rather own Pinterest at 15 times sales growing roughly at the same rate revenue wise, in terms of a long term moat, because I don’t think they’re going to be able to expand in the same way internationally, as they have domestically. I think you’re going to see fierce competition, as you’re running a revenue share model over advertising.

So Amazon can undercut you, Apple can come after you. I mean, like you want to talk about someone who’s dropped the ball in this whole space. Apple, what the hell did they do wrong with Apple TV. Like, how did Roku turn into what it turned into, like Apple was early, they had their UX, but like they made it difficult, like they didn’t want to open up the store, they didn’t want to make it easily accessible for every single application, their closed system, like Apple TV should have just been hosted on every single television. They didn’t take that approach. And it was like, but that’s their culture. They’re a closed box. And that’s one time where, like going the Android route would have worked.

Now Amazon and Google have tried this, but like, it’s like two fiefdoms. And Roku has managed to slide in as that neutral party. And just everybody gets on their platform. And they discovered in this window, I think with so much content, some people are happy to watch the free content you have on there with some ads. It can be tough to be free. And they still have your Netflix app there. They still have their other core apps that they want to watch. And like, because of that, and because they’re collecting data, advertisers are interested in it and like, it’s pull, push and pull out of linear TV into their neighborhood.

And I mean, like $20 when they were saying that that’s what they were, it was a fricking steal. But at 30 times platform revenue, with Amazon’s aspirations, Samsung wanting to do more in advertising, like Apple launching station, it’s like their content costs are going to go up, the margins are going to go down. I can buy Netflix at five times sales. Netflix, I’m not going to cancel my subscription if they raise pricing another $2. I may if they raise it, if it was double what it is today, considering I’m still watching more on cable. But I think Netflix can get me back if the Discovery element, because I’m sure there’s tons of stuff on there that I would watch. It’s like, how do you pull me back in?

DS: So what I’m hearing is with Netflix Discovery is the big opportunity, and they’re still it sounds to me like Roku. I wonder — I guess the last thing is, do you think that there is going to be at some point, a re-bundling opportunity play here? Do you think with all these different streaming apps, if Roku is not the right place, somebody else is going to figure out a way to be that Switzerland? Or do you think that that ship has kind of sailed at this point?

AR: I mean, I don’t understand why, for example, if I flip through the channel on a cable box, right, that the streaming channel isn’t available to be interacted with in the same way I go to the on demand button, on like a Verizon. This is something you got to ask the cable companies. I don’t know what they’re up to. I don’t know what Comcast is doing and Verizon is doing on this front. But if they can solve that interaction, like the TV guys have tried, but it’s different ecosystems. If I’m going to watch an app on the TV, but I haven’t connected to like a surround sound system it’s not working through the same way. So when I want to watch Netflix or YouTube on there, I have to turn one input down and I have to go through the other, right, you are going through the TV. It’s not a separate feed. Like somewhat there’s a hardware element that hasn’t been cracked, in terms of how to make that consumption still seamless.

Now I can get a Roku and that just becomes my de facto device. And that’s kind of what’s worked out for them. But like, I mean, like, my brother has a Roku, my brother has an Amazon Fire, like it flips between the two. Like I tried what was it, Chromecast at one point. I was really into the illegal one at one point. Cody, that was a great UX. And I don’t understand how they screwed that up. Like that should have just been a legitimate business. I mean, they had the exact setup you want to watch TV shows, movies, the skins, the way it’s managed, that whole skin. The way Cody was set up, why isn’t there a way of consuming content in that manner. That’s — I would pay $500 a year for that, no problem.

DS: Interesting. Okay, okay. All right.

AR: But I think what one thing from an investing standpoint here is like, it’s tough to find the pure plays now. Like you want to buy Disney but you got the cable business, you got ESPN, you got the box office, you got the theme parks, you want to buy HBO’s business and like, they’re doing well. Time Warner, maybe like gets their act together in DC Universe and — but oh, it’s sitting inside AT&T and I got to digest everything that’s going on in broadband. Although I kind of say, I think broadband is a good space to be. I think it’s the pipes of the infrastructure. I have pricing power going forward without question. But like, really the only thing that’s been like, an easy kind of layup on playing a theme has been Roku. It’s small, public, relatively speaking, the whole — it’s 100% pure play.

And I think that like you’ve seen, like, the maybe unwillingness to find something like people wanted to be that new Netflix and that’s kind of overinflated that valuation, because they don’t want to own Netflix here at these levels. And maybe the Netflix has got a bit of a transition period going on. Like Disney, you get excited, but this is not going to be moving the financial needle remotely compared to the rest of the business.

So like that’s part of the reason why when I look at the space, you have to get so familiar with so many other things unless you want to basically be long in Netflix or short in Roku. Like you saw when Disney reported and it went down on to Fox right down of that disaster of a film, what was it, X-Men Dark Phoenix.

DS: Dark Phoenix, it was X-Men, okay.

AR: Yeah, which by the way I saw and I walked out of that theater, and I was like, I thought X-Men Apocalypse was a step down. But I watched this movie and I’m like, what fricking, like introduce me to the writers of this, like how did they have a job? Are things this bad in Hollywood? Like that — like a franchise of this size and you’ve got like a — what’s her name Jennifer Lawrence has like a two second cameo and the way they dealt with removing her from the universe. And they bring in Jessica Chastain, who’s just an amazing actress. And she’s like, in this weird role and this aliens and I sold Disney several weeks, I think maybe even two months, I don’t know when it was before that report. But when that came out, I had been tempted to speculate on Disney as just a long on the huge box office. I had read something about how bad the Fox X-Men was. I was like, yes, it was bad.

I have not seen a superhero movie that bad in my life. And you had premier actors. So it’s no surprise that they took a hit on that. But that’s the kind of stuff you’re dealing with, like they report, it kind of goes down. The stock is unchanged, essentially speaking since that day, came back to like $138 recently. But they’re like — the theme parks not as impressive, right down at Fox, offsetting gangbuster numbers out of the box office. And we’ll see what happens with Disney Plus coming up in the near future.

But I don’t think you can go, like I think as a long term investor, like still where it currently trades. Like, I still think you got like, you got yourself a good 20%, 30% more upside in Disney. I mean, what is it right now market enterprise value? 240?

DS: It’s 250($B) market cap. So it’s probably…

AR: So like, what 280 enterprise value?

DS: Yes, I think they’ve got quite a bit of debt with the new deal.

AR: Yes, this is a $350 billion company. I mean, it’s a rare asset in this day and age. I mean, we go back to why Apple is doing what Apple’s doing? Why didn’t Apple ultimately buy Disney, or Apple buy Netflix. I mean, it probably would have been an easier way to enter into what they’re doing. But like Apple has their own distribution platform. And they have so much cash. And it looks like everybody has figured out how to make content. So look, we got you on iPhone, we’re going to get you on the subscription. And like even if that means we’re spending $5 billion a year, that makes more sense to us than spending $200 billion on one of these assets.

Well, this space should see — there will be a point where there’s going to be a lot of consolidation. And we can’t be that — like these guys will eventually retrench from it, because you’re not going to be getting the incremental subscribers and subscription revenue. That’s the big debate at the end of the day, with like Amazon spending, what it’s spending but like you are — what’s their penetration of Prime subscribers? It’s significantly up there. Apple’s got their music. It’s like, how many iPhone users are there? Like, obviously they’ve got a way to go to boost that substance revenue. But like I mean, where Netflix is subscriber wise, like yeah, I mean, they could probably add another $50 million, $70 million over the next couple years.

But like, it’s not a subscriber growth story now to get excited about. You got to look at it and be like, this has got to be a cash flow machine. Like, it’s going to be pricing power, it’s got to compound over time. And they have to differentiate themselves, I guess, in some way, shape or form from this whole crowd, because all these other guys are coming in, have installed bases of users. And they’re not competing against you for their time. We haven’t even heard anything about Facebook who wants to get into video and original programming. Like it seems like everybody wants to do content. I mean, like that’s the U.S. economy these days.

DS: Right, right. All right, cool. Let’s leave it there because I think we could, even just throwing out Facebook, we could be here for — I think there’s going to be more to unpack here over time. But this was — I think it’s just interesting to think about Netflix sort of now in the role of hunted and how they manage their lead in the streaming, like you said, what the new installed bases and then all the — yes, I mean, obviously, with Disney, just we’re going to find out in the next few months,

AR: Yeah, I think Netflix is quietly — like they’re spending what they’re spending, but they’re clearly being more rationalized with what they’re doing. They’ve been canceling a lot of shows. And they seem to be focusing more on trying to get like big budget productions that like bring people in to view in the same way a superhero movie does, or a series like a Game of Thrones. Like I don’t see them, I think they will lead the way into less volume of content creation. We probably — I think it’s worth us looking at the data and maybe doing a little research on it. But like I wouldn’t be surprised if Netflix is the first one to do less scripted content in aggregate.

DS: Meaning they’re the ones to lead the sort of pullback in scripted content.

AR: Yeah. Like while Disney Plus is coming in and Apple’s launching and whatever, like, they don’t expect to lose. They basically want to up their quality in terms of satisfying the existing base, and maybe to a degree, reducing the noise. So I give you six or seven shows that you’re focused on, on a year. And get me back interacting on a daily basis, and then over time, just raise the price.

DS: Right, right.

AR: Because I like I can spend $15 billion and lead the pack in terms of volume, but like have I hit a point where there’s just a diminishing return on that, and I’m better off spending $1 billion on some like crazy new series to compete with, you know, Star Wars and some the Marvel stuff. That may be like, I mean, it’s riskier. But if you get the actors and you spend the marketing dollars, and whatever, and the right people to create content as content and its quality has gotten really good. Like I’m sure, with the resources, they can create hits.

So I think for them, it’s like more about creating hits than giving you like this just giant menu of everything to consume.

DS: That’ll be interesting. That’ll be an interesting shift if they go down that route. So that’s…

AR: To me it’s like going to the cheesecake factory. They have like everything on the — and you just like, I don’t even know what I want to eat.

DS: I like that. That’s a good cross sector comparison. All right, cool. So this has been great. It’s a good way to start off the podcast. Any — you brought in a bunch of other names. I should you mentioned Google. I’m long Google is well, any other names of those different that you have positions in or are we still…

AR: I mean, I’ve started to short some Roku as of today, but that’s about it.

DS: Okay, great. Okay. All right, cool. Well, thank you so much, Akram looking forward to seeing how the streaming sector plays out and looking forward to the next time on Razor’s Edge.

AR: Me too, bro. Thanks.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Daniel Shvartsman is long DIS and GOOG. Akram’s Razor was short ROKU as of this recording. Nothing on this podcast should be taken as investing advice.

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2019-10-11