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Motley Fool senior analyst Tim Beyers discusses:

The Fool’s Ricky Mulvey and Catie Peiper discuss how entertainment companies have dealt with difficult financial situations in the past (and how they might respond in the current environment), and preview this year’s San Diego Comic-Con!

To see full episodes of all of The Motley Fool’s free podcasts, check out our podcast hub. To get started investing, check out our quick start guide to investing in shares. A full transcript follows the video.

This video was recorded on July 20, 2022.

Chris Hill: Netflix beats expectations and Twitter beats Elon Musk in first round, anyway. Motley Fool Money starts now. I’m Chris Hill. With me from Colorado, the Motley Fool Senior Analyst, and he’s completely caffeinated. It’s Tim Beyers. Good to see you.

Tim Beyers: Thank you, sir. You’re right, I’m fully caffeinated and ready to go.

Chris Hill: Let’s start with Netflix then. Shares rose slightly this morning after the company lost just 970,000 subscribers in the second quarter, not the 2 million subscribers it had originally warned it would lose. I keep hearing this phrase. I heard it after the doorbell yesterday. I heard it a bunch this morning, and the phrase is “less bad.” That is the expression used in this quarter. It’s less bad, which is good. It’s always nice to beat expectations. But just because it’s less bad, I don’t think it’s good. You’re telling me how good the results from Netflix were?

Tim Beyers: I mean, it’s almost like a Miller Light commercial: greg flavor, less filling. That’s where we are now. Yes, less bad is the new good, Chris. Here’s what I think. I don’t think this was any less bad. I think this was, I mean technically, it’s less bad. The number of subscribers that Netflix was estimated to lose by two million is much less than it came in at 970,000, just under a million. That’s great, and there’s reasonable growth, there’s room for optimism here when you remove the currency effects, aggregated growth by approx. 13%, approx. 8% to 9% when you include these. A pretty good story here. But what we’re looking at in the longer term is what Netflix is ​​doing to prepare for the future. I think that’s where the optimism lies. Frankly, I think the optimism is pretty well-placed. There is some decent work Netflix is ​​doing to get better at building a long-term growth story. I like that very much. They are removing about $150 million of regular costs. We should see some improved operating margins on that score. They believe that operating margins in the long term, at least for the next couple of years, will hit in this area of ​​19-20%. It is good. They still generate money if you consider the stock-based compensation. But overall, Chris, I like where the company is going and I like that they’re leaning into what they have to do. They do not shy away from the fact that this is a challenging time. I would be much more concerned if they told a story that felt unbelievable. Instead, they said, “Yes, hands up, this is a challenging time.” Here’s what we do about it.

Chris Hill: You have to assume that Microsoft is very invested in.

Chris Hill: The ad platform, working for Netflix. Because let’s face it. Satya Nadella and his team want this to work. They want this publicity and they want to grow their business. The best way to do that is to make sure Netflix absolutely hits it out of the park with the ad-supported tier when it launches later this year. I’m not a Netflix shareholder, I’m a Microsoft shareholder, so I’m pushing really hard for the Netflix ad platform to work.

Tim Beyers: I think you have good reason to be at least partially optimistic. I mean, we got some news recently that what seems to be driving the Disney streaming effort is Hulu. The reason is that Hulu has cracked the nut of delivering shows that people want, and throwing some commercials in there and getting good value out of doing it. They make money there. If you think of it as a template for what Netflix can do, I think you can be optimistic here. Now, the way they talked about this on the call is that they’ve made a real effort to work with Microsoft. They talked about technology. They talked about the ad serving platform. They talked about the tools that Microsoft has and that this is quite a deep collaboration. They chose Microsoft on merit. But Chris, I think we can both go beyond that and say that Microsoft, itself as an advertising company, makes billions upon billions of dollars. I think it’s actually $10 billion in terms of their ad business right now. There is a lot there. But in addition to that, Microsoft has a lot of experience in figuring out difficult problems, and they have a lot of regular people that they can throw at this problem. They have great incentives to become good in this area because their main rival, Google, is already very good in this area. They would like to have this work and be able to take that experience and put it elsewhere. There is no word that this is in any way an exclusive deal for either Microsoft or Netflix. I like that a lot. I agree with you. I think there’s a lot to root for, and I think there’s some things to be optimistic about, both on the Netflix and Microsoft side.

Chris Hill: In the case of Twitter v. Elon Musk, Round 1 went to Twitter. Lawyers from us were hoping to delay the trial until next year, but the judge ordered an expedited five-day trial to begin in October, so get the popcorn ready. Either way, you will disable this. I know you’re not an oddsmaker, but based on what you’ve seen so far, what stands out to you?

Tim Beyers: Well, I think the main thing that stands out to me is that Elon Musk is not getting what he wants, and he has to make a decision that I don’t think he wants to make any sooner than he wants to make. it. I imagine there are legal discussions going on right now somewhere in a conference room, either at Tesla headquarters or SpaceX headquarters or somewhere. But I think Elon is talking to lawyers because his options are now getting more limited every day. Which is interesting if you look at Twitter. Because right now, Twitter is valued. I think as we record Chris, it could be around $40 a share, maybe a little less than that. Maybe this isn’t worth $54.20 per share. Maybe not. But do you think the odds are, given what Elon is going to face, that it’s worth more than $40? I think the answer to that is, “Yes, probably.” Elon Musk has some decisions to make. I know some of these decisions are comfortable, whether it’s buying Twitter outright or leaning into a settlement. I think both of these are on the table and there is a high probability that one of the two things will happen. If I had to handicap it, Bill Mann said this morning on the Morning Show that it’s 85%. I don’t know if I would go that high, but I think it’s at least 75%. Yeah, not a good time — it’s hard to say. Usually, Elon Musk is on top of the world. I don’t think that’s true anymore. I guess it’s not a great day to be Elon Musk.

Chris Hill: It’s a great day to be a reporter covering this, because whatever the outcome here, I have to believe there’s an award-winning book underneath, behind the scenes, that’s really just about this whole calendar year that started earlier in the spring when he came out and was like, yeah, I’ll buy it.

Tim Beyers: Chris, you’re not thinking big enough. You are not thinking big enough. Not only is it a book, but it’s also a documentary, and it’s an HBO miniseries that happens 100%. Come on, you know, it happens, right?

Chris Hill: Yeah, it’s probably special when you think about the Uber miniseries that came out earlier this year.

Chris Hill: The one about Theranos. Look, just start casting now for Elon Musk.

Tim Beyers: Yes. That’s right, and he wants a hand in it. But you are right. I mean, this is going to change the way people look at him, will change the way people look at his deal-making. This may be the first time, actually, that Elon Musk actually gets his hand caught in the cookie jar and doesn’t actually pull out a cookie. That would be very interesting. It changes the dynamic a little bit because up to this point he’s really been as close to untouchable in the business as any executive has been, at least in recent memory, Chris.

Chris Hill: Tim Beyers, always nice talking to you. Thank you for being here.

Chris Hill: The smaller-than-expected subscriber loss may have been a relief for Netflix shareholders, but the streamer still has a lot to prove. Ricky Mulvey and Catie Peiper take a look at how entertainment companies have fared in past downturns and how they might respond in the current environment.

Ricky Mulvey: Well, we may be in a recession, which means budgets are being cut, but that doesn’t necessarily mean entertainment spending is going down, so what does history tell us and what does this say about entertainment companies? Joining us now is Catie Peiper. Prior to working at The Motley Fool, she received her PhD in media studies from the University of Southern California. Welcome Catie.

Ricky Mulvey: We’ve talked about the lipstick effect on the show before. Maria Gallagher and Chris had a great conversation about that, but it’s this idea that people still use for little indulgences even when there’s an economic downturn, recession, depression, you name it. So what does this effect mean for entertainment spending, and how have we seen it play out historically?

Catie Peiper: Yes, this is a very interesting question because one of the oldest stories or myths that are told around Hollywood or in screen courses around the world is that the Great Depression was the best thing that could have ever happened to the entertainment and film industry. . They were just getting their feet wet at the time, and the story goes that people were so frustrated with the world, so distraught with the economy, and had so little faith in the economy that they just wanted to spend their money at the movies and escape for a little while. It’s a great story, but it’s not true. At least not completely. I’m sure some people were as YOLO as I would be today when I spent $20 on a movie ticket, but it’s not quite the same as a $5 or $7 tube of lipstick. What really happened back in the Great Depression was that there were so many studios, so many you could rely on hand and toe, and they had to consolidate. They had gotten into a lot of debt in 1920s dollars, there was over $400 million in debt across all the studios. That’s a lot of money back then. They had to start consolidating. They had to start figuring out how to scale film production profitably. Thus the studio system where stars became part of their stable was invented, basically to increase that profitability. It’s not that the depression was good for movies in that people didn’t care and spend their money, it was good because it forced the companies, the entertainment studios, to be better about how they spent their money.

Ricky Mulvey: It was also at a time when if you wanted to be entertained, that was one of your only options. You didn’t have a TV.

Ricky Mulvey: Radio was still in its infancy.

Ricky Mulvey: There was a great podcast called Plain English with Derek Thompson, and he pointed out in a recent episode that movie tickets purchased per American peaked around the 1930s, 1940s. I know it’s a little past the Depression, but there were 35 movie tickets per person in America at the time. The decline since now is about two or three. I’m not saying the depression had a lot of macro tailwind, but if you’re an entertainment company, you benefit from being the only game in town at the time.

Catie Peiper: Absolutely. I would say that it is not only the only entertainment company in the city, it is the only leisure company in the cities in many ways. If you listen or read oral histories of people living and being consumers in that period, they talk about going to the movies like the way we would talk about spending time in the mall in the 90s. It was a place that was cooler than it was hot outside. You have your news, you have entertainment. It was a social event. It wasn’t just that you were going to see the latest Avengers movie.

Ricky Mulvey: We’re going to jump ahead to the Great Recession [laughs] because I think there are some lessons from that time period, especially when we look at how entertainment companies will pivot going forward. 2008 was actually when Netflix switched to streaming. That’s when they really leaned into it. What are some of the lessons when you think back to the Great Recession for entertainment companies to pull out as we look towards this one?

Catie Peiper: Yeah, that’s a very good question. Which is interesting during the Great Recession, since we saw similar behavior to the Great Depression, where these entertainment studios had to tighten their belts as they had to become more efficient with their spending. They began to look at other ways of accounting for their income. Rental films had been part of their equations since the late 90s, but now they had to start thinking about streaming revenue and long-term IP. I’ve said this last time I was on the show, but really the services that have the most return per asset. If you think about HBO, excuse me, they have a more limited catalog than Netflix did at the time, but they get a higher return on that asset in terms of views and subscribers. They are the ones that were the best setup during the Great Recession and probably the ones that are going to be the best setup now as well.

Ricky Mulvey: Let’s skip ahead to HBO. In particular, it’s now rivaling Amazon because instead of just having studios, really studio rivalries, you now have these streamer rivalries. I think the biggest one is playing out between HBO and Amazon regarding essentially the future of the fantasy landscape. You have Amazon coming out with this Lord of the Rings spinoff, The Rings of Power, and then you also have HBO’s House of the Dragon coming out within just a few weeks of each other. What are you watching, how do you see it playing out?

Catie Peiper: That’s interesting. What I would say is that it is half deliberate and half accidental, and this is something you see very often in the film industry. Our HBO and Amazon are going head-to-head for the same mindshare in consumer consciousness. They want to be the biggest person in the ring. But did they set out to be the best fantasy industry? I would be a little more skeptical about that. What I find really interesting about both of these is that they are spinoffs, and those are the big keywords. They both want to double down on safe things that have performed in the past, which is always a behavior that we see during market uncertainty in the entertainment industry is that they look towards investments that are based on other successes in the past. They try to use this data to inform what they do. The other thing is that they are looking at the same consumer data. If fantasy topics or IP is popular in their catalogs, they are going to start putting more money behind its development. It makes sense that they get the same data on both platforms. It’s a bit of a coincidence that they’re both fantasy, but it’s not a coincidence that they’re both doubling down on past successes.

Ricky Mulvey: I have no doubt that having a back catalog of intellectual property is a benefit, especially for someone like Disney and Disney+, you can throw your kid in front of a Disney Plus screen and then probably walk away for a few hours. You see similar things with Paramount+ HBO obviously leaning on Game of Thrones. I wonder if there is an advantage to Netflix not having it, in that they have to be laughable. It’s allowed them, I guess, to essentially create the new wave of reality TV shows with things like Love is Blind. I don’t think you have the squid game phenomenon if you are able to rely on a poor catalog like Disney can with the Star Wars series.

Catie Peiper: I agree with that. I would say that Netflix is ​​the superpower, always figuring out how to do what the other mainstream providers, whether it’s Disney or HBO, have more money to do. With Netflix, it often gets international content such as Squid Game. They have that swagger, but if you look at the spread of their money versus the number of IPs they’re acquiring, it’s just a lot of bloat there. The downside of that is that they can’t be sure that they’re betting on a safe thing when they get that information or that IP address. The other thing is that I think there are a lot of signals if you pay attention to industry news that Netflix is ​​pretty nervous even at the moment. They have recently updated their culture document internally for their employees. Previously, their culture memo had a section that said we’re not going to reduce your pay in tough times because we want to reward good business savvy. They took it out, which is a pretty interesting statement by omission.

Ricky Mulvey: Yeah, Netflix is ​​certainly on the ropes, and I think it’s going to be interesting to see how they get out of it. As a Netflix shareholder, I try to be optimistic about the company. This weekend we have Comic-Con going for the first time in a few years. What are you looking for when Comic-Con happens in San Diego?

Catie Peiper: Great question. I have to say that as someone who has been to Comic-Con in the past, who has watched Comic-Con for years, I am very sick of how much money goes into the publicity stunts of the major studios at this point. I tend not to pay much attention to the noise. It is only generated by the studios. Really, it’s just a signal of how much money they’re willing to sink into a franchise. But that does not actually mean that income will follow. What I usually look for, and what has held up this year so far, is where the fans go. I don’t just mean who is being talked about on Twitter, although that can be an interesting sentiment. I look at things like, suddenly we have a show called Our Flag Means Death. It’s from HBO and it suddenly has more cosplayers showing up to conventions across the country that look like Star Wars or Marvel. This tiny little show in its first season is already gaining a strong presence. Fans drive sold-out items in the market at Target and other retailers. Not because it’s licensed merchandise for the show, but because fans saw something that they thought was related to the show. These are major market moving forces similar to what we see as K-pop fans. But it is from a show that has received relatively little publicity otherwise. It had topped the chart for most anticipated or most requested show on streaming services for five straight weeks, even eclipsing Disney’s Moon Knight. I tend to look more at where the fan sentiment is and where the fan demand is coming from and less where the publicity budgets are.

Ricky Mulvey: It was hard to be excited about Moon Knight. But hey, we don’t listen to the tweets, we watch what the cosplayers do. I love it going into this weekend. Catie Peiper of The Motley Fool. Thank you for joining us.

Chris Hill: As always, people on the show may have an interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against them, so don’t buy stocks for yourself based solely on what you hear. I’m Chris Hill, thanks for listening. See you tomorrow.

Suzanne Frey, head of Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Catie Peiper has no position in any of the shares mentioned. Chris Hill has positions in Alphabet (A shares), Alphabet (C shares), Amazon, Microsoft, Target and Walt Disney. Ricky Mulvey holds positions at Netflix and Walt Disney. Tim Beyers has positions in Alphabet (A shares), Alphabet (C shares), Amazon, Netflix, Walt Disney and Warner Bros. Discovery, Inc. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares) ), Amazon, Microsoft, Netflix, Target, Tesla, Twitter and Walt Disney. The Motley Fool recommends Warner Bros. Discovery, Inc. and recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Catie Peiper has no position in any of the shares mentioned. Chris Hill has positions in Alphabet (A shares), Alphabet (C shares), Amazon, Microsoft, Target and Walt Disney. Ricky Mulvey holds positions at Netflix and Walt Disney. Tim Beyers has positions in Alphabet (A shares), Alphabet (C shares), Amazon, Netflix, Walt Disney and Warner Bros. Discovery, Inc. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares) ), Amazon, Microsoft, Netflix, Target, Tesla, Twitter and Walt Disney. The Motley Fool recommends Warner Bros. Discovery, Inc. and recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.

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