In this MarketFoolery podcast, host Mac Greer and Motley Fool analyst Aaron Bush take a virtual stroll around the digital globe for a trio of news items. First, they talk about how big a deal Call of Duty: Black Ops 4 could be for Activision Blizzard (ATVI 0.44%). The game's early reviews are overwhelmingly positive, and it may just knock Fortnite Battle Royale off its throne.
Elsewhere, Chinese internet giant Alibaba (BABA -0.82%) announced that it's taking a 10% stake in Mail.ru, one of Russia's largest tech companies, and linking up with it for a new e-commerce joint venture. Finally, they consider the somewhat snarky comment by AT&T (T 1.99%) CEO Randall L. Stephenson that Netflix (NFLX 0.54%) is the Walmart (WMT 1.08%) of video streaming, while his company's HBO is the Tiffany & Co. (TIF). Even if he's right, is it really an effective dig at a rival to compare it to the world's largest retailer?
A full transcript follows the video.
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This video was recorded on Sept. 12, 2018.
Mac Greer: It's Wednesday, September 12th. Welcome to Market Foolery! I'm Mac Greer, and joining me in studio, the one and only Motley Fool analyst, Aaron Bush. Aaron, you are flying solo today!
Aaron Bush: What a day to be here!
Greer: One thing that's playing out at the time of our taping, we should note, is the Apple event. Chris is going to be getting into the guts of that tomorrow. Because we don't really know what's happening right now. But, I do want to ask you, because we do know that they're probably going to be unveiling some new phones -- what's it going to take you to upgrade your phone? We were talking before the show, I know you have an iPhone 6, I have a 6s. What gets you to upgrade that phone?
Bush: I love new gadgets, but I'm so cheap. It really just needs to break. It needs to stop working, or apps need to stop working with it. Really, that's probably what it would take.
Greer: OK, I'm with you. I think you would have to double the battery life, and I'm not sure that's going to happen.
Bush: Yeah, probably not super soon. How old is your phone, though?
Greer: It's a 6s, so it's three or four years. But, I got a new battery, and then they just replaced the phone because the battery was bad, so I'm just a pig in slop. I'm happy as can be. I think I'll have that phone until I die.
Bush: Sounds like you hacked the system.
Greer: [laughs] On today's show, we've got the Kremlin's new joint venture and the Walmart of streaming. Yeah, I got you interested, don't I? Aaron, let's begin with the latest battle royale in the world of video games. Shares of Activision Blizzard up 7% on Tuesday and up 2% more at the time of our taping. Aaron, this all comes on the heels of positive reviews for Activision's new game, Call of Duty Black Ops 4. In fact, reviews are so positive that I'm seeing it being called a Fortnite killer. That may be overstatement. We should add, for those who may not follow the video game space, Fortnite is a craze. It's a video game with a rabid following. The game is free, they make all their money from in-app purchases, in-game purchases. Call of Duty is not free. A different business model here, Aaron. What they have in common is this battle royale mode, where the goal is to be the last man standing. What do you think of the latest Call of Duty here?
Bush: I mean, I think it's pretty exciting. This whole craze started with PUBG about a year ago. It's all happened really quickly. It's suddenly become a multibillion-dollar gaming business. All of the big publishers are out there wanting a piece of it. EA is going to attack it with Battlefield and Activision is doing it right now with Call of Duty. I think there was a lot of skepticism around whether or not they would be able to pull this off. It's really awesome to see that the battle royale mode is really positive. Obviously, this franchise has been around for 15 years. This is a way to really refresh the Call of Duty image. Really pulling the best of Call of Duty, which is all the shooting mechanics. Activision is a huge company, so they'll be able to cut out glitches and that type of thing really quickly.
I think that this is a really positive sign for them. And because it's purely digital, not only will they be able just to sell the $60 game, but there'll be opportunities just like in Fortnite and those other games for add-on purchases of skins, and all sorts of other things, probably.
Greer: Let's talk about the implications for investors. Fortnite is owned by Epic Games, which is private, but Tencent, which is public, has a 40% stake in Epic. Tencent would be one way, if you're an investor, that you could play the Fortnite craze. When you look at this latest battle royale game, Call of Duty from Activision, what do you think it means for investors both in Activision, or investors in a Tencent or other investors in video game companies?
Bush: Competition isn't great for Fortnite, for PUBG. I think it's attacking a bit of a different audience. This battle royale game with Call of Duty is really finding a way to get those Call of Duty players more entrenched. It's not really attacking Fortnite, although Fortnite's been so huge, I'm sure some of those players will come over and check it out. I'm not too concerned from a Tencent angle on this.
I think what I really like about this for Activision is the fact that this is a 15-year-old franchise, and Activision is proving that even 15 years later, they can still make it great. What that tells me is that in five or 10 years from now, battle royale might not be the fad anymore, but Call of Duty could still be there in whatever mode of gaming is most exciting at the time. Just seeing that makes me feel good about where Call of Duty is now and where it could go in the future.
Greer: You have me thinking that if I want to resurrect an old franchise, like a Ms. Pac Man, is the key battle royale? Just make it battle royale mode?
Bush: That's the way it seems right now. Give it six months and probably something else will be the craze. But, yeah, I could see Ms. Pac Man Battle Royale, drop 100 Ms. Pac Man's on an island and see which one is the last standing.
Greer: I like it. Let's move overseas to Russia. Chinese internet giant Alibaba is entering into a $2 billion joint venture with the Russian internet services company Mail.Ru. Aaron, what strikes me, there are a lot of interesting things going on with this deal. But this deal is backed by the Kremlin through the Russian Direct Investment Fund. How should I feel about this?
Bush: I think this deal is interesting for a couple of reasons. One is the geopolitical elements of it. This deal was actually announced when Putin and Xi Jinping were meeting in Russia. As the two countries have come closer together politically, coming closer together economically has sort of lagged. In some ways, this deal is symbolic of the current state of politics, and maybe is a hint of what else is to come in the future. That's interesting.
I do think that the business angle itself is more interesting. Alibaba is taking a 10% stake in Mail.RU. That company is one of Russia's largest tech companies. They have a really strong presence in email, you can get a hint from that from the name, but also social and other online services. Something like 90% of Russians interface with that company every month. It's very penetrated in Russia.
Alibaba is partnering with them to tackle Russia's nascent e-commerce market. On top of the 10% that they're investing in the parent company, they're also going to be taking a 48% stake and a new e-commerce joint venture with them. 52% will be owned by Mail.RU. The new venture will be called Aliexpress Russia.
I think this is interesting because they have a pretty good chance of success here. On one hand, the e-commerce penetration rate in Russia is only 3% of total sales. In reference, in China, where Alibaba is coming from, it's 15% of sales.
Greer: In the U.S., around 20%.
Bush: Yeah, it's around there. The runway just from that angle is huge. But by combining Mail.RU's 100 million or so users with Alibaba's several hundred million online merchants, I could see how that could scale pretty fast. This is a big move. But they're also not alone. I think that's interesting, too.
Greer: But when I see this phrase, that the deal is backed by the Kremlin, I mean, do you really have to have a stomach for risk and volatility? Already, we've talked about some of the risks that may be inherent in some of the Chinese stocks. There's a part of me that's not quite sure I know what I'm getting there.
Bush: I do think censorship, that type of thing, will definitely exist. But would you rather invest in a company that's backed by the country that you're operating in? Or invest in a competitor that's not backed by the country? In similar ways to how Alphabet, or Google at the time, failed to operate in China, but Baidu succeeded, that was because they were more in line with the Chinese government. I have a feeling a similar thing could happen here.
But they're not alone. Yandex, in December, also partnered with a new joint venture with Sberbank, which is the state-owned, huge Russian bank, for another massive joint venture attacking e-commerce. I think no matter how you are to approach the Russian e-commerce market, which has huge upside, the government's going to be involved in some way.
Greer: And they're betting on different horses. That's reassuring, in some sense.
Bush: Yeah, through different vehicles. It's still different people behind it, but just the fact that the backing is there, and that the scale of capital going into it is there, we'll see. We'll see a battle for Russian e-commerce dominance start to play out. It's super small right now. But if we check back in five years or so, it's going to be completely different.
Greer: I just have this vision, if you're a manager, if you're the CEO, and you have to report your quarterly numbers to Putin. Maybe you just came up a little short. And you're just sweating it. You're like, "I really don't want to give that PowerPoint."
Bush: Yeah, I don't know if he'll be checking that closely, but you never know.
Greer: Aaron, for our last story, I want to talk about the battle for the living room. Now that AT&T has completed its acquisition of Time Warner, AT&T owns channels like CNN and HBO. On Wednesday, AT&T CEO Randall Stephenson was talking about the competitive landscape and said that if Netflix is the Walmart of direct-to-consumer, streaming HBO is the Tiffany. What do you think of that analogy? Netflix is the Walmart, HBO is the Tiffany.
Bush: It just brings back deja vu. In 2010, Time Warner's CEO called Netflix the Albanian army. I feel like maybe they haven't entirely learned their lesson yet. Calling them the Walmart, in some ways, it's an upgrade. He's also forgetting that Walmart is still 20X bigger than Tiffany.
Greer: Yeah, I don't think I get that analogy. Is he trying to cheapen Netflix, saying it's generic or it's cluttered? Where do you think he's going with that?
Bush: Yeah, I think he's saying that with Netflix, you're just going to get a lot of content. It's a reasonable price, and you're just going to have a lot of content to work with. You know, that doesn't sound so bad.
Greer: And it's convenient.
Bush: Yeah, and it's convenient. With Tiffany, what he's really saying is that, "We might have less content, but what we do have is going to be quality."
Greer: Yeah, I'm not sure that works, though.
Bush: Yeah. I mean, the more content you have, the more quality content you can put in it, too. Jim Mueller, before we were taping, mentioned, "You know, Netflix has one more Emmys lately than HBO, right?" So, ouch!
Greer: If it is the Walmart, it's doing OK. With that in mind, how about fill in the blanks? Netflix is the ____ of streaming. HBO is the ____.
Bush: How about, Netflix is the Fortnite of streaming. HBO is anything else a kid could spend their time on.
Greer: That's interesting. I don't know. I worry about that. I almost think Fortnite's a craze. You're not saying Netflix is a craze, are you?
Bush: No, I don't think it's a craze. I think Fortnite is a craze, to some extent, but I don't think it's going to go away.
Greer: Where do you rank Fortnite, in terms of the potential for it to be a craze? Where do you rank that vs. Angry Birds?
Bush: Maybe it's similar. Maybe it's a bad analogy.
Greer: Oh, wow! No, no --
Bush: I mean, Angry Birds is still going somewhat strong today.
Greer: Yeah. But they made that movie, and I'm like ...
Bush: They sell lots of toys.
Greer: Right now, would you make a Fortnite movie if you knew that it wasn't going to come out for two years? And I go to you, and I say, "Aaron Bush, I need you to invest in this Fortnite movie, it's coming out in 2020?"
Bush: Probably not. Probably not.
Bush: I mean, most video game movies bomb. Maybe Fortnite isn't the best analogy for Netflix. Maybe Netflix is the Twitter of streaming, HBO is The New York Times. Something like that.
Greer: OK. I'm going Netflix is the Costco of streaming. I think people feel a real affinity for it, and they really like it, and, like Costco, it's competing with Amazon.
Bush: Not bad!
Greer: I've been thinking about this.
Bush: That's pretty good!
Greer: I don't know what HBO is. And I don't know what Randall Stephenson is of AT&T. I would say, you know what? Kill the whole Walmart thing. I don't think it's working for you.
Bush: Yeah, maybe just don't talk, and go back to work.
Greer: [laughs] OK, let's wrap up with our desert island poll. Over the next five years, you're on a desert island. My completely arbitrary, don't invest this way question. We've got Activision, we have Alibaba, we have at AT&T or Netflix. Which one are you buying?
Bush: I think I'm going to go with Activision. I think that they have such a strong cast of brands they can continue to put to work. They'll continue to create more. E-sports is still rising. Digital tailwinds are still there. They can spend their IP beyond video games. I think there's a lot of ways that they can move this business. But, I would say Netflix is a close second.
Greer: OK. If you have thoughts on our desert island poll, or if you want to complete the blanks -- Netflix is the ____ to streaming, HBO is the ____ -- then we would love to hear your thoughts. [email protected].
Bush: I'm sure you can do better than us!
Greer: I'm 100% positive. [email protected]. Aaron, thanks for joining me!
Bush: Thanks, Mac!
Greer: As always, people on the show may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's it for this edition of Market Foolery. The show is mixed by Austin Morgan. I'm Matt Greer. Thanks for listening! We will see you tomorrow!