In this podcast, Motley Fool senior analyst Jason Moser discusses:
- What a potential Directors Guild deal means for entertainment.
- The challenges facing streamers as they look for more ways to profit from content.
- Whether Apple can take headsets out of its gaming niche.
A simple pack of casino playing cards leads Motley Fool producer Ricky Mulvey and senior analyst Asit Sharma on an exploration of how old products can become new again.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on June 05, 2023.
Deidre Woollard: Directors want you to know AI is not a person, and Apple is looking to a mixed reality revolution. You're listening to Motley Fool Money. Welcome to Motley Fool Money. I'm Deidre Woollard, and I'm joined in studio by Motley Fool Analyst Jason Moser. Hey, Jason. How are you doing?
Jason Moser: Hey, Deidre. I'm doing fine. How about you?
Deidre Woollard: Doing good. I want to talk about entertainment with you today. The Directors Guild, they've reached a tentative deal with the Alliance of Motion Picture and Television Producers. It seems like a pretty good deal. It's got some wage increases, better benefits, higher streaming residuals. The writers' strike is still going on, but it seems like we're one step closer to getting back on track. Should those of us who hold entertainment stocks and really like streaming entertainment be breathing a sigh of relief?
Jason Moser: I think for sure it's a step in the right direction. I would say I think some are going to weather this better than others, to be sure. I think we're seeing a lot of damage has already been done here though, unfortunately, in that a lot of these shows are facing these long delays. You look at some of these really popular shows that have recently rolled out on HBO is a good example. You've got The Last of Us, and you've got House of the Dragon, two very well-received popular shows, and it's looking like this is going to contribute to a much longer span of time that goes between the next season wrapping, so that as a consumer is not ideal. As investors, probably not so ideal because it's not ideal for consumers, so it leads me to the idea here that some of these companies are going to be able to deal with this better than others. I think the bigger companies, the companies that have been in the space a little bit longer and have built out these streaming models and these libraries with all of this content, they've gotten more to fall back on while we wait for all of this to play out.
Some of the obvious names, you look at something like Netflix, of course, because they really were the first to this space, I think. You look at Warner Brothers Entertainment, what they have with HBO and with, ultimately, what is Max now. That's a tremendous library of content. Disney, another good one that'll be able to deal with this, so yeah, step in the right direction, for sure. As you said, it has not come to a conclusion yet. A lot of these streaming services going to have to rely on some of their libraries of content, so to speak, to be able to fill the time because this content does not live a very long life anymore, particularly when these companies drop the whole season at once. People binge through it, they finish it in a day or two, and it's over. You can start to see a lot of these services are reverting back to, we're going to release these more linearly, and so you're seeing episodes coming out every week as opposed to all at once. It's very interesting to see between that and the advent of advertising the space, how streaming is evolving, because it is not like the streaming that we knew from, just maybe, 10 years ago.
Deidre Woollard: It's definitely evolving. One of the things I think you just mentioned is the idea that some of these new heads, if we're waiting a year or so for another show, maybe we forget about them a little bit. That could also be a concern.
Jason Moser: Easily. It slips under the radar. You forget it happened, and then all of a sudden, oh wait, I forgot about that one. The longer that time passes, the greater that risk becomes. Again I think that does speak to the advantages in releasing this content more slowly. It does feel like we are seeing more and more streaming services relying on that. Netflix is the one that really started all of this. They were the ones. They're famous for dropping all the content all at once, and people just binge right through it. I think as consumers, we've enjoyed that luxury for a while. The problem is it's not the most sustainable model. I don't think it really works out as well for the business in the long run, which is why we're starting to see some of these businesses reverting back to the linear fashion and releasing things on a timely basis as opposed to all at once.
Deidre Woollard: Absolutely. In the proposed deal, there's this language, it really stuck out to me, which is this idea they say the agreement that AI is not a person and that generative AI cannot do a director's job. I think that speaks to our overall fear that AI is coming for our jobs. [laughs] But is this really necessary at this point? Was this on the table?
Jason Moser: I do think we're so early in the actual development of this space. When I say space, I'm talking about AI, in general. Understanding exactly the implications of AI and how it's going to impact our lives professionally, and personally, its capabilities, what it does well, what it doesn't do well. I think that a little caution is warranted. It's something that can be changed down the road, if it's deemed to be unnecessary. But absolutely understand from an individual perspective wanting that protection. There is this narrative out there right now that AI is coming for everyone's jobs. That's scary. I don't think it's going to be to that effect. But AI is going to change the landscape much as technology does. It probably will make some jobs redundant, and it will change how we do things. Now I think on the flip side, do we get to a point where AI can actually do these jobs and do them even better because we could get to that point. Entertainment may be a space where AI has dramatic implications. We just don't know yet. We're going to find out here over time. I do think at the end of the day, one thing to keep in mind that I feel is way right, this content, at the end of the day, is art. It is art. For many, art and the human element are just inextricably linked. There is something to that. I don't know that consumers necessarily will feel the same level of respect if they know that their content is coming from AI-generated sources. There's an artistic component to this that I think does matter, not only to the creators but to us as the consumers as well.
Deidre Woollard: I think that that is an interesting concern as we go forward. Part of the other piece of this puzzle is you've got the Writers Guild. Their strike is ongoing. We've also now got to worry about SAG-AFTRA. That's the big actors' union. They're headed to the bargaining table this week. I'm assuming AI is going to become even more of a factor there too because now we have the ability to generate versions of actors. We've got the ability to generate writing that sounds like a particular writer, so I'm thinking about that. I'm also thinking about how these streamers figure things out going forward. If they cut a lucrative deal with all of these unions, does that mean that they're going to have to slow down their production or make other decisions going forward?
Jason Moser: I think we are seeing a trend toward less content and higher quality content. Going back to Netflix, it's the obvious example here because they got the ball rolling in the space, Netflix has been known for having a ton of content. It's for everyone out there. They're not targeting one specific kind of consumer. They want a little bit of a lot for everyone. The flip side of that is you end up with a library of a lot of less-than-compelling content. I would say that's not just with Netflix. I look at a lot of these services today. A lot of these services have some excellent content. They have a ton of less-than-compelling content. So I think what we're seeing more and more is that these companies are starting to realize that more isn't necessarily always better, and technology hopefully will continue to help improve the quality of that content. But we're absolutely seeing these leadership teams really approaching these content budgets now with a little bit more scrutiny, recognizing the fact that it's not always about just having more, but there is a quality dynamic to it that consumers really care about. Also, I think that ultimately speaks to the consolidation in the space. We're seeing more and more of these streaming services falling under one corporate umbrella, so to speak. Some acquisitions, I think, are likely to continue, and we see a few really big entities that dominate the space. We're already seeing that really, I think, shape out with things like you've got Disney, Netflix, I think Warner Brothers with Max. That will be an advantage to these companies because they have more resources. They have greater distribution. They have these greater audiences in a way to push that content out in so many different ways.
Deidre Woollard: While we're talking Netflix, we got something in the mailbag from Bill in Seattle, and he said, why didn't Netflix put the advertising tier option in the notice about sharing passwords? I would have put my kids on that instead of the no-ad tier. If they're really going to make more money on the ad tier, this would have been the perfect time to offer it. What do you think, Jason? Is it that Netflix is still more interested in grabbing that subscription revenue than the ad revenue?
Jason Moser: If you go by what they're saying in their calls, Disney and Netflix both struck a tone here where the ad-supported model is a very attractive one from an economic perspective, and they like the economics of that ad-supported model. I think, in regards to Netflix, as quickly as they were leaders in the streaming space, they are not so when it comes to ad-supported TV. They are really behind the pack there when it comes to ad-supported TV, so I think they are approaching this with a little humility, very open-minded, wanting to learn the dynamics of how this ultimately works because that's not their speciality. Their claim to fame was, we're keeping it simple, it's an easy, cheap subscription model, and it just makes sense. For a long time that really worked. What we're seeing now is more of these companies realized the benefits of having an ad-supported model, and they're really rolling those out. I suspect, as time goes on, as Netflix gleans some lessons from the space, and learns what works and what doesn't, I think they'll start to tap this ad-supported model a little bit more because the economics are really very attractive.
Deidre Woollard: We'll have to keep an eye on that one. Speaking of another entertainment today, we've got Apple's Worldwide Developer Conference. That's the WWDC. In the past, there were a lot of surprises. This year we know what is going to be pretty much. It's the Reality Pro headset. They haven't quite taken off. This was going to be the next big thing. Is this going to be the moment where it shifts do you think?
Jason Moser: It is really difficult to say. On the one hand, you want to say yes. They have such a reputation for sitting back and watching an opportunity unfold. Gleaning the lessons from their competitors and understanding what works and what doesn't work in a particular space, whether it's smartphones, laptops, or whatever. This is the same thing. We've got plenty of headsets out there already, but we still not seen the traction I think that some were hoping that we would see at this point in regard to mixed reality, augmented virtual reality. I think a lot of that just boils down to trying to really figure out what the core use cases are. On the consumer side, really, the core use case remains in the gaming space. I think it's most attractive for gamers looking for a new way to interact with their content. I can speak just anecdotally. A couple of years ago, we got one of my daughters an Oculus headset. It's the last-second birthday gift. We just thought it'd be fun. She'd enjoy tinkering with it. She did, for a couple of weeks. Now it doesn't get nearly as much attention as you might have thought. Having used it myself, I understand that. It's amazing technology. It's phenomenal what it can do. It does put you into a whole other world, and to think that we have technology can do that is really impressive, but we haven't really come down to the core use cases to why a consumer needs this stuff yet. That may just take some time to develop.
I think Apple is very well-known for creating those opportunities, finding those killer apps, pry those core use cases they can really help take their hardware and software to another level. I think the other real challenge with Apple right now is, if they do indeed announce this, and the price point is in that $3,000 range that has been quoted, that's going to be very prohibitive because you're talking about Oculus that goes for $500 versus an Apple headset that goes for $3,000. That's obviously a tremendous Delta there, and it's going to be very difficult for consumers to justify that, at least in the near term. But you got to remember this is Apple. It is a company that has afforded itself so much brand equity through the years. You just can't ever count them out. You can't doubt them because, over time, they do such a wonderful job again of learning those lessons, taking those lessons away from what their competitors are doing, and ultimately figuring out what works and what people want, and they deliver it in a seamless, elegant package. Their hardware is just really good stuff. I think in the near term it's probably going to be a bit of a bumpy ride for this. Longer term, if they can really convince us of those core use cases, then I think they stand a better chance because folks out there going to give Apple a shot no matter what. That's the kind of brand equity they've got. What they don't want to do is put a product out there that just starts collecting dust and people forget about it.
Deidre Woollard: I think what's really important is, if it ends up just being a gaming product, that's not that exciting. I know when they were originally thinking about doing this, they were looking to do more of a augmented reality glasses thing. That ended up taking a backseat. Maybe long term, that's where we go. Do you think that this is maybe just the start of a whole new revenue stream for them?
Jason Moser: I think it has that potential, and I love the fact that they're looking at this and saying augmented reality and virtual reality. One of the big challenges with Oculus is that it's straight-up virtual reality. You're immersing yourself into a digital world that is fully made up, and that's entertaining. It can be fun for a little while, but there's not as much utility. It is more entertainment than anything else. I think if you're talking about a mixed reality headset, that would incorporate augmented and virtual. If we're overlaying some digital on top of the physical world, there's more utility there. There are more potential use cases there that I think Apple could certainly exploit. That could be one of the lessons they've learned from a lot of these headsets that have been released into the market over the last several years ultimately, while virtual reality is amazing technology, maybe it's not the most useful for the masses. I think it was something like a mixed reality, augmented reality. To me, there seems to be more core use case opportunities there. It's going to be fascinating to see exactly what this product looks like and what it does. While [inaudible] will most certainly be early days, Apple has a knack for figuring out ways to get products into a consumer's hands. It takes me back to, I don't know if you remember like 10 years ago, the Onion article that was titled New Apple Campaign Urges Consumers To Buy iPhone For Other Hand.
Deidre Woollard: [laughs]
Jason Moser: As silly as that sounds, in hindsight, that's basically what they did with the watch. I don't know that anybody really needs the watch if you have a phone, but they convinced a lot of people that they should have it. They find core use cases for devices, they convince consumers that they want them, that they need them. The brand affords a lot of trust and gives them a huge benefit of the doubt there where consumers will give it a shot because it is Apple, so this is going to be a fun one to watch develop.
Deidre Woollard: Absolutely. Thank you so much for your time today, Jason. Great to see you.
Jason Moser: Thank you.
Deidre Woollard: Innovation doesn't always come in the form of something brand new. Ricky Mulvey and Asit Sharma discuss a mainstay tech company that's still improving a decades-old product.
Ricky Mulvey: Joining us now is a Motley Fool analyst who demanded a present in order to record a segment with me. Welcome, Asit.
Asit Sharma: Ricky, it's good to be here. You make that sound so quid pro quo.
Ricky Mulvey: It might be a little quid pro quo because you said I have this great idea, and it's that you send me a present, and then we'll make a podcast segment about it. I thought it might have been nicer to do the other way, in reverse. You would send me a present, and then we'd make a podcast segment about it.
Asit Sharma: We'll chat about that later, Ricky. But the real present was the fact that I was barreling down i40 in North Carolina on a very sunny Sunday afternoon, listening to the radio, and a thought popped into my head. What was that thought? The desire to discuss something with Ricky Mulvey. That's the present, dude, that I thought of you during my time off.
Ricky Mulvey: I'm happy to send you something after about three months. I sent you a deck of playing cards, which is a little bit different from, I think, normal playing cards because they got a QR code design in the back, which I think represented an interesting mix of just a very old product and very new technology but more than that, the entire endeavor cost me about 5 dollars and 30 cents. Before we get to that, by the way, when you originally pitched this to me, you mentioned comic books like three times, so I thought that this whole thing was just like you wanting me to send you a comic book, and then we can talk about comic books, which we can do as a segment at some point.
Asit Sharma: Some people have trouble grasping a very obvious message that's right in front of them. But hey, that'll lead to another segment. I think that would have been really fun. Let me describe what you sent me, though, Ricky. So I get this package from you. It's old school because you've handwritten your address, my address, like we used to do back in the day. Inside I find a packet, yes, of playing cards from the Golden Nugget Casino with the edges crimped. These are authentic casino-played cards. They've been played in a casino before. Now on the back of these cards, it's a beautiful deep burgundy color. It's got minute floral etchings all over the place.
Ricky Mulvey: I think there's an interesting reason that there's these QR codes on these playing cards, and it's because I think they're in order to stop something called edge playing, which is when very skilled gamblers, or they wouldn't even be gambling at this point because they have an edge, are able to spot very tiny imperfections in the backs of cards, and then therefore they know what card is under it. Let's say you have the six of hearts, and you're able to tell that it's the six of hearts because, on the back, there's just a slight misprint when they're doing these sheets of playing cards. The most famous example of this was Phil Ivey and Kelly Sun. Kelly Sun basically was this, I would say, addicted gambler and actually got kicked out of MGM Properties in Vegas for playing a bad marker, which was asking for $100,000 when you didn't have the cash to back it up. MGM ends up getting her sent to jail because, in Vegas, that's the equivalent of writing a bad check. Since then she's had this mission of revenge against MGM, closely studying the backs of playing cards, and is able to team up with Phil Ivey in order, in some ways, to get bankrolled, and they played together with this very specific rule set, very specific cards in baccarat, which the casinos are happy to oblige because they're playing such massive hands. You can ask for anything you want when you're playing $100,000 a hand. This goes on for years, and eventually, it comes tumbling down. Casino security in Rockford's Casino in England noticed what was going on, and they claw back all of the winnings from them. Phil Ivey appeals. This is a years-long court battle, but eventually, the Supreme Court of England sides with the casino saying that Phil Ivey cheated.
In America, you have a similar situation with the Borgata Casino. Ivey and Sun win tens of millions of dollars, and Borgata says, hey, you were cheating there, and they argue that they weren't. They were asking for a specific rule set that you obliged them on, but they weren't touching the cards or anything. They weren't manipulating the game with anything other than their eyes and an edge that they saw. They saw an inefficient market. In the first court case, Borgata won, and they were able to claw back their winnings. However, on appeal, there was a settlement for an undisclosed amount. We don't really know how the story ends. But I think that's why you see these random QR codes, or maybe not so random QR codes, on the backs of a lot of cards now because, hey, what if we just have thousands and thousands of designs? Good luck finding and spotting the small differences in them when all of them have small differences. I think that's where there's a little bit of a cybersecurity angle as well because these casinos now are using something called a trapdoor function, which is, you have a function that's easy to create but very difficult to draw how they got there. You could think of a 100-digit number, which means that it's very easy to multiply into it, a 100-digit number, but it's very difficult to find the two numbers that got you there. I'll stop there before I keep rambling, Asit.
Asit Sharma: I have several observations. The first, Ricky, is that there's a thin line between an inefficient market and a game of chance breaking down into something that's not really a game of chance, and that's why there's so much legal ambiguity there. The second is I used to work in the offset printing industry. I was in the finance department of an offset printer, and you and I had the pleasure to meet for breakfast. You were in my town for a wedding this past weekend, and I was relaying to you how it took me a moment to grasp that certain sets of cards could have these imperfections that went from deck to deck to deck, and then I remembered from being in the printing industry, that's entirely possible. You can have imperfections that go from plate to plate, so the press prints off of a plate. You can have variations in what's called make-ready, so that's getting the colors right right before a run. There's all kinds of potential in older school technology for this to happen. But you know, technology progresses. As I was getting out of that industry, digital printing was all the rage because now you'd be able to print different addresses on a run of envelopes to be mailed, and that was, like, variable printing. It was the next big thing. Technology marches on. There are ever-new ways created to try to beat the house and get an edge over the house. I want to say one more thing about this idea of the trapdoor function which you explained to me. I think it's really cool because, in this case, the trapdoor was inadvertent, and poker itself is informed by encryption. Some data is available to all the players, but your hand is encrypted. Theoretically, only you know what your hand is, so in games of player versus player, and some games of player versus the house, we create these unintentional trapdoors to our data. In poker, this is known as the tell. That's the feature that gives away some information inadvertently. For example, Ricky, if you and I play poker a bunch, and you notice that my right eyebrow always twitches slightly whenever I have a really good hand, that's the tell. That's the trapdoor to my data. In the Phil Ivey case, that trapped door was also inadvertent.
Ricky Mulvey: The casinos were a little more upset about this because it was the trapdoor against the casino. They were playing baccarat, and Kelly Sun and Phil Ivey, were asking for these very specific sets of cards where I think Sun was able to more easily tell what those tiny little imperfections were, and they weren't just taking money from the players which casinos don't like. We are legally obligated to talk about stocks, Asit, and one of the reasons I sent you this is because it is that mix of innovation with a very old product, and we always associate innovation with something completely brand-new. I'm guilty of that. That's how I like to think about the future in these bleeding-edge technologies. But there are plenty of companies that have been around for tens, maybe even more than a hundred years, that are still innovating on very old products. What's a company that you think has shown some interesting innovation on very old products?
Asit Sharma: I am obsessed right now with a company called Synopsys, symbol SNPS. This is a company that provides electronic design automation software, and it helps companies automate the process of designing chips. That's a really old technology. Ricky, the first iteration of transistors was, I think, introduced in 1947, and since the '50s, we've been trying to really make chips more efficient. In the present day, it's, how many billions of transistors can we fit on one chip? We start bumping against something called Moore's law, which proposes that the number of transistors we can pack on a chip is going to double every so often. We're seeing physical limitations of Moore's law, so one thing many manufacturers are doing is turning to purpose design chips because if you design a chip for a certain task, in other words, avoid buying off-the-shelf chips, you can get more efficiency out of that silicon. Synopsys does only this. It works on providing the software to help companies design evermore efficient chips. They are now using artificial intelligence to further this process. The company trades at pretty reasonable multiples, and I think it's going to benefit from this need for evermore computational power and efficiency. Generative AI is only the latest demand factor that's pushing up societies' need for computational capacity over the long term.
Ricky Mulvey: It's like in earnings call, we always come back to generative AI, Asit. I haven't heard of this before we started recording. This is a surprise. Is this profitable? What do you think about the valuation here?
Asit Sharma: As per the valuation, lots of great tech companies now who have double-digit, high teens, low 20s revenue growth are trading still at some lofty multiples, say 40, 50 times their forward earnings. Synopsys trades a category below that. Depending on which multiple you're using, they are trading either in, say, the mid-30s against forward earnings and a slightly smaller multiple, if you like something like enterprise value to EBITDA, I think they're in the high 20s last I looked.
Ricky Mulvey: Final question, when am I getting a present?
Asit Sharma: Ricky, I got to one-up you now, so we know it's going to be less than three months from today.
Ricky Mulvey: Sounds good. Asit Sharma, is always a pleasure. Thanks for joining me.
Asit Sharma: This is a lot of fun. Thanks, Ricky.
Deidre Woollard: 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. I'm Deidre Woollard. Thanks for listening. See you tomorrow.
