Alex Morris (TSOH) on $NFLX, $DIS, and the media space (podcast #108)

Alex Morris, founder of The Science of Hitting, returns to the podcast to discuss all things media, including his investment in Disney and Netflix (you can find his first appearance on SPOT here).

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Transcript begins below

Andrew Walker: All right. Hello and welcome to the Yet Another Value podcast. I'm your host, Andrew Walker. If you like this podcast, it would mean a lot to me if you could rate it, review it, and subscribe to it wherever you're listening. With me today, I'm happy to have my friend, Alex Morris. Alex is the founder and the editor, sole writer, and entrepreneur in charge of The Science of Hitting Substack. I'll include a link in the show notes, of course. Alex, how's it going?

Alex Morris: It's going good. Thanks for having me. I think Francisco Oliveros is technically the editor because I sent him everything and he's the one who tells me what sucks and what's good.

Andrew: But between you and Bill Brewster, Francisco is doing a lot of editing on the side.

Alex: We keep him busy.

Andrew: Yeah. But, anyway, let me start this podcast the way I do every podcast. First, a disclaimer to remind everyone that nothing on this podcast is investing advice. Normally, we do one stock but so much is going on in the media space, I think Alex and I are just going to riff about a bunch of media stocks today. So, Alex might have a position of view, I might have a position of view, please just remember nothing on this podcast is investment advice, consult a financial advisor, and do your own work. Second, a pitch for you, my guest, this is the second time on the pod so people can go listen to the first one from last summer for a whole pitch. But Alex is one of the clearest thinkers I know, he runs a concentrated portfolio in some of the best businesses out there. I'm a happy subscriber to The Science of Hitting, so everybody should go out there and check it out. I think it will really help you improve if you're looking at larger cap, better businesses, media, retail, consumer focus, I think that's fair to say a little bit of Berkshire Hathaway in there, of course, too. But I don't want to give away all the secrets.

Anyway, having you on the podcast today, we started talking about this about a month ago when Netflix stock, I say it's sold off, but there's been about for sell-offs this year, but it's come down a lot. You wrote some really good notes on it. I know you recently added to your Netflix position, but then I figured we'd expand it to an all-in media podcast because media, in general, is crazy interesting right now. I know you just put a note like two days ago discussing Disney has sold off this year, too, you are adding to your Disney position. So, I just want to talk about media, in general. I guess I'll flip it over to you - what are you seeing just media, in general, it doesn't have to be company-specific right now.

Alex: Well, I think the main thing I'm seeing is a change in perception. We have gone through, gosh, a 10-year period I would think where we've completely flipped from Netflix as a competitor as, I think Zazzle famously said ten years ago, or maybe it was Les Moonves to Netflix is eating everybody's lunch, multi-hundred billion dollar market cap, Malone famously saying, basically, they've already won and that was years ago now.

Andrew: Barry Diller said they've reached escape velocity. This was five years ago and the stock was 300.

Alex: Right. So, a huge change in terms of perception and, obviously, the actual results as well. Another big development along the way is Disney launches Disney+ after dithering for a couple of years. Astounding success right out of the gates, I mean, at least in terms of sub members and, obviously, there are ways those numbers are kind of juice to get people to try the product initially, but the numbers objectively have been very, very strong and you kind of get to today where the Disney+ subscriber base alone is just shy of 140 million. Netflix is at 220 so they've really closed the gap in a very significant way in a fairly short period of time, so, we started seeing a lot more competition. Netflix had EVA Margin guidance for the last couple of years and we can argue about income statement figures versus cash flow figures, but the reality was we're seeing a very meaningful trend and improvement in the financial results, a business model, and the strategy that was clearly working and then we get to the pandemic, two quarters where they added had 25 million subs in six months, I think it was just, insane growth, now on the back end.

We've seen the sub-growth completely shut off, which was not anybody's expectation at all, management, and to fumble the communication on launching advertising, supported product, margin guidance is scrapped. So, everything that was looking good was now on the exact opposite end of that, and even some of the smaller players have come out and reported numbers that some cases were objectively pretty good, or at least decent. The market just isn't having it right now because they see what the prize is now and they're not very interested in the process.

Andrew: Yep. Right now, so, again, you've recently added to Disney and Netflix, I'll disclose I own Warner Brothers Discovery, I've recently added there as well. So, all of these are, I think it's fair to say not love right now. Right? Netflix is the worst-performing Stock Investing p500, I believe. Down 70% so far this year. Disney's been cut in half since its pandemic highs, Warner Brother, you know, Discovery was $90 per share when Bill Hong was just driving the stock to the moon and the Infiniti squeeze. Now, they've done a really, I think, creative deal and the stock is 17. Even take the squeeze-out, it's been cut in half. So, you and I are both bullish media, what do you think you're seeing that the market is missing that has you bullish media?

Alex: I think, well, there's a couple of different ways to think about this. Let's start with Disney because that's the one I've owned the longest, and I wrote something about Disney before and about Netflix, where I basically said, Disney's path to becoming Netflix is easier than Netflix's path to becoming Disney. And I think what I really meant by that was Disney has the asset base to become a global D2C video business. And that transformation was going to create economic opportunities for them that in my mind would be quite a bit larger than what existed for them in the prior world, where, obviously, they were a global company, but it was very much a US company as well in terms of what drove the economics. So, I think that was part of the thought process.

And the other thinking was, over time, the level of the spend that is going to be required to basically be a place where people consider going to consume content, they require such a scale that there's naturally going to be competitors that fizzle out, get consolidated, revert to a licensing model, whatever it may be. I think that's still true today. But in the interim, we've seen a number of competitors come to market, some of whom vary from not great IP to pretty darn good IP and they've invested significant amounts of money to try to build a subscriber base and, obviously, the competition that's been pretty heightened is, in some ways, bad for everybody.

Andrew: One of my big worries and I think Disney is separate from Netflix, Warner Brothers, and everyone else just because Disney has the parks business. Disney has the IP, will Disney outperform the market from here? Maybe, maybe not. I think the odds are probably in your favor, but maybe, maybe not, but Disney's not going away. Right? Like that IP is gold. Buffett said in the 60s, like the oil well that refills, right? Whereas when you look at something like Netflix or maybe to a lesser extent, Warner Brothers just because they do have some pretty iconic properties but I think the market is looking at Netflix, Warner Brothers, and saying, is Media investable? The competition is just so heightened and it's heightened for two reasons - one, you've got big players, Apple and Amazon are coming in with unlimited checkbooks and they don't appear to care about the economics of just the media business, right? They've got bundled economics for a lot of other products.

And, three years ago, everybody was laughing at Apple TV, everybody was laughing at Amazon Prime Video. Today, people are not laughing at those, right? You can get them and they got great products. Apple has some of the best shows of the past couple of years. Amazon's got that Lord of the Ring show coming up everybody said. So, you can get those real competitors and you've got a giant company that doesn't care about economics that's releasing the competitor, that's generally not good for you in the long run.

And then I think the second thing that people worry about is if we rewound this podcast 40 years, you and I would both be in the womb or pre-womb but if we rewound this podcast, there were three channels, right? If you wanted to entertain yourself, you could watch three channels or you could read a book. If we rewound this 20 years, you could do some really basic video games, or you could watch the cable bundle or you could read a book. Today, you can spend all your time on TikTok, you can do YouTube, you can go download Fortnite for free, and get hundreds of hours of play through that. I'm just worried that there's so much entertainment out there that the competition is just ratcheting up. Between Fortnite, YouTube, and Amazon Prime, you can entertain yourself for a lifetime for basically free. So, what do you think about the competition in media right now?

Alex: Okay. There's a lot there. I want to hit a couple of things.

Andrew: As I always say, wow, I just threw out - what is the meaning of life, Alex?

Alex: Well, I'll try my best to answer. I think let's start with the point on Disney because I think it's a really important point. Berkshire owned Disney up until I believe the late 90s, maybe into the 2000s, and I think a big part of what happened there to your point on them returning to the well is off it was seeing that that wasn't actually really happening anymore. Disney's content production and ability to create IP were faltering. It was not working anymore and it's so important to the output of that business over time. Eiger, for all the faults that he may have, did three deals that completely transformed that company's base business and they built everything around that now. Obviously, the opportunity is to be differentiated as a result of that and the risk is that you go down the path you went down before where these things lose their relevancy value, however you want to frame it. So, obviously, something to monitor but we've been hearing about Marvel fatigue for at least ten years now, and it's clearly not showing you the numbers, it's still as strong as ever basically.

In terms of the comment on linear, I think that's an interesting point to understand or to think about as well is the idea of hundreds of channels, obviously, fairly consolidated around a handful of companies but hundreds of channels competing for time and attention and now we're moving into a world where we're kind of seeing something like that, it's not explicitly HDTV or a Food Network, but it's all consolidated into one package and, obviously, you have a DC basis. I just think if you look at the progression of how that worked in the linear world, and you see where that ended up in terms of the business economics, I think there may prove to be some parallels there, but we're still relatively early in that happening.

And I also think, honestly, that informs the strategies that companies should pursue or at least think about in terms of, you know, think about a business like ESPN and how the economics of that worked and what the strategy was. Think about Legacy Discovery and how they kind of operated within the linear bundle and how they thought about the important things within their business. And I think there are slight variations in some of those things that will inform how some of these companies will ultimately need to go forward, especially if you don't see a ton of consolidation.

The final point of the competition, I think, it's spot-on. At the end of the day, YouTube is a competitor. As Reed Hastings said a couple of years ago, Fortnite is a competitor. It's one of the problems I've always had with the gaming space is everything is usage and new demos coming in is up and to the right and look at the companies, I'm like, yeah, but is EA really winning as a result of that, or are they just losing share to these emerging competitors. So, I think that's a very real thing to think about and, for me, as I first got in this space, I feel like Disney gives me a nice competitive position within that because they have the IP that even with everything going on, the fire hose that we're all consuming every single day when they come out with Black Panther 2, it's going to get attention, and it's going to get consumed by probably hundreds of millions of people.

If you're Netflix and your advantage is the global scale and spending power, I think you really have to adjust your strategy in order to play to those strengths and drive to survive obviously is a perfect example of that where go as celebrity guys, I don't know what the economics of that deal was but how much would Paramount Plus have to pay you to put it on that platform versus Netflix? It's a non-starter. So, they have to think about things like that I think more than they maybe have up to this point.

Andrew: For Netflix for years, I never had a position in it, but I always looked at it and I said, look, the bear case is this company is crap, the competition is coming, and I would always be - drive to survive. That reinvigorated F1 or my personal favorite was, look at Cobra Kai, the TV show. That was on YouTube for two seasons. YouTube TV when they were trying to do a TV product. No one watched it, it got great reviews, but no one watched it and you would hear some of the TV people be like, TV critics and stuff, "This show is great. You guys just need to try it," but no one watched it because it's on YouTube TV. And then Netflix picks it up, puts it on Netflix, and it instantly becomes a hit. It's not the only show that's done that. Manifest had a moment for a while. All the CW shows all break out because they're on Netflix. So, I would always look at them and be like, you can say that, but the best real estate in the world is the Netflix home screen.

But I'm increasingly a little concerned, like, I would have said Cobra Kai, a huge hit, all the shows that Netflix picks up from syndication, huge hits, but outside of Stranger Things and Squid Games, which you can't discount Squid Games, in Netflix, it doesn't feel like the shows are really breaking out in the same way linear TV did. I get like most streamers haven't had breakout-breakout hits but it does concern me that it seems like all the breakout hits come from linear TV, and if Netflix can't have those breakout hits, ex Squid Games, ex Stranger Things that do speak to maybe streaming just doesn't stick the same way linear TV did.

Alex: Yeah. Obviously, there are two ways to think about that - is it a company-specific thing or is it an industry-specific thing? And thinking about what that means. Again, as I kind of was referencing a second ago, these thoughts need to inform your strategy. A good example is we don't want to do sports because we'd rather focus it on-demand and we don't want to have to do advertising. Well, now, you're introducing an advertising tier so you're going to be in the advertising business either way and the on-demand thing is somewhat of a fallacy to your point, if you put a show out and the vast majority of the consumption happens, maybe not at 9:00 p.m. on Friday night, but the vast majority of the consumption happens in a relatively small window.

Basically, what I'm trying to say is you need to take these signals and rethink some of the thoughts that you have about your business. It's funny to think how Netflix even came to be in terms of the industry-standard practices on things like windowing and what they were willing to do with their content, now it's time for Netflix to probably explore some of these ideas and at least think about what they mean. I've always liked, I think it was Goldman who said, "If you can't get a mark on something, sell 10% of it and then you'll know what the value is basically." They should be pursuing some of these ideas, what is the value of Red Notice? Was it actually a smart idea to make that or not, and obviously they can measure some of these things internally, but it may be worth testing theatrical, and you may need to reconsider live and sports and news.

Some of those things may not be intelligent to do, but they're certainly worth at least thinking about as you go, hey, we have a massive global sub-base, nobody can rival what we do, but again, Formula One, is there a rationale for having a much deeper relationship there? Is it worth thinking about that question and where does that get you to? Are you some version of ESPN/YouTube? You have interviews. There are a bunch of different ways that you can go from there but need to be having these conversations.

Andrew: This is the fun thing about the podcast and just talking media with smart people because when you said that, I had like 15 different questions and thoughts and ways that we could go in response to that. One thing you said which I haven't heard someone say before but I do think is interesting. You said Red Notice which, correct me if I'm wrong, is Ryan Reynolds, The Rock, Gal Gadot film. Yeah.

Alex: I think I got the name right, yeah.

Andrew: Red Notice. Go sell it and see what it's marked at. It reminds me of Spotify. Spotify, for years, has said, "You've got to trust us." We see the data in buying and releasing our own podcast and you've got to trust us. We're leaning on users heavily because the internal data we have is off the charts. When the stock is going from 100 to 300, you get that trust, but then when the stock comes back from 300 to 100 people look and say, you guys are investing a lot of money into podcasts and we're not really seeing it in the financials and Netflix in the same way, right? When the stock goes from 100 to 700, they get all the trust in the world. And now that the stock is going from 700 to 200, people start to look and say, "How much did you guys pay for the Knives Out sequels? That's a lot of money to pay for the Knives Out sequels. Why aren't you releasing these movies into theaters?"

For a long time, I have thought, "Release it all at once and let people binge it" model, I thought that it works for some shows but I think Disney gets a lot more of the Marvel shows that they release. They get a lot more buzz because they do it weekly. I can go listen to a podcast recapping, hey, here's what happened in this episode of Moon Knight, and let's speculate on what's about to happen and what that means. Like, I do think there's some brand value there. Anyway, I don't know where I'm going. Let's talk, actually, Netflix.

Alex: Just out of that point, real quick. I mean, it's a good example, theatrical. They don't have to pursue it for the sake of financials alone. It's the idea of, to your exact point, people like going to the theater with their friends and seeing Doctor Strange 2 on a massive screen with great sound, with people that they want. These experiences have value for the brand and for the customer outside of the fact that you're going to scrape five dollars a ticket from doing that. It's that kind of thought, right?

Andrew: You mentioned Doctor Strange 2. Let me go to a completely different point and ask the most important question that will be asked on this podcast. I've heard you do not like Marvel?

Alex: Who told you this?

Andrew: Somebody on Twitter. I've talked to you for multiple years now, I've known you, and I can't believe you can be a Disney shareholder and not like Marvel.

Alex: I shouldn't say I don't like it. I have had very little exposure to it. I've seen Iron Man, I think, and maybe two or three others. I like them. They're fine. I like Pixar stuff a lot more. I like The Office. I like sports.

Andrew: Hey, nothing wrong with liking Pixar stuff. I love Pixar stuff. But you not liking Marvel reminds me of, every now and then, there'll be somebody who inherits a sports team and these sports teams will make money and the value goes up and they're like, yeah, I own the Knicks, but I just really don't like basketball. Gosh, you hate the product and you just made money off it.

Alex: The scale of ownership in those two examples is slightly different. I'm slightly smaller. I don't own the entire sports team, maybe one day though, maybe one day.

Andrew: Lots of different areas to go but one of the big news recently is Netflix is exploring and I think it's pretty clear at this point that they're going to launch an ad-supported tier. Disney, I believe it was this morning The Wall Street Journal said, hey, we're all systems go for an ad-supported tier for Disney+ by the end of the year. So both of them are moving to ad-supported tiers. Disney, that makes total sense, right? They've done ads for years. Netflix is interesting. For years, they said, we don't do ads, we want to be HBO. We want all of our money to come from people to say, I love your content so much, I will pay ten or fifteen dollars per month to get it. When you introduce ads, there can be a little bit of weird dynamics where ads kind of encourage you, it's the clickbait model, right? You just want eyeballs, maybe, so lots of different stuff there but what do you think about Netflix's move into launching ad-supported?

Alex: I'd say-- skeptical is not the right word. I'm just uncertain about it all and I'd like to understand it more and I think, part of the Netflix thesis or owning the company that's been a bit of a struggle for me is understanding things like international ARPU, which seems someone out of whack with what you'd expect given purchasing power and those considerations. So, I mean, it obviously makes sense in terms of making the product more accessible for a customer who was unwilling or unable to pay a few more dollars a month. I do worry about the impact it has on the product. A good example is I was watching a show on HBO Max the other day and the show was created without the idea that there would be natural adverts. It used to be written or at least they'd be shot with the idea that, hey, they're going to be an ad break every seven minutes or whatever it is.

Now, I'm sure they tell someone or have a computer say, hey, in this 30-second window, find a place to put an ad. Sometimes there's not a place to put one and it's just kind of right in the middle of someone talking, it screws up the captions after the ad. You see the same ad six times during the episode. So, the point being, and that's not unique to HBO Max, you see some more things like that on Hulu and I'm sure you'll probably see it on some of the companies who are just introducing this for the first time. So, it's thinking about those things and just being really thoughtful about the trade-off of what you're creating when you start doing this. Obviously, them becoming very much off the cuff and saying, hey, we're going to do it now after being pretty clear for years that this is a key point of differentiation relative to the industry. That's certainly concerning.

Andrew: Let me push back on two things. So, one, you just mentioned seeing the ad six times in a row. I hate it. We all hate it. I'm with you. It's 2022. Like, how do these people not know this? But at some point, you have to match the ad tech gets better and they can run ads where they're not showing the same Tide Detergent ad 15 times in a row or something. You have to mention that. So, I'm with you there. It's awful, but they've got it fixed that at some point, Jesus Christ. But I do think there is something like, if you're Netflix or any of these guys, you are in a war for attention and you're in a war for subscribers and I think anything that can get you more subscribers, I think it's good for your business. And if that's, hey, we need to offer a free tier that's ad-supported to get an extra 10 million people, I think it makes all the sense in the world because there are extra 10 million people, you'll get money from them in ads, people can still pay up if they want to remove the ads, and that does lower your overall unit cost. Right?

If you have 100 million people who are watching a show and it costs 100 million, that's a dollar per show, but if you get an extra 10 million people who are on there because they got the free ads, that lowers your unit cost. It just helps you hit that skill flywheel. So, I think it makes sense. And then, I also think it makes sense to build that muscle up because as you were saying earlier, if you're ever going to get into sports, you need advertising to pay for sports. There's just no way you can have NFL football with those ad breaks and maybe they stick to, "We never get into sports." Maybe they don't, but it's probably good to build that muscle and that habit for a bunch of different reasons. I don't know. Do you want to say anything there?

Alex: Yeah. It'll be curious, the devils in the details with a lot of this stuff. I would be curious to see what it actually looks like. We heard yesterday at the upfronts, Disney basically said Disney+ left four minutes of ad-load per hour on the ad-supported tier versus linear. I think their data has it at like 20 minutes an hour or something. So, a very significantly reduced ad load, and the question that pops in my mind is - what is the pricing look like on that and how much ARPU can you get added from the ad-supported tier.

You have different people saying different things about this, but this was a big promise to the VM BPDs when they launched was, because of the nature of the product, the advertising is going to be higher CPM and we'll be able to price the product lower and you look at something like Hulu Live, the price went from $50 to 90 bucks or whatever over the past handful of years because that theory was at least somewhat flawed. It could just be an offset from the lower ad load, and obviously, the pricing could be higher and you end up in the same place, so the product is better but it's just a question I have. I mean, what are they going to price this for a product if you can only advertise for four minutes an hour, that's not going to drive much of an ARPU, but we'll see.

Andrew: I don't know if you follow them closely but Warner Brothers Discovery and especially Discovery, they haven't talked to it too much recently because you're going through a hundred billion dollar merger, it turns out you're more concerned with synergies and integration and getting improvements up. But especially when Discovery+ first launched, they had to add the ad and the ad-free and they came out after they launched, they were like, we're actually making more money from the ad-supported model which was like the price that I believe it was half of the ad-free model. When you get these targeted advertisements, we can't believe the rates and how much people will pay for them. They haven't talked about that too much, but I do believe, like, hey, if I'm subscribing to Disney+ and they have my credit card information, they know when I'm watching, they know where I'm watching all this sort of stuff, it does make sense that they're going to be able to hit you with some targeted ads that are worth a heck of a lot more than when I turn on NFL Sunday on the TV and they hit me with 15 truck ads in a row. And I'm not even a car driver. I don't even own a car, right?

So, it does make sense that they should be able to get pretty good money for that. Or, I would think of something like Disney is advertising the next Doctor Strange product, right? And they're going to put that in every freaking ad break during NFL Sunday or whatever show you're watching. But maybe if they see, hey, Andrew already saw Doctor Strange, maybe they can dial back all the ads and hit you with something else that would probably cost less than the aggregate but it's probably better for their brand. So, I think it does make a lot of sense.

Alex: Yeah. I mean, to your point, Discovery has said that pretty consistently now. Hulu has said similar things over time. It's clear that the economics are clearly working. So it's something you have to at least consider especially, again, if you can do it on a basis where we are out of the insanity of 20 minutes of ad load per hour and it's a very reasonable ad load and tastefully done then, yeah, I think that's a very compelling option for consumers so you would be crazy to not at least think about how to participate there.

Andrew: I've got so many notes. Let me hop to something different. Just this morning, an article came out in the information, it was talking about the rising turn at Netflix. I did think that was interesting because a lot of the concern with Netflix is they're not adding subs anymore, they're not going to take over the world. We're not in this scenario where every person in the world has a Netflix account. But rising turn is really concerning, right? Because it shows that the competitive products, specifically mentioned in this were Peacock and Paramount Plus were gaining a lot of steam and in part because I think Paramount Plus you could get access to the Super Bowl through it. And Peacock, you could get the Winter Olympics which were a disaster. But people still care about the Olympics.

There were a lot of different interesting angles to that, right? Sports seem to be driving signups for a competitive product and competitive products are making inroads, but I was surprised. For years, the thing with Netflix was people said, hey, you pay $15 per Netflix, they could raise that price to $30 tomorrow, and they wouldn't see any turn. They didn't see a lot of turns when they increased the price last year or a couple of years ago. Now, it seems like the turn is getting to them. So, their ads are coming in lower, it seems like turns have increased, too, so, how do you think about that?

Alex: Well, I think we've seen data, kind of, for the industry that shows the turn is on the rise, which again, this all makes sense given the quality of the offerings and what economic or not companies are there are numerous products out there with very attractive price points. And if there's content on there that people want, then they're willing to sign up for a month or two and then hop off and I think that's kind of just how it's going to be. In terms of how you defend yourself against that, I think this is where Disney with the US bundle looks pretty smart right now. There have been many people, one of them has been ESPN off for a long time. And I think what you're starting to see is as you look to build a DC offering, at least to complete one that can keep people's attention across the entire calendar, it's hard to put out a new Marvel show or movie every single week. They can get relatively close to doing that especially if they stagger the releases of the episodes, but it's very nice to have content that is going to drive subs and drive retention and I think a lot of the content they have on the ESPN side does exactly that.

Again, it goes back to what I said earlier. I think a lot of these companies want to figure out almost who they're trying to replicate from the old linear US TV world because there are a lot of important lessons from the different strategies that existed there. And if you're not going to be in sports then that kind of informs what you need to look to. And it also informs probably the pricing strategy for that product and the reliance on something like an ad-supported tear. So, for Netflix specifically, as we know and as you already mentioned, the hit rate for the IP seems quite low relative to what they're spending, maybe they should ask themselves, was letting something like The Office go, should we have paid any price we had to basically keep that IP? Or Friends, whatever it may be. In hindsight, that would have been an intelligent decision as opposed to taking that risk.

Things like movies. Does it make sense to spend 200 million dollars on a movie given the nature of their product? The answer may be, yes, but how can we ensure that it's actually going to be anywhere close to the hit rate of a Marvel type of movie, which is basically impossible to do when you start with a blank sheet of paper. How do we monetize it? Is there value in having a run-in theatrical before it shows up on our service? It may actually be additive to do that. But they have to think through these things and change what they're doing, it seems like. But they start from a very strong position, we should also add that point too. They have a massive recurring revenue base, they have a very strong subscriber base, and obviously, a lot of spending now.

It's funny to think that Disney came out on their call and said, our target was 33 billion to spend for the year. It's actually 32 now. It's almost a small enough number that it's like why would you even say that? And I think the reason why they're saying it is because everybody recognizes we're at the point of the cycle where you have to show that you're spending cost-effectively and someone like Netflix needs to actually do that.

Andrew: It is just funny like, a couple of years ago, how much more can you pump into spending on streaming content? And now, it's how low can you go? Again, so many places I want to go and I want to talk about ESPN a second. But you mentioned the Disney bundle, right? And how the Disney bundle reduces turn and the Disney bundle for those who are listening, it bundles Disney+ plus the Hulu, not the Hulu Live product, but just the Hulu general product plus ESPN Plus and it's a big discount. I think, if you subscribe to the three of them, I'm close on the numbers, maybe like 30 or 25 dollars per month if you subscribe to three, individually. Subscribe together, it's like $15 per month, right? And it does strike me. I get that bundles work, definitely get that.

But the two things that are interesting about that are, one, you're basically just starting to recreate the old cable bundle. Now, it doesn't have live sports, it's a lot cheaper, but you're just recreating the cable bundle. But the second thing that's interesting there is Netflix is a standalone product. One of the nice things about Netflix is you subscribe to them and they're basically a bundle in one thing, right? You subscribe to Netflix and you got everything on linear TV, basically except for sports. And then for HBO Max, Warner Brothers Discovery, right? They just did the merger. And as soon as the mergers close, they cancel CNN Plus, they say, hey, we've done these, we tried to roll out a food plus product. None of it works. HBO Max is going to be our product, and, at some point, at least towards the end of this year, they're going to combine Discovery+ and HBO Max into one product.

It's just interesting that Disney is rolling out this bundle, and those are separate brands and everything, so I guess it makes sense. But Disney has their bundle and everyone else seems to be going, hey, let's merge it all into one. We don't want a bundle. What do you think about that?

Alex: Well, I think a huge part of it is just an accident of what happened with Hulu and where they're sitting now where Comcast is alone at third and we're all waiting for this to finally come to its end. Something that should have already happened by now, but they're both kind of sitting there and without any signs of moving. So I think that's a massive part of it because rolling everything into one product would have been a huge headache in terms of how to think about that. I mean, Hulu already has a huge headache, anyways, with all this stuff. And Disney effectively killed the brand when they went internationally. I mean, the brand doesn't have any relevance internationally anyways, but they basically said, "Why the heck would we consider taking this brand internationally and adding more value to this product when we could just do it in a different wrapper?"

So, I think that's a massive part of it. I do think it's an open question once we finally get this resolved is the plan to more tightly integrate those offerings. I think the answer at least from a consumer side of it all is it has to be much easier for them to be kind of one product in terms of log-ins and ability to access the content. You see that more and more, right? If you're a Hulu user, you'll frequently see titles when you open the app. Kind of the most prominent titles are sports and its content that's coming from the ESPN Plus side of the business. So, I think they'll continue to do that where Hulu content will be featured on Disney+ and Disney+ content on Hulu, but I think they're effectively getting closer to that end state. Whether or not they ever actually do it, I guess is just a question of how much.

For example, with Discovery and HBO Max, I mean, obviously, Discovery+ is a fairly small product but there are headaches with actually doing that transition and there are also questions if I'm signed up for Discovery+ and I don't want the HBO content, you're going to roll me into it and charge me 2x what I was paying before, that's going to piss some people off. So, there are risks associated with doing all these things, but I think they effectively get there at the end of the day where it's pretty tightly integrated.

Andrew: One thing you said earlier that I've thought about. Was Netflix okay to let The Office leave? So, they let The Office leave, they had this weird thing with Peacock where for a year they shared and then now The Office is exclusively on Peacock. And for a while, Peacock was basically like only The Office, which was kind of funny, but it's an interesting question. How much can just one TV show reduce your turn and pay for it but one thing that strikes me about Netflix, I don't know if there's anything here, but they brought Seinfeld on basically to replace The Office, right?

Now, Seinfeld's a little bit older but widely regarded as one of the best comedies of all time, it's a classic, people thought, oh, it's something new, it's going to introduce you to a new generation of viewers and I just don't feel like it's broken out in the same way as The Office did. So, is there anything to read there, or is it just different shows, different quality, and a little bit of different humor? Do you read anything about that?

Alex: No, I think it's a good question. I mean, maybe the answer is partly that as these other offerings have come to be and as the quality and scale of the content spend have risen across the industry, maybe the quality of the alternatives was just, you know, The Office was competing against easier competition than Seinfeld maybe. That can partially be the read. I look through the numbers and see Peacock had 13 million paid subs, it's a business with two billion dollars and kind of run rate revenues call it and a company like NBC have to figure out what that means and where they're actually trying to go long term and as someone who owns Comcast, their strategy seems a bit interesting because they're-- I'd argue on the margin they're stepping away from some sports rights, granted they get a massive EPL renewal at a price point that nobody thought was going to happen.

But they shut down NBC Sports, they kind of you EPL to try to drive Peacock but at the same time, it's not a really prominent thing of what they're doing. They're still monetizing it through USA Network and linear television. It's just really how are you going to get to the other side with what you're doing here? I know the Legacy companies now have kind of a talking point about the ability to monetize across various channels and this type of idea is just important to remember that that type of thinking also kind of got them to where we are today. So, it's not a strategy without at least some risks or thoughts that have to be considered.

These companies have all effectively said, hey, we're very flexible and we're not going to win the spending war and it's just thinking about what that actually means. And again, what kind of strategy does that almost push you towards? What can you actually do if that's the way you're going to approach it? It's very hard. If HBO Max is going to have sports rights on there, you need a lot of sports rights. You need a way to present it in an intelligent way. It's really it's going to be odd if you pull it up and it's like, hey, here's one hockey game, and that's it. How are you actually going to present it?

That's why I've always thought ESPN was a really interesting way at least at the start and granted, they may have been forced out because of Hulu, they couldn't really integrate in a way. But it made it very, very clear to people what the product is and what you're going to get from it. And now it's at a place where it obviously helped by the bundle, but it's out-of-place where it has over 20 million paid subs. And the ARPU is not insignificant and will continue to go higher over time. It's just an interesting place to start from, I don't know where the end game is there, but it's much more real than just saying, hey, we're going to take Paramount Plus and just throw a ton of sports rights on there. It's unclear to me if that works nearly as well.

Andrew: Well, that's a great transition. I want to talk to ESPN, but I do just want to laugh. When we're talking Seinfeld versus The Office, I pulled up Netflix and if you search The Office, the fourth thing that pops up is Seinfeld, and if you search for Friends on Netflix, the second or first thing that pops up is Seinfeld so they clearly know that there was a hole to fill and I just think that's kind of interesting.

Let's talk about ESPN because ESPN is one of the most hotly debated pieces of Disney. A couple of years ago, John Malone said they should spin ESPN off. I think, John Malone consults private equity and runs it for cash flow, which is kind of interesting. Now, it seems an interesting part of the bundle, but I look at ESPN Plus. Last quarter, the ARPU for ESPN plus if $4.73. I haven't looked at the numbers in a while, but I believe ESPN and the Legacy bundle get $9 or $10 per sub, right? So, every sub does not watch ESPN, so when you think about the subs who actually watch ESPN, now, at this point, we can talk about the bundle as pretty much a sports bundle, so probably more do than it used to.

But I do look at ESPN, and I say, okay, yeah, it's a nice product. They're putting stuff on there. But the UFC fights you have to pay pay-per-view for them and I do think if at some point you spent, I know Bob was seen on the last earnings call, hey, we think ESPN has a clear path to even if linear goes away, it's being directed and I just don't know like four dollars per month is not going to cover, hey, we're shifting to NFL or NBA rights to ESPN Plus. So it's just in a weird spot. So, I threw a lot out at you again, I love this subject obviously, but I just want to turn a few. ESPN as we go into a direct-to-consumer world, how do you see that evolving?

Alex: Yeah, well, they may say it's a clear path and maybe it is, but the amount of time for that path to unfold is probably the most important question. In this quarter, the pay-TV numbers were really concerning for a while. I can't remember the dates now, but the pay-TV numbers have improved pretty significantly, which is a massive tail win for many of the players in this space, in terms of, obviously, cash flows and the ability to take more time to transition from linear to D2C. If you look at the actual numbers, I mean, linear for Disney is a 25 billion-plus revenue stream and has actually been growing a little bit over time, it hasn't even been shrinking yet. And it generates a significant amount of profitability for the company. So, to make that leap is going to require something from the D2C side not just ESPN Plus on its own, but the collective assets, at least in some way, it has to be somewhat on par with that and justify doing it.

The other really important point in my mind is, technologically, even in a market like the US, I just don't think we're there yet. I mean, go watch a game on your TV through Peacock or ESPN Plus, whatever it may be, the quality of the stream is just not equivalent. If you live in a good place with good internet, the quality of the stream is not equivalent to turning on CBS and watching Sunday football.

Andrew: I watched the Super Bowl on Paramount, I downloaded it and subscribed to it literally just for the Super Bowl and the service was horrible. I think halfway through the third quarter, there was like a five-minute pause in it. It was not good. I don't understand why they can't figure it out, but they cannot figure it out for some reason.

Alex: Yeah. So, I mean, I think those two factors pretty clearly suggest that outside of a significant change and the pace of pay-TV subject lines, obviously, a very important variable. But outside of that, I don't think you can clearly show how this happens in the next two, three, or five years. And if we're a long way off which is from my perspective, my thought for a long time has been a company like Disney coming out and saying, it's doomsday, we're taking everything off linear is a very significant point for the industry, and from a competitive perspective, it has huge ramifications for a lot of their competitors. But you can only do that within reason, you can't kill yourself in the process.

Andrew: I just don't think they can do it because it sounds so simple, like, hey, you guys took the new season of Arrow and put it on your DTC show. It sounds so simple, but you don't have any commitments to Arrow, you can cancel that show tomorrow if you want to and nobody's going to notice the write-off. Where, these guys were paying a billion dollars a year for the NFL to just say, hey, we're canceling the thing that provides all of the money. If you think ESPN, $10 per month per sub, 65 million subs, that 650 million dollars in revenue ignoring advertising per month coming in from ESPN. Say, hey, we're going to forego all of that, because that's what you would do if you took NFL and put it on ESPN Plus. Every provider would cancel their contracts with you.

So, forego all of that and put it onto ESPN Plus, the losses would explode. I just don't see a path to it and these are contractual commitments. And, by the way, the NFL would probably be pretty pissed because they say, hey, we are getting 30 million views per game on ESPN, and now ESPN Plus, we're going to get 10? That's 20 million viewers less. They're not going to be happy even if they're making some money.

Alex: Yeah, two points there real quick. The last point you just made, we'll see how this test-- I guess not to call it a test. It's a significant commitment, but we'll see how Thursday Night Football goes on Prime as an exclusive. Thursday Night Football has been on Prime for a number of years and I haven't seen the numbers lately, but there was a period of time where if you looked at the numbers that came out afterward, the linear viewership compared to what Prime was reporting was 10 or 20 to 1. Granted, it wasn't exclusive, so people didn't have to go to that window, but there was no real interest in consuming it that way when the alternative was turning on Fox or turning on CBS. So, that's a big problem that still needs to be addressed, and again, some of it's just technological and until people have much better internet, much better TV, or whatever after using, that problem is going to remain.

The other thing I'd say is, to your point, ESPN linear is north of 10 billion in annual revenue, and even with ESPN plus it's about a billion a year, whatever it is. The gap there is just so massive at this point that we're just not really close. In the interim, they're kind of complementary in some ways and it gives Disney interesting opportunities to commit to rights deals where they can use things in a way that's more expansive and more unique and very difficult for others to do. So that's really helpful. But, to your point, from an economic perspective, I just don't think we're really anywhere close to this making sense. So, the way you would get there in the short term would be as if you were forced to. If it gets back to 5, 10 percent plus pay-TV sub declines, then that would put things in a different place. That would be very hard for the whole industry though in terms of the rights commitments.

Andrew: You framed it for me a little bit because my next question was going to be on Amazon Prime. Because I believe this year, the exclusive Thursday Night Football stuff.

Alex: I'm pretty sure it's this year. Yeah.

Andrew: Yeah. Netflix for years and I believe Netflix is not the only one, Greg Maffei said this for a while when Liberty was looking to buy RSNs, one of the issues with getting into sports is you pay these high fixed costs and you have a medium-term contract and at the end of it, you were either underwater or if you were earning a profit, the leagues are going to come and say, okay, cool, we'll take all of that profit and there's always another bidder for it. Right?

So, Netflix said this, Liberty said this, and a lot of people have said this. So I do worry with ESPN, again, there are a lot of bidders who might not be economic. Amazon is willing to let money on fire as they get Prime going because, A, it lures people into Prime. They can probably monetize better than everyone because they know your purchasing history so they can really hit you with advertisements at the moment. But, Apple, it looks like they're going to acquire Sunday tickets for two and a half billion. So, I look at ESPN and say, not only do they have these fixed contracts and it's going to be really tough to make them move from linear to streaming just based on the ARPU problems that we've talked about. But the sports leagues are probably going to extract all the economics from them in the end. And, by the way, maybe the sports leagues are going to extract more than their economics because you've got Apple and Amazon.

Again, it comes back to the thing we talked about at the beginning. You've got these giant companies who might be willing to burn a billion dollars per year on sports or media in general because it fuels the rest of their business in interesting ways.

Alex: Let's start with the idea that that is actually happening. Well, there are puts and takes, they're kind of ascending and descending, some of the Legacy players in my mind. Again, mostly on the margin, but their ability to spend and keep spending is insignificant, they're less comfortable doing it especially if you're, again, NBCU and you can't really do anything with Peacock, at least at this point. It needs to be significantly more successful for you to feel confident committing to those rights deals.

Amazon and Apple specifically, and Apple is making noise now about potentially trying to get the NBA rights when they called for renewal. So that would be, obviously, a massive deal, and Sunday tickets a massive deal as well. It's funny, this is kind of like the Marvel thing, the Marvel fatigue. We've talked about this for ten years, and it certainly has happened in some ways, and on the other hand, if you looked at the cumulative control of sports race in the US from the big tech companies, it's probably some low single-digit percentage of all the live programming that's consumed in a given year from sports rights. So they're still incredibly small players, but to your point, that can change over time. It is interesting to think about this idea of obviously in the media space and the D2C space, we're all talking about capital cycles and, okay, if everybody is spending like crazy, now, we're going to the other side of it where everybody's going to try to justify their spend and show that they actually have a good business.

Listen to the Amazon call and it seems like they're going through a version of this as well in terms of thinking about the investments they've made on the e-commerce side and trying to justify that as we come out of COVID. So, we'll see how a new CEO at Amazon thinks about some of these areas. I mean, to your point on the Lord of the Rings, they spent a lot of money to get that property and we'll see how they think about the ROI on that spend. Maybe they just absolutely don't care or maybe they don't care until they hit a rough patch and then they said, hey, we do need to care about the ROI in these things. Maybe their ROI is good, but I just think it may become more of a consideration. So, we'll see what the viewership looks like and their willingness to become much more aggressive.

Obviously, as we both know, a lot of these agreements are long-term and it's almost the problem that I have or the question I have for a lot of the other competing services with ESPN Plus, which is how do you feature the content in a way that convince people to go there consistently such that you can get the eyeballs on this content to justify the ongoing spend? And, again, we'll see how many people they can convince. I don't even know how you go to the website, do you watch it, and I guess you go to the Prime Video app. So, those are headwinds for someone who's 55 years old and has absolutely no idea how to get Prime Video on their TV. If they even have a connected TV.

Andrew: I've heard from a lot of people like, hey, my dad called me up and wanted to watch the game, but I had to like walk him through downloading, opening an app, and stuff. At some point, these problems go away, but in the near term to medium term, they're paying a lot of money for these things. It's probably a small percentage, it does that up. I'm laughing because I was prepping for my next question and I pulled up Rotten Tomatoes, and the front of Rotten Tomatoes - Fire Starter, which is a horror movie where Zac Efron apparently plays a dad which has a little out of my girlfriend's on fire, you might light me on fire. I don't know if I'm an attractive man. It got a 12% on Rotten Tomatoes and streaming on Peacock.

So, the quality problem is not limited to Netflix but I was pulling up Rotten Tomatoes to ask-- we mentioned Marvel's fatigue. People have been worried about this for years and it hasn't come to pass but I love Marvel. I go see every movie within the first week it comes out. I watch every TV show. I love it. Love it. Love it. Love it. But I am starting to worry about it a little bit more the fatigue and maybe that's because I didn't like Doctor Strange or The Eternals. But I look at it and I would say two things. Doctor Strange, Eternals, Black Widow - three of the past five Marvel movies, and they've been some of the lowest-rated Marvel movies to date.

Now, to be fair, Spider-Man, No Way Home, or Multiverse, or whatever it was, was probably the highest rate of Marvel movies of all time. So they're still putting a good product. But three of the past five, that's not a great trend. I worry about that. And then number two, you know, I think Star Wars was just absolutely mismanaged. But in hindsight, people do say, oh, maybe there was a little Star Wars fatigue after Disney bought Star Wars. They released so many movies. I think it was more mismanaged than Star Wars fatigue because I do think people would take Baby Yoda and injected it into their veins at this point if they could. But, now, I've got two evidence, right? Three of the past five movies hadn't been great and Star Wars seems like there was Star Wars fatigue. So, do you worry about Marvel fatigue at all?

Alex: Yeah, I think it's something I'll always be cognizant of. And, obviously, it's one of those things as an investor, especially a long-term investor that can be somewhat difficult to monitor, and as you're saying, maybe the best way to do it is to look at things like box office data or Rotten Tomatoes scores. I think it's something I'll always be thoughtful about, it's a massive massive risk for this business. Again, I think it's what they effectively went through in the late 90s and it led to a lot of the decision-making that created the current Walt Disney Company that we see today.

You think about what this entity looks like without Pixar to Lucas Film and Marvel and it's just a completely different company with a D2C offering, assuming a parallel universe where the ability to drive huge subscriber adoption very quickly in my mind, doesn't happen. I mean, it's a completely different product if that happens. So, I mean, I think it's one defending those franchises and then, two, hopefully, over time obviously they're expanding within these franchises especially Marvel and Pixar's clean slate for whatever content they can come up with, but maybe look to find other areas to continue to grow which everybody wants to do.

Bob Iger said something interesting about the Fox deal which people have different thoughts on it. But he basically said, we have an ability to spend something on this that Brian Roberts can't match because of our ability to monetize across various channels. We have a competitive advantage there given our asset base and I think that's still true today so they can go out and find things that'll probably be added to the long-term results.

Andrew: With Marvel, I do just worry. If you go back to the front of Marvel, right? It was a story about Tony Stark, Robert Downey, and Captain America, and it was building towards The Avengers where they all came together. I know you don't like Marvel. But I do worry now, like, they've got multiverses, and I've seen every movie and I have no clue where in the timeline they relate to, you've got multiverses, you've got all these hanging pot threads and I worry, it gets too expansive. It reminds me of Game of Thrones, right? Everybody loved it. But every little incremental bit of story, you start to get a little more complex, and then all of a sudden you've got this Gordian knot that you can unwind. And the quality goes to crap and the last season of Game of Thrones widely reviled because of exactly this problem. Partly, they had to rush it but partly the story was too messy and they had to clean it up and about.

Alex: Just to add. It's part of the reason why I'm not necessarily a fan or someone who hasn't tried it, right? Because the sense is someone who's not intimately familiar with it is it's too hard to get in, basically. You're going to watch a movie and you're in the theater, and people are laughing at something. I have absolutely no clue what that was in reference to. It's a hard problem to solve and something that obviously needs to think about as they come out. These shows feel like they're evergreen, they're completely new things. So I should be able to watch Moon Knight and have some clue what's going on, or at least get into the story. So obviously, they have to think about that as they create these shows.

Andrew: Moon Knight, you could have, but something like Loki or Hawkeye, you had to watch six shows and movies. Doctor Strange - if you went and watched Doctor Strange and you hadn't watched Wanda Vision, Doctor Strange, Avengers-- so, and look, Marvel, it's big with Disney, but you don't have this problem at Pixar. You don't have this problem everywhere else. So, it is a unique problem, but it is one.

I know we're running long, obviously, I love this stuff. I have two last questions for you. One Disney-specific. We've mainly focused on media, people forget Parks is a huge driver. It's one of the most unique assets out there and everything. I just wanted to get your thoughts real quick. Parks, we can sum it up. It is booming right now. A hundred percent occupancy, massive pricing power. They don't even have a lot of international travel, booming, booming, booming, but there's been a lot in the news with Disney losing their special district status and all this sort of stuff. I don't want to bring politics into it but just as an investor, when you see this noise about Disney losing special districts status for kind of their crown jewel, which is the Orlando Parks, how do you look at Parks from that lens?

Alex: I've tried my best to understand exactly what's going on there and it's always hard when there's huge political-- especially at the moment. There's huge political back-and-forth, in terms of all this, and obviously, the bill associated with it all. All those things. As best I can understand is this is effectively awash, it's probably not good for either party. I find it funny to think about how these things even come to be which makes a lot of sense at the time when they did it. Obviously, it's been a huge boom for Orlando. It could have been a place like Gainesville where I went to college or smaller cities around there and instead, it's one of the most important cities in the United States, largely because of that. I don't think it's particularly relevant to the long-term results of the business and I would assume they eventually just fade away a little bit from the front pages of the paper. It just becomes a reasonable political corporate negotiation like it should be.

The results in the Parks business have been obviously astounding and like anything with a company where you're planning on owning it for the long term, it's a balancing act. I do worry at times about pressing the pricing lever too hard and just being thoughtful about those things and especially with a company like Disney where you can find an endless number of blogs where people are literally writing blog posts about they moved a sign in Epcot. So there are really, really super fans, but you'll be thoughtful about how you monetize and kind of the price-to-value trade-off that you're asking from people. So it's something I think you need to be cognizant of and I don't want to see double-digit per capita spending growth or at least if it's price-driven, obviously, I just think you got to be very thoughtful about this.

Andrew: It's a really interesting one because you do have to remember that if you're a four-year-old and you go to Disney, could Disney probably charge double the price and get more super friends going to Disneyworld. Yeah. But at the same time, having that four-year-old go to Disney is almost a customer-acquisition cost, right? That's going to be paying dividends 30 years down the line and everything. So it's a weird thing. And if you really start gouging people, it starts to impact the brand. But there's always going to be pricing power at Park in my personal opinion.

The last question, and then I'll let you go because I realize we've been running quite long. Look, everything in investing is opportunity cost and there is the question which we started the whole podcast with, right? Is media investible versus everything else? But I know you are along Comcast, I know you're along Disney, I know you're on Netflix, so you are heavily invested in media and it just does strike me when I look at the three of them, right? Disney, we talked about impossible to kill, great IP. Netflix, still the largest D2C service out there, no longer has a bigger ED than Disney, but it is trading more expensive than Disney, but it is a pure-play D2C already scaled business. And then you've got Comcast, which has a cable business, which I know you and I love cable businesses, probably trades at a discount to the sum of the parts.

I was just looking at my model. If you think Comcast's cable business is worth what charter traits for which Comcast is a better-managed business. It produces more profits, probably a little bit. But if you just made that assumption, you would be buying Sky and NBC for 70 billion dollars if you made that assumption and they probably overpaid for Sky, but they paid almost 50 billion for Sky and NBC. When Park was open in 2019 did about 9 billion in profits. So, you can say you're getting a really big discount at Comcast, right? So when you look at those three, how do you weigh the opportunity costs between all three? Because I know you're along all three, but how do you weigh the opportunity cost?

Alex: Yeah, these discussions are very, very difficult. And one thing I really try to do, first of all, is step back a little bit and you framed it in a very good way. Basically, if one of these businesses basically unkillable for lack of a better term and it's going to generate at least reasonable returns for me, that's a massive part of thinking about. Okay, this one's a fifteen percent IRR, and this one's 12, but the one that's 12 is the business that I think it's unkillable. Obviously, that has to be accounted for in some way. So, I think Comcast is probably the one that I view as being particularly cheap right now, particularly if they take advantage of, I use the term patients/dithering in my last article about what they're going to do with NBCU. But they're in a really, obviously, valuations as well across the space of an absolute smash, but in terms of what they could get for that asset after disposing of the Hulu stake, it's something that could put them in a very interesting spot in terms of a company if they have an equity interest going forward.

I don't think we've seen anything yet to suggest that that's going to happen in the immediate future, but I think we'll probably hear more about that in the coming months, especially, one thing I was looking for this past quarter was a little bit more difficulty on pay-TV numbers, which would make people a little more skittish. It ended up coming in the other way where the numbers were actually pretty good. So, I think that may be delays that slightly but I expect activity eventually there, what form it takes, we'll see.

Now, Netflix again is another one where I think if the thesis plays out as expected, the IRRs on that in my mind will be quite a bit higher than what you probably get from Disney. But the trade-off to your point, is I feel incredibly well about what Disney ends up being long-term. Not that there's nothing that can kill it and the Marvel risk is probably one of the most prominent examples of that, just that IP losing its relevance. And then the other big one is as we go through the linear pay-TV transition to what looks like a different version of the bundle at some point and what does that actually mean for the economics? It might mean that they're better, but it might take 10 years to get there and they're only 5% per annum better. Do you know what I mean?

Andrew: Yep. Yep. Nope, it makes total sense. It's a tough one. Somebody tweeted recently, they were like, look, here's my secret to market timing - when the most attractive thing in the market looks like Comcast, that's when it's time to sell and raise some cash and when there's a lot of stuff more attractive than Comcast, that's when it's time to start buying.

The funny thing is right now, I think there's a lot more attractive stuff in the market than Comcast but Comcast looks incredibly attractive to me and on a risk-adjusted basis, as long as you think Brian Roberts is not going to do another Sky because I think we can all agree, he overpaid and destroyed value there. But as long as you don't think that's in the cards, which in the grand scheme of things, I think Roberts has done a great job with M&A, so I think you have to give him the benefit of the doubt. I'm not sure if there's a lot of better risk-reward than Comcast out there just because you get kind of access to every different side of the media cable equation. I think you could access it in a very good way.

Alex: Let me turn this on you because it sounds like we're almost done. What do you think about Berkshire and Paramount?

Andrew: You know what, that actually was on my list. I'm a little surprised, I just looked at it. I doubt Buffett was going to buy Warner Discovery just because I don't think he likes to buy messy mergers though. Obviously, he has a thing there. But I'm just surprised he would go buy Paramount instead of as we just listed, he definitely has knowledge of the cable business because I believe Ted and Todd have owned charters in the past and Buffett rids everything. So I'm a little surprised it wasn't Comcast or Disney because when I look at Paramount, yes, they statistically looking screen cheap, and was Paramount a Buffett pick, or was it at Ted and Todd's pick?

Alex: I think the purchase was a decent size, a few billion but I think I would still lean toward being Ted or Todd, personally.

Andrew: I think Paramount and I don't disagree, there's asset value there, but I look at it as a controlled company run by a manager who I don't think has really executed super successfully. And I look at it as a subscale company where the scale players are available at pretty much just as attractive valuations and Paramount is the one where I look at them, and I say, hey, if NBC doesn't make a deal, they will survive. Paramount, if they don't make a deal, their future is dwindling really quickly. They don't have killer franchises like Star Trek is a nice franchise. They don't have killer franchises. A lot of their IP is locked up in a strange way. South Park is a killer franchise, but they get the movies to South Park but HBO Max gets all the South Park shows currently. Yeah, it's not my pic. It was cheap, he'll probably do well. He's way smarter than me. I'll probably do fantastic on it, but it's probably a Warner Brother Discovery Target, in the long run. It's almost a bank shot. And I think there were four plays that are much better risk-adjusted plays in the media space.

Alex: Yeah, I'd be curious if you ask him how much of this bet is basically some version of Apple Cycles Plus M&A. Is that the bet here because if that's the bet, I can understand. It's not something that I particularly do, but it's something I can understand making that bet. But to your point, if that scenario doesn't play out, where are you in 5 to 10 years?

I think the image actually had a decent amount of success in DC. But that said, they started from a relatively low point and the success has been relatively recent, and we'll see if it actually holds. They also have an interesting position in terms of kind of the ad-supported/free video space. And we'll see what that becomes. But they objectively have a reasonable starting point there. We'll see if it's a viable part of the business long term.

Andrew: You're referring to Pluto which I did a lot of work on Paramount again last summer. And I always think it's interesting, it always looks cheap. They've got great assets. CBS is a good asset. But, Pluto I had Andrew Friedman on and he was the one who said, look, Pluto looks good, it sounds good. But a lot of it is intercompany licensing where Paramount is probably giving their content for free on Pluto, and, yeah, you can drive lots of subs, but if you ever start charging the intra-company for it, it doesn't work as good. And there's a lot of opportunity cost there. So, yeah, I just look at Paramount, I say, at some point, they have to be a seller because they're so subscale. And, would you rather be, long Warner Brothers, which just did a deal, doesn't need to do deals and probably buys Paramount from a position of strength two years from now and they're getting lots of synergies and they're run by a guy who I think's pretty good even though his results haven't been great probably partly because of-- or would you rather just like go buy Paramount and kind of bet that they do the right thing at the right time. Warner Brothers or Buffett, I'm just surprised it wasn't Disney.

Alex: I know we're over, but I have one more for you and it just popped in my head. It can be one of the Legacy Media. It could be one of the media guys going after something like Paramount or more interesting for me, do you think any of the big tech guys would consider taking a run at Disney and Netflix or Warner Brothers Discovery or just completely off the table?

Andrew: Look at you turning the tables around on the podcast. I'd be interested in your answer. Look, I think the tech companies, I think there would be natural synergies with all the tech companies going and juicing like, all of them are going after video in some way. I think there will be natural synergies. I think it makes a lot of sense. I do think the regulatory environment isn't exactly in favor of Apple, Disney for years was a popular run, right? I don't think the regulatory environment is super in favor of Apple writing at 350 billion dollar check to go acquire these guys. And then I do also think Netflix had proof, you can build it out yourself. And, yeah, you probably would really like the Marvel IP and stuff.

But you build it out yourself. You don't have the regulatory issues. You can build it from scratch. And you can build a product that can stream a Super Bowl with 100 million people watching without the whole app crashing constantly. So, back and forth, but I wouldn't be shocked, but I kind of think at this point, they're going to go it alone. And I wouldn't be surprised if the endgame is actually the reversed AT&T, right? Where Verizon looks to acquire a content company, I don't know, it's tough to say. Or, video game companies, I do think you could say, hey, we're going to be a consumer entertainment-focused company.

Netflix, getting into video games is on my list, but we didn't hit it. I don't know. What do you think about tech giants acquiring entertainment companies?

Alex: Well, the video game party is perfect because I think a big part of this is Microsoft, ATDI, if that gets done then it probably opens the door to people. At least, I think there's a possibility there. I've always thought that Microsoft or, I mean, obviously the last handful of years, Microsoft just seems to be perceived a little bit differently than the Apples and the Amazons in terms of its scale and what people are worried about. So I don't know if that's just perception or if it's actually reality but I would agree with you. I just think this environment is very difficult to get a deal done.

But if the prices go down enough and I think this is also a very important part of this whole thing, which is that Netflix getting into gaming is a very small version of it. But is there an integration between these things that makes sense? To your whole point earlier on, basically, it being an entertainment market, is there an intelligent way to bundle gaming and BOD that makes sense, and I think people are exploring that idea and nobody's really cracked it yet. But if somebody figures that out, it certainly would lend itself to the need for large-scale M&A.

Andrew: If Microsoft can buy Activision if that gets through, which I think it should but the market is telling you it's about 50/50. But if they can, I think the natural next step would be for them to go and look to buy, hey, we've got Activision, we've got video game capabilities, we've got Xbox, and we've got the thing in people's homes. I think the natural thing would be for them to go buy an entertainment company and kind of now you can get your whole bundle from Microsoft and you think about marrying either-- the nice thing about Disney is they've got all that great IP, which would be perfect to marry with a company with video game capabilities, or Warner Brothers, which owns Looney Tunes which owns DC Comics. Those two guys would be perfect targets for somebody who's like, hey, we bring all the super-elite IP in-house, we can marry it with the video game. So, yeah.

We have gone to so many different places. I really enjoyed this, Alex. You might have to come and do a cable or something. But anything we didn't hit that you wish we had hit or anything you think we should hit a little harder?

Alex: Not that really pops to mind. I always know these things, especially during these tough times. It's amazing as an investor to see how the world can change so quickly - perception and reality in this case. It's so fascinating to play this game. It's painful at times too, but it's very fun.

Andrew: It's been crazy. It's so funny if we have been talking a year ago, we would be talking about how many subs can Netflix get to? All this sort of stuff. And now, you mentioned earlier, Disney says, hey, it's not 33 billion spend, it's 32. Investors are like, "Yes, let's go."

Alex: A huge deal. Huge deal.

Andrew: Well, Alex Morris, the founder of The Science Hitting investing, link in the show notes. I love reading all of his stuff. I love having you on the podcast and looking forward to doing it again in the near future.

Alex: Yeah, I really enjoyed it. Thanks for having me, Andrew.

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