Alphabet's Discipline, 5G's Potential, and Microsoft's Big Buy

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This video was recorded on Jan. 19, 2022.

Shares of Sony (SONY 0.31%) continue to fall in the wake of Microsoft's (MSFT 1.65%) plans to buy Activision Blizzard (ATVI), causing some to question the future of Sony's PlayStation. Tim Beyers analyzes the shifting landscape in entertainment, including Alphabet's (GOOG 1.25%) (GOOGL 1.27%) move to shut down its original programming division at YouTube. He also discusses whether winning regulatory approval to become a bank holding company makes SoFi Technologies (SOFI 4.55%) a more attractive investment, and Verizon Communications (VZ 2.85%) and AT&T (T 1.17%) changing some of their plans for today's nationwide rollout of 5G.

Plus, Ricky Mulvey talks with John Laconte from The Vail Daily about how Vail Mountain Resorts (MTN 1.04%) is managing a labor shortage after a difficult holiday season.

Chris Hill: Today on Motley Fool Money, we're hitting the slopes. We're not actually going skiing, but we are digging into Vail Mountain Resorts to see how the business is doing. That and more coming up right now. I'm Chris Hill, joined by Motley Fool Senior Analyst Tim Beyers. Thanks for being here.

Tim Beyers: Hey, thanks for having me, man.

Chris Hill: We've got the latest on financials and 5G as well, but we're going to start with the changing landscape in the entertainment industries. On yesterday's show, we opened with Microsoft continuing their history of strategic acquisitions, buying Activision Blizzard. A clear shot at Meta Platforms (META 2.98%) in their bid for the metaverse. One of the ripple effects involves Sony, because shares of Sony have dropped more than 10% since this move was made by Microsoft. Let's start with PlayStation. Is PlayStation that crucial? I know it's part of Sony's business, is it that fundamental to the business? Is it so threatened by a combined Microsoft and Activision Blizzard?

Tim Beyers: I think the answer to this is yes and no, which is a horrible way to answer a question. But let's take the yes. The yes portion is as of right now, the game and network services portion of Sony's business is about 30%. I think it's about 30% of Sony. So it is meaningful. PlayStation is important. In some ways, yeah, the sell-off and the fear is a bit justified here because this makes the Xbox a much more attractive platform, and in a couple of ways. It makes it an attractive platform for buyers, but it also makes it an attractive platform for developers. A game developer does have decisions to make. When you're developing a game, you do have to decide where you want to target that game. Are you going to target it at PlayStation or you're going to target it at Xbox, you're going to target it to the cloud, you're going to target it to mobile. A developer does have choices to make. So I think for Sony, their platform becomes a little less attractive today, and in that sense, yeah, it's a big deal. On the other hand, I mean, come on, do we really believe that the PlayStation is going away and that this means that all new exciting games from independent studios are going to go to Xbox first all of the time? No, I don't believe that at all. In fact, I believe that there will be plenty of PlayStation exclusives, PlayStation reveals. Sony also has a very big entertainment and a well-diversified business. I think the Sony response, whatever it is, Chris, is going to be fascinating.

Chris Hill: Well, and you and I were talking earlier, neither one of us thinks that Microsoft is not going to have this deal shot down by regulators. Regulators will have some tough questions as they should. But all the more reason for Microsoft to put themselves in a position, if you're a regulator, it's in one of your questions about PlayStation because there's a version of this where Microsoft takes a ton of new games, makes them exclusive to Xbox and slowly PlayStation withers on the vine.

Tim Beyers: Yes, that is a question. The question from the senator from Connecticut is will Call of Duty be an Xbox-exclusive game from here on out. The answer to that better be no. Of course it will be no, because Microsoft isn't just selling Xboxes. In fact, hardware, I would argue, is the least important aspect of the Xbox business. The bigger aspect of the Xbox business is the software, the licensing, and I think most important of all, is the franchising. Because what Microsoft bought here isn't just really good games. They bought really good brands. They bought Candy Crush, they bought Call of Duty, they bought Overwatch. These are a bit more transcendent brands, and gaming has become, in a lot of ways, I think, Chris, the new movies. Like when you are interested in something, you're getting yourself involved in an entertainment franchise. Games, I think are the first line of choice for somebody who's getting into a new entertainment franchise instead of maybe getting into Disney+. Which Disney+ is amazing, and those are good franchises, but gaming franchises are very important. They are growing in importance, and Microsoft has got some really big ones. I think if you were to diminish Sony a little bit, I would say Sony doesn't really have the same degree of franchises that Microsoft has gotten now with this deal. But yeah, no other company among the big tech companies could get away with this deal. But Microsoft gets away with this deal because gaming is such a small part of its business.

Chris Hill: I like to think that the senator of Connecticut is asking that question because he owns a PlayStation and he doesn't want to have to shell out money for an Xbox now.

Tim Beyers: A hundred percent.

Chris Hill: Let's stick with entertainment. YouTube is shutting down its original programming division, and I saw that headline and I was reminded that YouTube has an original programming division. It seems like this was always the way it was going to go. What do you think when you hear something like that? Because one of the things I think is, I'm amazed that YouTube is still as a business, as dominant as it is, as big as it is, as a business, it's not performing the way that the people who run Alphabet would like it to run.

Tim Beyers: I love that you just basically called out YouTube original programming as the Quibi of streaming. That is amazing, but also accurate, factually correct, I mean, can you name a YouTube original program? I cannot. So it doesn't surprise me that this is going away. Frankly, YouTube is known for short-form programming. It's known for clips, it's known for recaps, and that's what we love about it. Here at The Motley Fool, we do have something for our team, particularly on the analyst team, where we can get the subscription that allows us to get rid of the YouTube ads. I can go in and watch, say, an Investor Conference. No ads. I just get the full experience of it. In fact, I did this. I watched the AMD presentation at CES. It is great. You get the full 40 minutes, all of the discussion of what's going on and it's a much better experience, that's actually worth paying for. So the fact that YouTube is getting rid of original programming, I honestly, Chris, think this is good news for Alphabet because original programming is expensive. It takes a long time for content to have a really long life. Before, you have to invest quite a lot upfront to create a content franchise, then on the back end, the returns on that if it really hits, are amazing, but the upfront cost is immense. Now YouTube gets rid of that cost, they build out their network, and they do what they've been doing wonderfully for a really long period of time, which is take other people's content, repurpose it, and give them a platform. I think it's a good move.

Chris Hill: Last thing before we move on, I think if you're a shareholder of Alphabet, it's one more reason you have to love that Ruth Porat is the CFO. Because Alphabet makes so much money. The problem with businesses that make so much money is that some people both inside the business and outside the business say, well, we can try all these other things because we've got this golden goose, and that will just subsidize everything else we do. With Alphabet, Ruth Porat is putting a timeline on these things. There's a version if someone else is the CFO or the leadership makeup is a little different, they say, "Yeah, let's keep going. Let's keep doing this." They gave it a shot and it didn't work.

Tim Beyers: Right. She's stone cold. I love Ruth Porat. She is a Jerry Maguire CFO. It's all, "show me the money." You've got to show me the money. If you can't show me the money, sorry. That is what you want from your CFO. You want to be able to run a lot of experiments, run them with a very low cash outlay, if you can get away with it, give the experiment a certain period of time, and if it's not delivering returns in that period, you want to shut that down. This is something, by the way, it is an underappreciated cultural aspect of Alphabet. I think they've lost it in the last few years. It's heartening to see it coming back, Chris. It used to be that the pre-Alphabet days, back in the Google days, Google would run an enormous number of experiments and sometimes they would kill those experiments when they were popular. I remember being an early user. I'm going to date myself here. I was an early user of Google Notebook, and I loved Google Notebook, and they killed that thing because of Evernote. I was devastated because I'm just a nerd that way. But it was the right move to make. It was the right move to make because it wasn't a big project that was returning cash to the company. So it's heartening to see this where they're going old-school running experiments and then ending them when they should be ended.

Chris Hill: Two more things I want your thoughts on before I let you go. SoFi Technologies, one, regulatory approval to become a bank holding company, shares of SoFi are up more than 12% today. How much more attractive does this mix so far as business, because this was not a stock that was on my watch list before, and I'm not sure regulatory approval to become a bank changes that.

Tim Beyers: Yeah, I think this is a shrug emoji, Chris. I really do. By the way, name another bank that has technologies in its name. That's interesting. But no, I don't think this is a massive deal, and the reason I don't think it's a massive deal has really nothing to do with SoFi. It's the nature of banking itself. I think that banking is changing dramatically. We are moving to a period where at least a portion of banking is done through apps. In an app-first, banking world or an API-first banking world, where you don't really need a banking relationship as long as you've got the app and the app acts as your bank, and it becomes where you get your money, where you withdraw your money, where you send your money, and most of this is driven through the app. Like for example, I really believe that Block, the company formerly known as Square, and its Cash App, I believe that is reflective of what a future bank looks like. That's not the only one. But Cash App as a banking experience, I think for a younger, modern consumer, that becomes like your banking interface. SoFi, becoming a bank is a checkbox item. But what else do you do to attract a customer and say you should bank with us other than give rebates, incentives, and things of that nature. So no, I think it's a bit of a shrug emoji. It doesn't mean that SoFi is a bad business, but I don't think it materially changes its fortunes, Chris.

Chris Hill: Today's the day that Verizon and AT&T are switching to 5G service nationwide, except reportedly near airports because of concerns that high-tech radio signals could interfere with the navigational systems on some aircraft. I've got to be honest, Tim, as a guy with a mobile phone, I didn't care all that much about this story. As a guy who occasionally gets on an airplane, now I'm really interested in this story. Where do we go from here with 5G?

Tim Beyers: Where we go is to major metropolitan centers, and there are going to be places where 5G is going to be blacked out. The interesting thing about this story is it's terrifying and a non-event. The reason it's terrifying is, I'm reminded of, again, I'm dating myself, but there's a very old show now. I can't believe this is an old show, but it's an old show now because it was from the late 90s called The West Wing, which I loved that show, and there is an old episode in which one of the characters is on an airplane and making a call on his mobile phone, and the flight attendant is telling him he cannot make a call on the phone because it's going to interfere with the navigation system and he goes on a screed about modern navigation systems of, are you telling me I can take that down with this little flip phone? The answer is probably not. 

But at the same time, it is a real thing like bandwidth and frequencies. You don't want to be interfering with navigation systems on aircraft. I do get that and there are also blackout zones around major metropolitan airports. I remember there being one when I lived in the Bay Area, there was one around Moff Field near, that may be more to do with defense than actual aircraft. But at the same time, this is not necessarily new, but it does speak to some of the specialties of 5G because what's interesting about 5G is that it's very high frequency. It's a very high bandwidth type of communications protocol. Like you're sending a lot of data over a very shorter digital pipe. Yeah, it makes sense to me, how we're going to design 5G networks will be fascinating to me, Chris. I predict it will be more antennas in tighter spaces, which means more cities, less rural areas. Yeah, don't expect 5G around airports anytime soon. But if you live in a city, I think 5G is going to be a game changer. Interesting, not too surprising though.

Chris Hill: Since you confessed to your nerd-dom I will confess to mine. I'm also a big fan of The West Wing. It was the pilot episode, it was Toby Ziegler and he had the great ending to that screed where he said, are you telling me I can take down this plane with something I bought at RadioShack?

Tim Beyers: That's it. Yes. Well done. That's that's it, exactly right. Talk about multiple old-school references in one quote right there.

Chris Hill: Tim Beyers, always great talking to you. Thanks for being here.

Tim Beyers: Thanks for having me, Chris.

Chris Hill: Among the people who follow individual companies most closely are local beat riders. John LaConte is a reporter for Vail Daily newspaper in Colorado and he follows Vail Mountain Resorts, ticker symbol, MTN. Our producer, Ricky Mulvey, caught up with LaConte to talk about Vail's difficult holiday season. How the company thinks about its labor shortage and a climate change assumption that investors should pay attention to.

Ricky Mulvey: Why are our investors feeling a little bit more pessimistic about Vail right now? They sold 2.1 million pre-purchase tickets. That's a 76% increase over the 2019-2020 season. You have more people going to the parks, hopefully spending more money. But it seems there's a little bit more negativity right now.

John LaConte: Vail is unique in travel and leisure right now. They are underperforming and the people who are investors in this company also ski and visited the Vail Resorts properties over the big vacation period and could see visible decrease in the quality that they had grown accustomed to.

Ricky Mulvey: Vail right now is having a huge labor problem. You could call it the labor shortage. It could be because maybe they are not paying enough to some employees. What's the problem with the labor shortage in Vail? Are there simply less people willing to work on the mountains or are they finding it unaffordable and they want to work on the mountains as ski patrollers and chair operators, that sort of thing.

John LaConte: Yeah, I think the issue has been a long time coming. Labor has been tough in the mountain communities for a long time. Housing is hard to find. But yeah, just to make it appear in general, it's really difficult and if you want to start a family, that's nearly impossible for a lot of people. If you're one of the lucky ones who gets a job at Vail Corporate, you can get ahead and you can get a great job that you will make enough and be able to raise a family one day. But you're going to be moving around. You are going to be bouncing around the country. People will opt out for that reason. Then if you're working for Vail itself, they can provide ways around wages. Why do you need a wage when we'll provide your food, your housing, your bus pass, your ski pass, your ski equipment, and we'll even set up a morning calisthenics program for you to help you stay healthy and reduce your health costs burden. The resort can set up a lot of these systems to get around paying wages. From their viewpoint, why would they pay a wage if they're able to provide housing, that is town housing? They have a great system for them dialed in where you have government housing you're able to take advantage of, and if you get to a situation where that's full, and some of that housing is now being used by other companies who are in the valley, we have lots of big players here, not just Vail, Marriott, Hilton Height, you name it. Suddenly it just becomes really difficult to just maintain a labor force.

Ricky Mulvey: Vail cut the price of its season pass this year by 20%, ticket sales went up because of that. But is this something that might prove to bite them later on, is larger crowds maybe decreasing the quality of experience for skiers and snowboarders.

John LaConte: Well, we would have the ski pass costs $5. How many would you sell? At some point, you run out of the skiers. We're trying to figure out how many skiers are out there, and it varies year to year and you measure it by skier days. But in the U.S., we've been getting to 60 million skier days over the last decade. A skier day is just a day on the mountain, so maybe I might in a year contribute to 100 skier days if I get out every day. We're up to 60 million in this country. Vail selling 2.1 million pre-sold ski passes, they're trying to figure that out. They know how many they'll sell when the price of the pass is $2,000 because that's what it was once upon a time. Over the last decade, and in this era, we call the era of the mega pass where you get a pass that gets you everywhere in the country. In this era of the mega pass, they're trying to figure out where is the price point so that every single skier buys a pass. Who knows? Maybe we very well might get down to $5 at some point but there are new problems associated with that. But again with this stuff with the crowds, it's this year that somehow has been a magnifier of that. Because if you were to search the term "lift line apocalypse," you'd go back to the two seasons ago and see just as insane of lift lines as you've been seeing this season, maybe worse.

Ricky Mulvey: Do you think the problem then is exasperated by social media? This is the lift line problem and something that Vail takes very seriously. They're spending hundreds of millions of dollars on it opening the lifts, improving the EpicMix app to include these lift line forecasts. Do you think it's a little bit of an overreaction by social media?

John LaConte: First off, I'll say that if you talk to EpicMix app users, they'll say that there has not been improvements on that app. They'll say that the app is a much compromised version of what it once was, and the lift line forecast, that helps. But I think that Vail maybe, it's the social media aspect is magnified in their mind because they're on those feeds watching that stuff. But what the problem is that you have the skiers who they can ski any day of the year that they want, and now you've got skiers, everybody is good now. Everybody in Colorado who comes out and skis, they're all pretty good skiers now, a lot of them. We've all been shredding on this epic pass for the last 10 years, getting as many days as we can and getting good at skiing, and now, everybody only just wants to ski on the same day. It's a powder day, and we haven't had a powder day in three weeks let's say, and all of a sudden one comes, the lift line is just going to get absolutely slammed. I don't see that as a problem for the ski season overall, I just see that as an issue for certain times and for the perception of the ski experience. Because I'll tell you, I never wait in any of those lifts lines. I find ways around those lift lines every single time. It's something that affects guests, people that don't really know and to try to get an app to help with that is a classic-like Vail solution like, yeah, let's just come up with some technology to help this. But really, I think it's more in education and just saying to people like, when the powder day arrives, the lift lines are going to be long and you're going to be waiting in them if you're trying to get out there.

Ricky Mulvey: The other long-term problem that Vail could eventually run into is climate change which may be shortening ski seasons for their mountains.

John LaConte: Absolutely, if you listen on these investor calls, they start off by saying, all of this projection that we're giving you is assuming normal snow conditions. Then you say to yourself, OK, Vail, what is normal snow conditions? Let's go to your website and check it out. You say on your website now that average snowfall per year is 354 inches. Vail Mountain hasn't received 354 inches of snow in more than a decade now. If I'm an investor and I hear assuming normal snow conditions, and then I realize, wait a minute, you haven't hit that professed normal snow condition in the last decade, yeah, I'm getting a little nervous here, of course. Last time they reached their 354 average, they got like more than 500 inches that season. It was the 2010/2011 season, and it was this massive snow year. But since then, Vail Mountain has only gotten over 300 inches of snow one time, it was like 310 or 315 or something like that. They haven't hit their professed average, and the idea of an average is just getting thrown right out of the window because you have these massive snow years and then you have these smaller snow years.

Ricky Mulvey: A final question, I have to ask you. We have a longtime Fool. He wants to know where he can go ski in Colorado where snowboarders will not bother him. Where should he go?

John LaConte: I would say he can go straight to hell.

Ricky Mulvey: Thanks, John. I appreciate it.

Chris Hill: If you're just getting started investing or you know someone who's looking to get started, we have a free investing starter kit. It covers everything from how to set up a brokerage account, to 401(k)s, to buying your first stock, and it includes 15 stocks and five ETFs selected by our investing team, and it's free. Just go to fool.com/starterkit. It's fool.com/starterkit. We'll put the link in the show notes. That's all for today, but coming up tomorrow, Jason Moser and Matt Frankel will have a deep dive on a payments company that's probably not on your radar, until tomorrow that is. 

As always, people on the program may have interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against, so don't buy yourselves stocks based solely on what you hear. I'm Chris Hill, thanks for listening. We'll see you tomorrow.