Episode Transcript
The Finance Ghost: Welcome to episode 248 of Magic Markets. We've just finished recording Magic Markets Premium, where we covered Netflix. Old favourite here, one that I will always kick myself for missing out on when it got down to such deliciously low multiples around 2022. I guess hindsight is perfect.
Moe, we discussed it many times over the pandemic period and my concerns were always around the free cash flow and the level of competition. Kudos to Netflix. They emerged as an absolute winner in the space and they are back to being pretty fully valued. But of course, the rest of that research is available to our premium subbies. Go and check it out and if you aren't a subscriber then please do consider being part of that community. It's R99 a month, which is the same it's been for like three years now. We've tried really hard to keep it at that level. So take advantage while you can.
Moe, what has not been at the same level for the past three years is the Netflix share price. That is for sure.
Mohammed Nalla: Indeed, Ghost. It's one that we've covered not just here on Magic Markets Premium, but we've also covered it here on our free show. And again, I think we did a head-to-head, we did Netflix and Disney. I would really say if you want the deep dive on Netflix, what's happening recently, there were some issues, go and actually check out that deep dive report if you are a subscriber.
This week though, Ghost, as a compliment to what we've done in that Netflix show, we want to talk about what's been happening in the overall entertainment industry because it's really been a super-hot space. Not just the Netflix share price, but there's been a lot of action. There's been a lot of M&A activity and consolidation coming through. This is as some of the larger media houses, some of the larger studios have been scrambling to actually build out their own presence in that streaming space. But then also the battles over the content libraries and this typically controlled by some of the larger studios.
Not so long ago we actually saw, I think it was in 2021, we actually saw Amazon go and buy MGM Studios. Now this is one of those hallmark studios, MGM, you'll picture the lion doing the raw at the start of the show. That's Metro-Goldwyn-Mayer. Amazon buying out that company in 2021, it was around $8.5 billion. This was as it tried to build out its own offering within that Amazon prime video segment. So that was one of the deals that happened.
And I want to touch on that, but I also want to touch on some of the recent activity, because we also saw AT&T spin out their WarnerMedia business, effectively it became Warner Bros Discovery. And that company now also the potential target of a takeover by another company that's been merged, which is Paramount Skydance. Lots of activity to unpack here. And that's just in the US.
Ghost, I know you've got some stories down in South Africa of what's been happening in what we can call, I guess we can call the show the Stream Wars. Like Star Wars. It's the Stream Wars, right?
The Finance Ghost: Yeah, it is the Stream Wars. It's also the Dish Wars because there's still linear tv, slash, satellite tv, slash, cable. You know, put it all together, basically anything that isn't delivered over the internet, and that's still a big part of what's going on out there. A lot of those companies are really just struggling to hang on to the market share they have. That's where we've seen a lot of this consolidation take place.
So the South African equivalent to this is MultiChoice, of course, and MultiChoice recently acquired by - or they're in the final throes of that deal really - by Canal+, which makes a much, much bigger group. When you add them together, they will have over 40 million subscribers across almost 70 countries in Africa, Europe and Asia. 17,000 employees. So that will be a group of scale. And this was really such a Hail Mary transaction for MultiChoice, because MultiChoice was losing out on their core South African market, their premium subscribers, etc. Under a lot of pressure. People complaining left and right about how expensive it is, how they get a whole lot of stuff they don't actually want because at the end of the day, the pricing strategy has been there to essentially rip the ring as far as possible on South African consumers. You want to watch the Springboks, great - you're going to get a full package whether you like it or not. It has 100 other channels no one asked for. And if you want to watch the best of sport, you’ve got to pay the big numbers.
You can only do that for so long. MultiChoice did it for long enough to be able to fund their expansion into streaming across Africa. And again, we've just covered Netflix in Premium. We've touched on how bad that J-curve actually is. No different for MultiChoice trying to build out streaming in Africa and the bottom of the J is a really hard thing, that cash burn for people who aren't familiar with the concept. It's hard enough if you're sitting in the US where you have deep capital markets, you have investors who are willing to be patient for growth, who can believe in the big dream. It's much worse in South Africa, particularly in public markets, because building in public is ugly. You have to release your results and then, unfortunately in the case of MultiChoice when you've upset so many consumers, obviously the court of public opinion gets pretty ugly because everyone points out that the reason why you lose money like this is because your stuff is too expensive. True or not, it's not easy.
Canal+ swooped in and they bought it. And thank goodness, because I'm not really sure what would have happened to MultiChoice otherwise. The offer was so successful Moe that they actually got above the 90% acceptance level that allows them to do a “squeeze-out” - so they will own 100% of MultiChoice. And then in happy news, the combined group will then inward list on the JSE, so South Africans will still be able to invest not just in MultiChoice, but now in the combined group, which is something they didn't really have access to easily before. And I guess it means that MultiChoice will hopefully be disclosed as a separate segment inside that reporting so we can actually track the progress and see how that's going.
So yeah, plenty of merger activity in this space, plenty of consolidation, all thanks to the desperate need, I guess, to fight against actually not just Netflix, but also YouTube. We should definitely consider that behemoth in the space.
Mohammed Nalla: Indeed. I think we cover YouTube as a competitor to Netflix in our detailed report - every week we do a deep dive, but we also have a quick look at competitors. And in this space, it's really just so relevant. I've been following that MultiChoice deal with for some time. It really has taken a very long time. Obviously the Competition Tribunal had to rule on that. Glad to see it getting across the line. And also, you pre-empted me. I was going to say, I hope Canal+ is actually going to do some sort of listing into South Africa. I think that's definitely a good news story.
But you were talking about the J-curve and how some companies burn lots of money in the space. I'm going to actually step back because I've mentioned a whole bunch of stuff in my intro. I'm going to step back all the way to AT&T, which is a telecommunications company today. But a while ago, they actually went and acquired Time Warner. Now, when I say a while ago, 2018, for $85 billion. It looked like a great deal on paper back then. I raise this because of the caution of people potentially overpaying for assets and then not being able to really get the value out of those assets. They eventually spun this out into what became Warner Bros Discovery at a $43 billion valuation in 2021. How's that for a cash burn? What's that - three years later, they've lost half of their money? And this is a big company, AT&T, deep pockets there. But again, just AT&T saying we want to focus on our core business, on telecoms. They exited media completely.
This then gave birth to Warner Bros Discovery. Now, what sits inside Warner Bros Discovery? You've mentioned some stuff with MultiChoice, for example, the sports rights, those are usually very valuable. And when we look at Warner Bros Discovery, they have the sports rights in the US for the NBA, the hockey league, they've got baseball in there as well. So that's showing you how sport is very important to that overall entertainment ecosystem. But remember, sitting inside Warner Bros Discovery, you've got linear tv, the traditional cable networks up here in the US and then you've got this very small streaming business. They've been late to the streaming party. And so that is the reason why some bigger players, some of the sharks are circling. And what we're seeing is these are actually coming from outside the industry again. AT&T was outside of media, they were telecoms. They came into the industry, burnt a lot of money. Now we're seeing a lot of that tech money coming through and chasing some of these deals.
I mentioned Amazon buying MGM in this particular instance. It's not entirely outside of the entertainment industry. The company that is actually looking at taking over Warner Bros Discovery, I must say the offer was rejected, is Paramount Skydance. Why this is important is that this is a company that is headed up by Larry Ellison's son. Now, Larry Ellison, he heads up Oracle. That's another company we've covered in Magic Markets Premium. A lot of people saying Ellison's just looking at buying out his media, let's call it media street cred. If Jeff Bezos has it, Ellison's gotta have it as well. And again, the offer that was rejected there was at around $24 a share. Go and have a look at the share price moves on Warner Bros Discovery, certainly ratcheted up on the news of this offer that has been rejected. Instead, Warner Bros saying they want to look at splitting their business into two separate companies - one that actually looks at their streaming and studios and another at their global networks and linear TV business. So that's a lot of action, a lot of activity in that space. I don't think Paramount Skydance is actually backing down just yet.
But before I actually round off on this point, Ghost, I want to just touch on the multiples that some of these companies are actually paying. Because if we go all the way back to that Amazon deal, that was done at around a 28x EV/EBITDA multiple, right? So that's pretty heady. A lot of people saying that's kind of expensive. But if you compare that to where companies have traded at their peaks, it's maybe a little bit off those peaks. I would say they’re paying full price to get access to some of those content libraries as well as the studio's production capabilities. If we look at the current Warner Bros Discovery offer from Paramount Skydance, it's a bit of a complex one there because remember, if they buy that company, they're getting the linear TV business where you don't apply a very nice multiple. Back of the napkin suggests something like sub-10x on the linear TV business. But then for the streaming business, again, paying something close on a 20x EV/EBITDA if you use a back of the napkin calculation. That's kind the valuation that these deals are getting struck at. And again, big question mark, because everyone other than Netflix in that streaming space is really coming late to the party. So they're going to have to spend a lot of money to try and actually bolster their momentum in what is becoming a very crowded streaming market.
The Finance Ghost: And like I mentioned, I think the one that people are not talking about enough is YouTube. I really, really do believe this. If you go and you ask your favourite local AI platform and you hope that it doesn't hallucinate an answer, then it tells you that YouTube is doing very well in terms of their share of total TV viewing time in key markets like the United States. According to TechCrunch, YouTube is the most watched platform on living room TVs ahead of Disney and Netflix. Interesting. Now, if that's true, and it probably is true, that's actually amazing because YouTube has gone from being this community generated content, very indie, into a very serious platform for a lot of stuff. My observation would be that a lot of the niche content has improved in quality quite dramatically. To compete on YouTube, you've got to just keep getting better. And they're also really doing well on stuff like podcasts, video interviews. Then there's loads and loads of specialist channels doing extremely high-quality stuff like historical documentaries. It's actually amazing, it really is, and it's become a viable competitor. Just what cable TV didn't need, right? Another streamer.
Mohammed Nalla: I'm laughing. I think you were first, between the two of us to jump into YouTube Premium. You know, I want to actually ask some questions around this, right? For me, what's interesting here is if you look at YouTube, they've gone at this the other way around, right? They started out as an advertising business. You could view YouTube for free and they got advertising, and now they're transitioning into a subscription business, which is effectively the reverse of what a player like Netflix has done. So that's interesting for me on the one front.
On the other front, I'm probably late to the party here, but I've recently tried out YouTube Premium at your direction, Ghost. I must say I just got tired of watching adverts that I could no longer skip through. And again, that just shows some sort of maturity in YouTube's own approach is that fine, we're either going to make money off proper adverts with offering the advertisers adverts that can't be skipped and so forth. And if you as the user, the end-user don't want that, you can actually pay us and we're going to then build a subscription business around that.
What I do want to touch on is that if you look at YouTube, a lot of it is user-generated content. YouTube hasn't really gone down the road of going to studios producing content the same way as a Netflix or some of the bigger studio houses. And again, my question is, is it not just a matter of time before you actually see that? Because a while ago I saw something called YouTube Red. I don't know if you're familiar with that. And that was looking at some sort of content coming through that was more in line with the types of longer form content you might find on a Netflix or other studio houses. But it hasn't really gained any traction. And so perhaps they’re trying to actually just push through those higher subscriber numbers, once they start getting some flywheel going through on that, they might actually just pull the trigger and then take the fight to the streaming platforms like Netflix as well as some of the other studios.
The Finance Ghost: I think so, because Netflix is going to take the fight to them. And so one of the things we covered this week in premium is Netflix's partnership now with Spotify, which is around taking video podcasts onto Netflix. That's very YouTube-esque behaviour, right? It really, really is. It's fascinating. And the winner is always the consumer. At the end of the day, we want to be able to pay relatively modest subscriptions to be able to watch great content without adverts.
Moe, I'm so glad that you have finally made it into the ad-free category of humanity on YouTube. That is the only way to live. No one should suffer through YouTube adverts. It is not good. So pay your money, enjoy it for what it is. It's like being on Spotify free, which is actually even worse than anything else. There's a reason why Spotify's conversion rates are so good. And yeah, it's fascinating to see how this is changing.
At the end of the day, the lesson from all of this is: distribution is kin. That's the truth. So for creators, all they are looking for is maximum distribution and then a fair economic model. That's it. And what is the moat around this stuff, at the end of the day? If suddenly your favourite show moves from Netflix to YouTube and you can watch it in HD and it's a decent user experience, do you actually care where you pressed play on your smart TV, from one app to the next? No, you don't care. So it's amazing, it's really, really interesting and it's going to get worse for these traditional TV networks, I think, not better.
Mohammed Nalla: Yeah. In fact it's a nice place to pull one of my favourites, I haven't done this in a while, what have the share prices done? Ghost, no Googling here, right? There's been so much activity. So just over the last year, let's call it year or let's maybe make it a year-to-date if you want. I mean, what's your preference? Year-to-date or one year? Give me a timeframe and we'll play around.
The Finance Ghost: Make it year-to-date. And that's why it's - I mean, it's almost the same thing now, but year-to-date.
Mohammed Nalla: Okay, so year-to-date and the companies we're going to look at are all the ones we've mentioned. So we've got Paramount Skydance that wants to acquire Warner Bros Discovery. We've got Warner Bros Discovery, obviously. Then let's include Amazon. They're kind of in there with the streaming space. We've got Netflix, we've got Comcast, which is again a traditional network that owns Universal, trying to do some streaming stuff. You've got AT&T that I mentioned. They've exited streaming, but let's - they've actually exited entertainment completely, but we'll just throw them in to the mix because I mentioned it. And then your favourite here, Google, take a flyer. Who's the best performer out of that subset on a year-to-date basis?
The Finance Ghost: I do not follow half the companies in that list. Just tell us. I don't want to guess. It's just going to be embarrassing and awful.
Mohammed Nalla: We often say when there's M&A activity, you want to go and buy the target - the company that's being acquired rather than the acquirer. And so that actually puts Warner Bros Discovery up at almost 100% on a year-to-date basis.
The Finance Ghost: Wow!
Mohammed Nalla: And this thing was languishing. If we actually go back to, let's call it the middle of the year, it was flat. All of that share price move has really just come on the back of the fact that they are now a potential takeover target. Next up on the list we've got Paramount Skydance, which before the announcement, or in fact just before the announcement was up around 100%. Now down, but it's up still at 56%. So it's bled a lot of that value back again because they are the ones doing the acquiring, maybe the market concern that they're going to be paying too much for the underlying asset.
Then interestingly enough, in the third podium spot, and again with these players, it gets a little bit messy because there's a lot more going on if you're looking at Amazon, if you're looking at Google. Do you want to take a guess? Would it be Amazon? Would it be Google? Who do you want to guess for your number three podium position? You can't get away with saying I don't know. Give me a pick. One of the big players.
The Finance Ghost: Google is basically an advertising business with all of the AI stuff now disrupting them, right? YouTube - I wish they'd spin out YouTube. If they spin out YouTube, I would be long YouTube. That I can tell you for free. I will guess that it is probably Google.
Mohammed Nalla: You've got Netflix in the mix as well. So don't forget you've got Netflix.
The Finance Ghost: In the mix as well. Yeah, well, Netflix has done pretty well this year, although it came off hard recently. I don't know, let me say Netflix and see what happens.
Mohammed Nalla: I'm trying to confuse you and I have succeeded.
The Finance Ghost: Yeah, it's not difficult!
Mohammed Nalla: About a month ago it was Netflix. Netflix was up around 40%. It's come off hard, so now it's only up 24%. And so the third spot on that podium goes to Google, or Alphabet, they're up around 40%. And then look at the rest of them. I'm surprised, but below that you've actually got AT&T which is a defensive, more utilities and communications business, up 12%. And then surprisingly, Amazon hasn't done that well this year. They're up around 3.6% on a year-to-date basis. And then the last player, Comcast, traditional networks really struggling in streaming, down around 20%. So this showing you a dispersion of down 20% on the one end of the spectrum, up almost 100% on the other end of the spectrum. Again, just such a dynamic and competitive market.
And again Ghost, I mean, yes, that's been the recent trend. But I'm going to do a quick look through here on a five-year basis just for fun. And if we look at this on a five-year basis, let me actually pull up a chart. I don't know these numbers offhand, right. On a five-year basis, there we've got – hmmm, Google shot the lights out. We know there's a lot going on there. But if we look at just the traditional entertainment businesses here, Netflix has been a clear number two position coming through. Google up 230%, Netflix up 130%. So still a big delta between those two over a five-year time period, but miles ahead of some of the other players. If you're looking at some of those networks that we are speaking about, Warner Bros Discovery, pretty pedestrian, over five years only up 4%. And then traditional businesses, in fact, even if we include Paramount Skydance, they're actually down in the solid double-digits. So just showing you a lot has changed, but a lot of that change has actually happened very recently. And the question here is, are we actually seeing a bit of a bubble as these bigger players try and chase some of those media libraries and media assets?
The Finance Ghost: Yeah, I mean, time will tell. I'll tell you what I won't buy though Moe, is I'm not going to buy any of these traditional TV networks. It just feels like they are going to be just scrambling for survival for basically the next five years to maybe a decade. And I can't see long-term why their distribution model survives in any way, shape or form. Maybe they become good content studios, etc. - I mean that's fine. But in terms of distribution, if it's not a streaming first platform now, I just wouldn't go anywhere near it. And it's not long until the big sports - the first time, and I feel like Formula One, it's going to be one of the first ones. I just feel like it is such a natural partnership for them to do with Netflix. I mean just think of Drive To Survive. It's all there.
Mohammed Nalla: No, too late, too late, too late. I saw something recently. Apple! We haven't actually mentioned Apple. So it's interesting there, right? Apple have secured exclusive US - so it's just US - media rights for Formula One starting in 2026 under a five-year agreement.
The Finance Ghost: You're right, look at that. I missed that completely.
Mohammed Nalla: The deal was valued at $140 million a year, which is significantly above the prior rights fee. So again, that's something interesting. I'm a big fan of Formula One. I know you are too. I was always saying Netflix has got to get Formula One. I thought they would have been first at the bit here because they had Drive To Survive. They've done so much to build out the F1 brand. Guess what? It's so competitive. Apple went and actually secured those rights under Netflix's nose. So again, just showing you how hot the space is. We've mentioned Apple, but not in the detail. We've mentioned some of the other big media companies there. They've gone and actually secured probably one of the best or most lucrative sporting deals out there and you can expect to see more of this. Just expect to see it in Netflix, expect to see it across most of your large networks. Boy, it's going to be so interesting.
My only, my one gripe Ghost, just to maybe close off on this, is that unfortunately in some of the larger players, and specifically if you look at Alphabet, right, you're buying so much in the mix. You're buying the cloud business, you're buying an advertising business. I agree with you. I think in time they possibly need to look at spinning off YouTube into a separate listing because a lot of these big companies are going to start coming up against competition regulation at some point in time. And so perhaps spinning that out might just create a lot more dynamism in the overall market. And again, they can retain some of that shareholding as well if they still want some of the economics there. But that's when I start to get really interested around carved out exposures.
Right now, you're buying a big bucket of stuff and some of that stuff might be very highly valued because of megatrends in other verticals they play in - that doesn't give you a nice pure-play though. And again, that might be where some of the appeal of a player like Netflix starts to come through, I guess.
The Finance Ghost: Yeah. Last thing I'll say on this podcast is I do understand why I missed that news. So, one, I'm not on Apple. Two, I don't live in the US and three, sadly, I think I've watched about two Formula One races this year because the Drive To Survive era has made the TV coverage just so much less about the racing now and so much more about whose girlfriend is at the track. It really, I've lost so much interest, it's actually frightening.
Mohammed Nalla: You've missed a great, it's actually been a great season and we're not going to turn this into an F1 podcast. We should probably do one on F1 specifically. But it's actually been a very entertaining season. Incidentally, last year I missed a whole bunch of races and I started actually watching a few more this year. And part of that is because of Drive To Survive, my daughters actually watched F1 Academy, which is kind of teenage girls that Toto Wolff's wife is trying to bring into the industry. Again, look at how they broaden that TAM. I've now got my two daughters that are interested in racing and so they’re watching some of those races with me. Again, a solid strategy and again, probably another reason why Netflix should be really grumpy that they weren't able to secure those F1 rights because this now ties it up for a couple of years.
The Finance Ghost: But it's that Apple movie, right? They did the F1 movie, and so that would have helped them lock this in. I bet you that somewhere hidden deep in a contract, page 20, was a little clause there about how Apple would then have first dibs here. And I see they got the rights away from Disney, from ESPN. So, streaming wars continue - that's the point. And they're going to keep going and keep going and keep going. Lots of money is going to change hands and consumers win. Consumers win! That's the message.
Mohammed Nalla: Yeah, it's just such an exciting space. Unfortunately, that's where we got to leave the show this week. We hope we've done enough to whet your appetite to go and have a look at that deep dive report on Netflix because there's a lot going on in the industry, even on a deep dive basis. Go and check that out. Their pros, their cons. It's only R99 a month and you'll get access to the full content library on our side.
We've built up a pretty impressive library ourselves, if I do say so myself, Ghost. That now over 200, probably around 250 names that we've covered of global stocks, certainly on the reports and you get full access to that as well as a new report every single week on a global stock.
Until next week, let us know what you thought of the show. Hit us up on social media. It's @MagicMarketsPod, @FinanceGhost, @MohammedNalla, all on X or go and find us on LinkedIn. Pop us a note on there. Until next week, same time, same place. Thanks and Cheers.
The Finance Ghost: Ciao.
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