Electronic Arts Makes a Move

In this episode of MarketFoolery, Chris Hill chats with Motley Fool analyst Jason Moser about the latest headlines and earnings reports from Wall Street. They discuss a recent outage suffered by multiple Google services and the market's reaction to the event. They've got all the details on a possible new deal in the video game industry. They've got news on the entry of a new video streaming service and much more.

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This video was recorded on December 14, 2020.

Chris Hill: It's Monday, December 14th. Welcome to MarketFoolery. I'm Chris Hill, with me today, Mr. Jason Moser. Good to see you my friend.

Jason Moser: Good to see you.

Hill: It is time for another deal, this time in the video gaming industry, it is time for Comcast (CMCSA -5.82%) to make their move in the video-streaming wars; and we'll get to both of those. But we're going to start with shares of Alphabet (GOOG -1.96%) (GOOGL -1.97%), which are in the spotlight this morning after multiple Google services -- Gmail, YouTube, Google Drive, Stadia -- suffered a massive outage for reasons unknown at this point. Google issued a statement saying service has already been restored for some users and we expect a resolution for all users in the near future, please note this timeframe is an estimate and may change.

Where do you want to start with this? You know, the stock is not tanking, there are a couple of different directions we can go. But my reaction to this was different than, sort of, the normal, you know, when we come out and we see, you know, as we've talked about in the past, Home Depot has announced that they were hacked and as many as 40 million credit cards could have been exposed.

Moser: Well, where I want to start with this, I want to flip the script here a little bit, Chris, because as we were talking pre-show here in our production discussion here earlier today, you seem to have a little bit of a take on this, and you wouldn't really elaborate. So, if you remember The Office, well, well, well how the turntables have... let's turn those tables and let me interview you, friend, [laughs] what is your take on this, because I really was interested to hear that?

Hill: So, I told you I had a weird reaction to this. And my reaction was almost one of sympathy, it was not alarm, and I'm not an Alphabet shareholder, it was not similar to the reaction I had when in the past we've talked about Home Depot or Target or any of these major retailers announcing, hey, 40 million credit cards may have had their data exposed. And you know, you just think, oh, boy! That's a little bit of -- my gut reaction, when I first saw this news was almost like Google was the coffee shop at the end of my block that I've been going to for 20 years, it's like a little local shop and I know the guy who owns it and, you know, he had a break-in. My reaction was, oh, I hope they're OK? Are they all right? Which is, I don't know what that says about me, I think it may say something about me, but I think it also says something about the way that I can't be alone in this regard, I think it says something about the way that a lot of us think about Google. It is an invaluable service for which we do not pay. We don't pay a dime to use Google or YouTube or Google Drive, you know, all these schools across the country that use Google Docs to share information, particularly as we're doing remote learning.

So, my gut reaction was this weird mix of sympathy, like, it wasn't alarm, and maybe it should be alarmed because this is, I would argue, one of the five most important companies in America.

Moser: Yeah. I mean, I think I'd probably put it in the top three even, and we can argue that 'till the cows come home, I guess, but I think that you're right. And it's a good observation, it is such a valuable collection of services that they offer that we pay nothing for. And of course, we've been having this conversation all year regarding privacy and that we're really the product and that they're just kind of exploiting our data and yada-yada-yada.

So, we as consumers, we make that trade-off, right, we choose to make that trade-off. And Google is not the only service we do that; I mean, you've got social media writ large that trade-offs are made every day. But I do think you're right, if you look at something like Twitter and Facebook crashing. I mean, I know that social media is central to a lot of folks' lives, and that's fine, I guess, whatever. But Twitter and Facebook crashing is not the same thing as Google or Amazon or Microsoft crashing. Google, Amazon, and Microsoft are far more important to what's going on, not only really domestically here, but globally, I would argue.

And Google to me is just one of the most invaluable resources we have as investors, as consumers, as students. And so, I think this to me, it's a good reminder of the risks of placing all of your eggs in one basket, so to speak. If you are a workplace or if you are a school and you're relying on something like Google and then all of a sudden that rug is just yanked out from under you, it doesn't matter how long it is, you feel it, even if it's for five minutes, it's like, whoa! What just happened here? Because it really does ding productivity.

And it's difficult to say exactly what happened here; I mean, these things just happen, it makes me think of the word "redundancy" you see with a lot of these tech companies today, particularly the big ones and like Amazon and Microsoft and Alphabet, where they talk about redundancy. Where you have essentially a failsafe, right? So, if something goes wrong, they can fall back on something which keeps the world from coming to an end, so to speak.

And it makes me wonder, and I'm no techy, I'm not a coder so, this is just something I thought about, but it makes me wonder that as these systems advance, as the tech gets better, it feels like to me that it would become, oftentimes they would become more intricate if developers and coders aren't careful.

And I guess the analogy I was coming up with this morning, it could be something akin to our tax code here domestically, in that, if instead of making it more streamlined and efficient and making it work better, if you keep on adding things to it without really accounting for everything that went into building it in the first place, it just becomes more complicated, it becomes more complicated to unwind, it becomes more difficult to fully figure out, and you could ultimately run into situations where failure becomes a bit more of a frequent occasion or event. I just don't know, but either way, yeah, to your point, it's something you feel, no doubt.

Hill: It's also interesting to me, just as an investor and someone who watches the market for a living, Google hasn't really said what's going on, and the stock isn't -- like, I think it speaks to Google's track record, the track record of the leadership, you know, you combine all that and the market is more than willing to just say, oh, OK, well, just let us know. [laughs] Like, you know, there's not even a 5% dip, which would be, you know, arguably very normal in this situation. Again, this is a huge company, it's an important company, but I think it speaks to the people running it that Google has basically said, yeah, we're working on this, we're not telling you what happened because we're working on this, we'll get back to you. And everyone is just like, oh, OK, cool, I'm not selling the stock.

Moser: Yeah, well, I mean, as an Alphabet shareholder, I absolutely wouldn't be selling my shares on this type of event. And one of the reasons -- so, I think, you know, a time ago there could have been a more severe reaction to this, a more harsh reaction. And when you consider this migration to cloud computing and all of the different ways it's impacted our economy and this move toward the digital economy, a lot of companies out there utilize Google services to make their businesses run. I mean, Netflix, I think is a customer, for example.

But what we've seen over the last several years is the incorporation of this multi-cloud strategy. And ultimately, multi-cloud in its simplest form is just, when a company chooses to use several different public cloud vendors. So, one company might use Google, Amazon, and Microsoft, for example -- and that goes back to that "redundancy" word I mentioned earlier. I mean, that helps a company in not placing all of their eggs in one basket, knowing that they have some sort of fallback or some sort of failsafe, so that if one provider checks out for a little bit, that the customer's business doesn't just grind to a halt.

So, maybe a time ago, before multi-cloud really was something that was as prevalent as it is today, maybe those companies and Google also would have felt a little bit more of an impact from this, but I think today, you know, technology has just made so many great advancements, and again, I go back to Amazon, Microsoft, Alphabet, to me, just three of the most important companies out there, because of just the infrastructure that they've built in controlling so much of what the world does today.

Hill: In mid-November, Codemasters, which is a video game maker based in the U.K., agreed to be acquired by Take-Two Interactive for just under $1 billion; that was then. Today, Electronic Arts (EA -0.65%) announced that it is buying Codemasters for $1.2 billion in cash. And Jason, this might not be over, Take-Two has said they're going to reconsider their position. And I will point out, all three of these stocks are up. Now, Codemasters is up big, but both EA and Take-Two, still up a little bit.

Moser: Yeah. Well, EA has stepped up and said, hey, nope. We want this one and we're going to pay for it. And they offered more money. And that's the way that works. And Take-Two is going to have a chance to get in there and perhaps reconsider their offer. I don't know that they will; I mean, maybe they will. To me, I think this was a smart move on EA's part. I mean, gaming is, of course, we talk about this all time, it's one of the largest market opportunities in our universe, I mean, entertainment and otherwise. And EA itself, they own a number of popular franchises that are hits in their own right. I mean, you think about Star Wars, and Battlefield, and Apex Legends, and The Sims. They also have a very big presence in things in that racing market. And Codemasters, that's what Codemasters is really known for, is its Formula One and Dirt racing game franchise.

So, to me, it'll be interesting to see how this shakes out from a deal perspective, but this does seem more complimentary to EA's MO, so to speak. I mean, it seems to be more in line with what EA does pretty well. So, we'll have to see if Take-Two decides to counter that. I mean, Take-Two is a good business as well. It's smaller than EA Sports or Electronic Arts. And EA definitely has the larger balance sheet, they have something around $6 billion in cash and equivalents on the balance sheet, so they can certainly make this deal. And if Take-Two decides to go in there and offer a little bit more, there's nothing that says EA wouldn't push it up a little bit higher, they can afford to do that. So, I think that if you look at a company like EA, the moves they've made along with all of these other gaming companies, the move toward digital has just been such a big winner for them, so you're seeing consolidation. But the move to digital, not only is it more efficient, but really it does create network effects, it creates switching costs. And to me, as this space continues to grow, it continues to get more competitive -- I mean, look well beyond the pandemic, this is still going to be a tremendous opportunity -- I think EA is going to be one of the companies that continues to lead the way. So, this will be fun to watch.

Hill: I don't have a horse in this race, but part of me hopes that [laughs] we get one more pass at the bidding war, just selfishly, it's like, you know what, we'll go to $1.3 billion. If you're Codemasters, you're like, yeah, sure ...

Moser: Why not? Hey, and Codemasters just sits back and just watches it. You know, they got the cigar in the mouth and they're just laughing, [laughs] it's a nice position to be in.

Hill: NBCUniversal, which is owned by Comcast, has a decision to make, because next month the video streaming rights for the hugely popular sitcom, The Office, are going to transfer from Netflix to Peacock. NBCUniversal is considering putting most seasons of The Office behind a paywall. Before we get to anything else, let's just start with that. If the team at NBCUniversal calls you up, you're a fan of The Office, you've downloaded Peacock, you use it, if they called you up and said, Jason, we're thinking about doing this, we think this might be a way for us to drive subscriptions. What do you tell them?

Moser: Well, that's a really good question. And I think it goes back to what Peacock is really all about to begin with. And so, what I mean, when I look at this, and I look at this as a Netflix versus Peacock thing, it's they're two very different approaches. Netflix is a subscription play. Peacock on the other hand, while we talk about signups and downloads and they have subscription offerings. They have that $5 subscription offering and the $10 one. Ultimately, Peacock is an ad play. And so, advertising is the primary revenue driver for Peacock. And that ultimately is going to make all of the decisions for them, kind of, how they determine what to do with their content.

Now, I will say, as a Peacock subscriber, I went ahead, I downloaded Peacock initially just to try it out. And we had talked about it a lot on the shows here throughout the year. I wanted to get a firsthand user experience. And so, I saw that they had that Stephen King series Mr. Mercedes, and I thought, let me just check that out because I couldn't find it anywhere else. Then I also saw they had Yellowstone, and I thought, well, I really want to watch Yellowstone too, I heard a lot of good things. So, I watched the first season of Mr. Mercedes free, I had not subscribed to anything, and wouldn't you know it, the second season [laughs] you have to subscribe. With Yellowstone, it was even to the next level. I only got to watch the first episode of Yellowstone and if I wanted to watch any more than I had to subscribe.

Well, the problem, Chris, is that Yellowstone I think is a pretty darn good show, and I liked Mr. Mercedes too. So, immediately they've got my money. And $5/month is a very forgettable price. I have no problem signing up for that and saying, if that's going to give me access to those two shows alone, I'll continue to watch them, and what it's done is it's forced me to look more through what Peacock is and the stuff that they have. And the more I look through it, the more I'm like, well, you know, this is a pretty nice little setup they got there. They have a lot of content. As we talk about with content and distribution, they work pretty much hand-in-hand, but really distribution has kind of been commoditized now. Like, if you're not throwing stuff through an app and letting people stream it, then you're obviously well behind the curve there. And so, then it really just content is the differentiator and content will make consumers do things like pay for it. I think that if they decided to put it behind that $5 paywall, I think they would probably get a few signups.

Now, the caveat there is that advertisements are still incorporated and that stinks, but I will also say that they've done a very good job, they've been somewhat thoughtful with the advertisements, they're not longer than a minute, often they're shorter and they are very tolerable, so it really does boil down to what Peacock is all about. And for right now, it's an advertising generator for Comcast.

Hill: When I was looking over the details of this, and it was a Bloomberg report that NBCUniversal is considering this move, it reminded me of a point you made on Motley Fool Money last week when we were talking about Disney (DIS -1.01%) and their big announcements around their investments into streaming. And one of the things you talked about was pricing power. How Disney raised the price of Disney+ from $6.99/month to $7.99/month that is still basically half of what Netflix is per month. Now, obviously, Netflix has a much bigger catalog. But while neither one of us thinks Netflix is in any kind of serious trouble as a business, I think we're both in agreement that they probably have slightly less pricing power than they did before. And I think part of it is the pressure that Disney, and I will now add, NBCUniversal in this group as well. The fact that they are pricing [laughs] this at $5/month I think is a really smart move, and it is the sort of thing where if they can get a lot of people into this, they've got so much more flexibility over the next five to 10 years in terms of when they pull the pricing power lever, when they kick it up from $5/month to $6/month, that sort of thing.

I do think that whatever they decide with The Office, it's essentially going to be their first bet, it's going to be their first serious test. Similar, I'm not going to say it's the same in terms of the consequences of the results of the test, but because Disney+ was much more established and in a lot more homes already with paying customers, but it is, I think, somewhat similar to the test that Disney+ did earlier this year with Mulan, where they said, you can get this, but you're going to pay us $30 upfront. [laughs]

Moser: [laughs] Yeah, I do. And this is just partly because Netflix is so far along in the game, right, they're the ones that really spearheaded this whole movement to begin with. And so, they've just had more time to be able to inch their prices up, and I agree with you that Disney and Peacock and other apps that have priced their offerings at such low prices from the get-go, that's a wise move, because it gives them a lot of time to continue to inch those prices up.

Consequently, I mean, just as of today, Peacock has over 26 million signups, now that's signups, that's not paid subscribers. But again, you go back to what Peacock really is, it's an advertising generator, it's an advertising revenue generator for Comcast, it's not about subs, at least not today. And with that in mind, one of the things I thought they could do with The Office, because it really is, first and foremost, about getting people to sign up for the service. If The Office goes over to Peacock, or when The Office goes over to Peacock, I think a clever move for them could be, because advertising is the North Star, don't put it behind the paywall, make it fully available for anybody who wants to watch it, you're going to get probably [laughs] 50 million more sign-ups immediately, because everybody is going to want to be watching it, it's still a very popular show that's still very relevant. I mean, we're still in the middle of -- who is it, Jenna Fischer and Angela Kinsey are still in the middle of doing a podcast on Spotify called The Office Ladies, where they go and they give you the skinny on each and every office episode in order, every week. And so, this podcast is going to go on for a long time to come on Spotify. I mean, it's still a very relevant show that people care about.

But if you want to drive signups, and that to me is probably what they should be focused on, don't put The Office behind the paywall, just put it free for everybody. You're going to incorporate the advertisements in there and you're going to be able to reap the benefits of that advertising revenue, particularly if you are bringing in as many signups as I think The Office probably would. And then who's to say that you couldn't offer, well, an ad-free office experience if you just pay the $5/month subscription. Maybe that's something beyond their technology or maybe that's something beyond the agreements, I'm not really sure, but it does seem like they have a few different ways they could look at this.

And so, it'll be very interesting to see, but no doubt, I mean Disney and Peacock will have the luxury of being able to just inch those prices up for years and years to come. Netflix is going to have to be more thoughtful, because what we're seeing with the competition in the space. And I say this as, and I like Netflix and what they've done, I find their content to be just utterly subpar. And I don't mean subpar as in like good, I mean subpar as in like over par, like you shot 85 instead of 72. It's just, it's not as good as I feel like it should be. Maybe it was better a time ago when they're just losing a lot of that content to Peacock and Disney and whatnot. I mean, a lot of that is the case. But they're going to have to either bring the goods or they're going to have to be very, very careful about how they raise prices in the future.

Hill: One more lever that they may have down the line, and I'm talking about NBCUniversal, is the Summer Olympics. If the Summer Olympics go off as expected and hoped for in July, you know, Comcast has locked up the rights for the Olympics, I think, through the 2030s. I think, either through [laughs] 2032 or maybe through 2036. And that could be a big driver in terms of signups, depending on what they choose to do and make available on Peacock.

Moser: Oh, I totally agree. And I was actually down visiting my parents just a couple of weeks ago, playing some golf down in Georgia. And every so often we saw the advertisements for the 2021 Olympics. And they were advertising it as the 2020 Olympics, like, they were making an extra-big deal. The commercials just [laughs] got you really stoked, man! I mean, they are doing a wonderful job pushing this, and I do think that is going to be a big driver for them. It's going to be a wonderful catalyst. And that's just, what nine months down the road or so.

Hill: Jason Moser, thanks for being here.

Moser: Thank you.

Hill: 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 or sell stocks based solely on what you hear.

That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd, I'm Chris Hill, thanks for listening, we'll see you tomorrow.