It's "Pop Culture Week" at Industry Focus. Specifically, we're looking at why movies and television often get finance -- especially the stock market -- wrong.
Admittedly, buying and holding good companies with a long-term mindset does not exactly make for good drama. But while Hollywood tends to make the market look like a cross between a game show and the Wild West, that does not mean there are no real-life investment strategies and challenges playing out on your television.
On this episode of Industry Focus: Consumer Goods, Vincent Shen is joined by Fool.com contributor Daniel Kline to look at two cases where pop culture and investing meet. The pair examines how HBO's drama, The Newsroom, dealt with the revenue versus ratings dilemma that plagues the leading names in the cable news business, including Fox News, CNN, and MSNBC, with a direct impact on the bottom line of their parent companies.
In the second segment, the pair look at how Michael Lewis' Moneyball offers a baseball strategy that can similarly be applied to stocks that might not make the headlines or put up the flashest numbers but can still deliver for shareholders.
A full transcript follows the video.
This podcast was recorded on Aug. 2, 2016.
Vincent Shen: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market each day. I'm your host, Vincent Shen. It's Tuesday, Aug. 2, and joining me from ... I think Boston, right, Dan?
Dan Kline: I'm in Salem, Mass, actually. If you hear any noises behind me, it's a witch from the 1800s.
Shen: That's Mr. Daniel Kline, Fool.com contributor. He's joining us via Skype. It's great having you back, Dan. How are you?
Kline: Thanks for having me.
Shen: What's new?
Kline: Well, what's new is I'm moving halfway across the country. I'm moving from Connecticut to West Palm Beach, Florida. The next time we do this, I'll probably be in sandals and a tank top by the pool.
Shen: There you go, that sounds comfortable. I wouldn't mind having the ocean breeze in the background of the podcast.
Kline: You're welcome to visit.
Shen: So, listeners, Dan and I have a particularly fun and Foolish show for you today. As part of our "Pop Culture" theme week we're having on Industry Focus, our goal with this theme is to take some storylines from various books, TV shows, and films, and bring them into The Motley Fool world of investing, and to see what they got right, what they got wrong, and more. For our source materials today, first we're going to turn to HBO and a show that aired a few years ago called The Newsroom. Then, for the second part of the show, we'd like to talk a little bit about a book from Michael Lewis, who I'm sure a lot of our listeners are familiar with.
For the first topic, from 2012 to 2014, HBO aired three seasons of The Newsroom. Please chime in here, Dan, by the way if you don't feel like I'm doing the show justice.
Kline: The big conceit of The Newsroom is that Jeff Daniels' character wanted to return cable news from "The Talking Heads" and "The Opinion" to make it the "correct news," which might mean not the most viewers, not the most money. Basically, as the three seasons play out, you see a sort of money versus integrity battle that's raging at the news networks. You look at a CNN or an MSNBC, and just doing news, unless something huge is happening -- sure, if there's a terrorist attack, people, turn in, but on a regular night, just reporting the news with no varnish of opinion, doesn't do as well as Fox News. You can see in the ratings. What is it, four, five million for Fox News many nights, and 800,000 for MSNBC?
Shen: Yeah, it's a huge discrepancy. Fox News is definitely the clear leader when it comes to the three major cable news networks.
Kline: So, on The Newsroom, you basically had that playing out. Jeff Daniels was working with a producer, and they were trying to "do the news the right way." They had a news director, played by Sam Waterston, who was leading that charge. The idea was, what's the balance? Is it OK to put Anthony Bourdain on Sunday nights at 11 when nothing is happening, because it's going to draw ratings and it's going to draw an audience? As a journalist, there's a whole appeal to me of, "We're going to do the news correctly!" And I think at the Fool, we do the news correctly. We mark our opinion appropriately, when we say it's news, it's generally news, we don't put a varnish on it. But of course, everybody has economic concerns, and that's what played out in the background of The Newsroom.
Shen: Absolutely. At its core, the story here behind The Newsroom revolves around this nightly news show, it's a fictional cable network called ACN.
Kline: It's basically Countdown with Keith Olbermann, but they're not saying that.
Shen: Exactly. I was actually personally a huge fan of the show during its original run. I really liked the behind-the-scenes look, granted with plenty of Hollywood poetic license of course, of how a news programming comes to be on the networks you mentioned: CNN, Fox News, in the real world. We're going to play a short clip here from the show that captures this back and forth that Dan was talking about in terms of doing the news the right way versus maximizing profits for these parent companies.
Kline: Right. What's happening here is Sam Waterson's character, Charlie Skinner, who was sort of the crusading news director, has died. The network, which was owned by the Lansing family, with Jane Fonda playing the matriarch of the family, Leona, they've sold it for pressing financial reasons to Lucas Pruitt, a tech billionaire played by B.J. Novak. Of course, what he wants to do is turn the network into the most profitable thing possible, which is a horrifying combination of Gawker and TMZ. In this clip you're about to hear, you have Leona basically convincing him that he doesn't want to do that, that there's some value in letting the journalists have a piece of the pie.
[Audio from The Newsroom]
As you can see with that, obviously, it's a bit played up, it's a bit dramatic. But it's really the balance. CNN and MSNBC are both constantly in transition. It's all put on hold a little bit by the election, which brings new viewers. But after the election ends, what goes on at 10 o'clock on CNN? Do you put a talk show host on? Do you put Dr. Drew or whatever is going to be the most salacious? Do you pick up Nancy Grace and let her do the kidnapped person? Or do you follow the news, even when it's not sexy. One of the dramas on The Newsroom was always, do we lead with the important story which might be politics or military, or do we go to Kim Kardashian's latest low-cut outfit or whatever people might be most interested in?
Shen: Yep. So, just to step back a little, so listeners can understand what the numbers are on the actual business impact that some of these networks have ... CNN and MSNBC and Fox News are part of three bigger entertainment companies, or companies that overall, I'm sure our listeners are familiar with. Fox News, obviously was Twenty-First Century Fox (NASDAQ:FOX). MSNBC with NBCUniversal, which is under Comcast (NASDAQ:CMCSA). Then, CNN is under Time Warner (NYSE:TWX.DL) as part of their Turner segment.
These networks, during primetime, which is the ideal evening time slot, they average about three million viewers. Hence, the evening news show on The Newsroom was called News Night with Will McAvoy. Daytime totals are weaker for these news networks in general, about two million viewers. Just to give you some perspective in terms of where that sizes out, with the three networks averaging three million viewers during primetime ...
Kline: And about two-thirds of those are Fox, it's worth noting.
Shen: Yeah. A hit cable show like AMC Network's The Walking Dead, for their season five finale, had 16 million viewers. We're already operating at a lower level. With that said, there is definitely quite a bit of a financial incentive for these companies.
Kline: Yeah, the economics are different. Because the cable world is rapidly changing, it's becoming more pressing. Cable networks, especially news networks, make a big portion of the revenue from carriage fees, meaning, on your cable bill, you're actually indirectly paying a few cents for those channels. As we move to more of an "à la carte" or even a limited subscription cable world, if you choose to not have CNN because it's not relevant to you, well, if they lose a few million viewers, that's very relevant money. We've seen the hits ESPN and Disney have taken. So, it becomes important not just for them to attract viewers but to get you to actually care about their programming, meaning, if you love Anthony Bourdain, and otherwise watch Fox News, you might still pay for a package which includes CNN. But if there's nothing on MSNBC that appeals to you, and you have the option of not paying an extra quarter to get it, or whatever the carriage number is, you may not. So it's becoming a much more pressing financial matter to actually have people care about your station.
Shen: Yeah. And there's the double whammy The Newsroom touches on. You want to have the programming that people want, and the viewership. These networks can make some money from advertising. Then you have the loyalty, I guess you might describe it as, so that when it comes down to some of these more "à la carte" options, and they make their affiliate fees -- just to be clear, those are basically coming out of your cable bill and going to the content providers from the cable company.
Kline: Yeah. And basically, it's all a compromise. You watch The Newsroom, and they're pushing integrity and doing the news the right way, but they're all still really good-looking. They're not putting on ugly newscasters. So they still understand that there's a balance. You have a Fox News which is called "advocacy journalism," and it's very highly rated, but is there some compromise where you should be doing news, or you should be working as advertised and being fair and balanced? It's a very complicated case, and it plays out beautifully on The Newsroom.
Shen: Yeah. Stepping back, in terms of the investing angle here, as I mentioned earlier, these three major networks we're talking about are part of bigger companies, part of their business. Revenue among the three networks in 2015, I think I have an estimate here, gathered from Pew Research and Nielsen, was estimated to hit about $4 billion. That's up over 120% from 2006, over the past decade. Fox News, again, is the leader, not only viewership, but they had about $2.3 billion in revenue. There's a profit number provided, but I'm not sure what kind of profit that is, exactly, operating or maybe some type of net profit.
But, the cable networking programming segment at 21st Century Fox had $13.8 billion in revenue. $2.3 is a pretty sizable portion of that. They had $4.7 billion of operating profit, that's about 70% of the total operating profits. Where this $1.5 billion number comes from for Fox News still is a huge portion of that, so you can see that, as much as Will McAvoy and his team on The Newsroom wanted News Night to be this idealistic take on the nightly news, I can also see the other side, with Pruitt wanting to drive the ratings and the revenue.
Kline: And that's what you heard in the clip you heard before. The answer is that they're both right. You need the two sides fighting against each other. In any newsroom, you talk about the separation between church and state, which is the separation between editorial and advertising. But, that's kind of a 1960's notion. Now, you have to be aware of eyeballs. If you look at it, Fox News is a much bigger business than CNN or MSNBC. It's not likely that either CNN or MSNBC are going to be able to catch up. They're going to become niche products. Now, they might become niche products that serve a specific audience of older people who are willing to pay for them. They may become premium products. But unless you do something leaning very specifically in one direction, or switch completely to entertainment programming, then the market for the news on television has disappeared with younger people, because you don't have to wait for the news. We've seen the same thing with ESPN and Sports Center. Nobody under 30 watches sports clips on an hour-long evening show. They go to YouTube or other formats. Fox is operating with a little bit more protection, because they're doing something to a very specific right-wing audience. CNN and MSNBC, they're going to go up and down as the news cycle goes up and down, and there's no real way to get out of that unless they really change and go TMZ, or some other completely different direction.
Shen: Yeah. And that's reflected in some of the numbers, too, among the financials for CNN. Estimated revenue in 2015 was about $1.2 billion, the Turner segment where CNN falls, that includes some of Time Warner's other networks --
Kline: TBS, TNT. Cartoon Network. Things like that.
Shen: Exactly. The overall segment revenue for Turner was about $10.6 billion. A smaller piece of that. In Turner segment, though, overall, for Time Warner, is by far the biggest operating profits. I think they make about 60% of the bottom line.
Kline: Comcast and Time Warner are two very different stories. I don't discount Comcast because of MSNBC, or even NBC News, because it's such a tiny percentage of the company. It's OK for them to run a boutique news service as kind of a public service. For Time Warner and CNN, it's not as big of a company, it doesn't have theme parks and a movie -- well, it has Warner Brothers, but it doesn't have quite the level of movies that Comcast has. So there, I look at CNN as a drag, and think CNN might be better operating as a quasi-public partnership, where the goal is to break even. There are a lot of newspapers working that way. CNN might make more sense partnered with CBS or one of the networks to defray costs. But as a stand-alone money-making cable organization, you're going to have to have a lot more Anthony Bourdain shows, and Morgan Spurlock, and things that attract an audience, and cooking shows, or whatever it is, to offset the cost of having news bureaus and flying Anderson Cooper all over the world.
Shen: Yeah. The last point I wanted to end on was with the affiliate fees, to give our listeners an idea of what's going into their cable bill, if they haven't cut the cord yet, or slimmed it down in some way. The most recent numbers I could find had Fox News at about $1.50 per month per subscriber for their subscriber affiliate fee. CNN commanded about $0.60, and MSNBC about half that. That's basically what you're paying to have access to those networks.
Kline: And those are pretty good numbers. Aside from ESPN, which is roughly $6.30, last time I looked --
Shen: It's king of the heap, admittedly.
Kline: That puts Fox very high up there. It's a huge base of revenue, but as that model changes, you're going to need to sell more ads, or, you're going to need to have people pay directly to subscribe to you. Fox News might make more money if it's sold as a $9.99 streaming service. CNN and MSNBC, for the few hundred thousand people they have watching religiously, it wouldn't work. We saw, when Al Gore tried to do Current with Keith Olbermann, who's about the biggest star in that world, there wasn't really an audience for it. In a changing cable universe, I think Time Warner and Comcast have to absolutely worry about that.
Shen: I really like that segment. We have a few more minutes here, and I want to move on to this other one. When you pitched me this idea, I thought it was a really interesting take. I had mentioned Michael Lewis for the second part of the show. In particular, we're going to talk a little bit about Moneyball. At least, not specifically the book itself, but that take in terms of how to look at stocks. Why don't you kick that off, Dan?
Kline: The premise of Moneyball, which is a tactic used by the GM of the Oakland Athletics at the time, was, baseball players tend to be valued based on their flashy statistics -- home runs, batting average -- when the reality is, the values to be had in baseball are based on less-known statistics, base percentage being one of them. So you might have a very productive player who doesn't hit for power, who doesn't put up the flashy numbers, but he actually has a greater impact on the game. If you start looking at players based on value, you might be able to bring in guys for $1 million versus $20 million, and the difference in production is maybe 10%, whereas the difference in money is astronomical. That's the premise of Moneyball.
When you apply that to stocks, you can look at some of your more popular stocks, your Apple, your Microsoft, Comcast, companies that get a lot of hype, that get a lot of media attention, and maybe they're overpriced because of it. Then, really look at companies that have the on-base percentages, have the fundamentals that make them a good buy, even though they might not be as hyped.
Shen: With that analogy in mind, I know you mentioned two tickers to me that you wanted to talk about. The first one, which, I actually really thought this was a good example in terms of not getting as much of the headlines, but it's definitely shown a lot of progress and growth in recent years. I think their business model is putting them in a really interesting position. That's SiriusXM (NASDAQ:SIRI).
Kline: Sirius XM is using the same model as Netflix, but they have less competition. In the old days, they were spending $50 million on Oprah, and $100 million on Howard Stern. Those are rough numbers. And they were bidding up every piece of available content. Now, they've learned, aside from Stern, who has a lesser deal, that you don't need to pay a lot of money for content. You can put on some lesser-known shows, build them up, have your music programming, buy your sports right. But they're sort of competing for sports rights against no one when it comes to the national radio audience. And you're making subscriber revenue. And it's such a low subscription number, less than $20, less than $15 in some cases, that it becomes like Netflix. It's something you don't cancel, even if you're not using it that well. Plus, they have the added advantage of, it's installed in most cars now. When you buy a new car, you get a free trial of it, so a lot of their marketing cost has gone away. So you have a company that's just minting, I don't know the exact number, 23 million is the subscriber ball park. That's maybe half Netflix in the U.S., but it doesn't have the billions of dollars of cost Netflix has, and Netflix is competing with every broadcast network, every streaming network. SiriusXM is competing with, if you have a good internet connection, or good phone data, and you want to listen to podcasts in your car.
Shen: Absolutely. The thing there is, what you mentioned, in terms of Netflix's competition with other content providers, really deep pockets. SiriusXM doesn't necessarily face those kinds of challenges. I actually wanted to jump in to say, I think their most recent subscriber numbers came in over 30 million, actually. Quite a bit higher.
Kline: Oh, sorry, I was a little out of date on that.
Shen: That's, again, more support for the idea that they have this base, they have really solid, consistent free cash flow generation off of that. I think their churn rates have come in recently at really low levels for the company. Churn rates, for listeners who aren't sure what that is, is people who are rolling off the service.
Kline: It's a base which hasn't shrunk as programming has left. Oprah went away, Martha Stewart went away, Cosmopolitan radio went away. Lots of things that were big-money deals expired, and you didn't see big hits. I think they'll take a big hit when Howard Stern leaves or retires. But maybe they lose five to 10%, if he doesn't go anywhere else, maybe they don't. It's a really solid business. You talked about the streaming services. When Seinfeld came up for bid for streaming, you had Hulu and Amazon and Netflix all bidding it up, and it went for, I believe, $1 million per episode. In radio, you simply don't have those costs. Local radio, there's very few national personalities and people who are getting a lot of money. It's really a free course for SiriusXM.
Shen: Yeah. Touching on the last one here, it's kind of similar, the way you described it to me -- I was not as familiar with that, but I did use to be a wrestling fan.
Kline: World Wrestling Entertainment (NYSE:WWE), it's a very similar business model. Obviously they have other revenue streams. They have live events, they have their TV contracts, but the most promising number they have is the WWE Network, which is in 1.4 to 1.5 million homes. It changes every few weeks. But it's been steadily growing number. That's a hardcore dedicated audience that's paying $9.99 for the programming. As that technology rolls out around the world, it's reasonable to think they're going to build to three, maybe four million, on top of all the other revenue streams. You're getting a very fixed-cost programming. There's no major other wrestling organizations that they're competing with for talent. So they have a very strong ability to control cost, and they have an endless amount of archival programming. You get that Netflix model, but once again, holding the programming cost down with the recurring subscriptions. It's going to take time to build. It hasn't grown as fast as they would have expected. But wrestling has been a resilient business in the U.S. for something like 90 years, there's no reason to think that's going to change any time soon.
Shen: The company launched this streaming service in February of 2014. It's only been a little over two years. As Dan mentioned, it's expanded all over the world at this point. $9.99 a month. It's shaken up their previous model, when they used to do a lot of pay-per-view events. Now, it's giving them a bit more stability.
Kline: Right. Pay-per-view, which used to cost $39 to $59, maybe a little bit more if you wanted it in HD, would depend on having the right programming. If they had the right match up, maybe they would do 1.2 million and make a lot of money. But if they had the wrong match up, they might do 180,000, or even less than that when it comes to buys. Now, as a fan, for the price of one pay-per-view every six months, you get all 16 pay-per-views, plus all this other programming. But most of the programming they're doing, aside from the live shows and the pay-per-views, is very low-cost, in studio talking heads, or old clips strung together, the 50 greatest tag teams from 1980 or whatever it is. It's all very inexpensive archival programming. It also can bring back lapsed fans, as their kids get old enough to want to watch wrestling. The guy who grew up a Hulk Hogan fan might say, "Yeah, I'll spend $10 for this for my kid." And once again, it becomes something you just don't cancel. I'm a WWE Network subscriber, and I remember to watch it maybe once every four months.
Shen: There you go. WWE Network and SiriusXM, at least in the time we have to talk about, are our two with this Moneyball approach -- maybe not taking all the headlines on the Wall Street Journal, for example, but they have that base of subscribers or users that has given them a pretty solid business model.
Kline: Yeah. In baseball terms, putting it back to Moneyball, they're a hitter who hits .280 who can play five positions who walks a lot. Maybe they don't put up a lot of home runs, but if you look at the impact on the game, in the case of the two companies, their ability to return revenue to shareholders, it's much higher than you would think it would be.
Shen: OK. Dan, that was a great discussion. Loved touching on Newsroom and Moneyball. Thanks for joining us.
Kline: I'm going to watch the last episode of The Newsroom again.
Shen: That's a wrap for us today. You can continue the conversation via Twitter @MFIndustryFocus, or send us any questions via email to IndustryFocus@Fool.com. You can also enjoy the other great podcasts from The Motley Fool by checking out Fool.com/podcasts. People on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell stocks based solely on what you hear during the program. Thanks for listening and Fool on!
Daniel Kline owns shares of Apple, Microsoft, and World Wrestling Entertainment. Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com, AMC Networks, Apple, Netflix, Time Warner, and Walt Disney. The Motley Fool owns shares of Microsoft and has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.