Netflix Inc. Steals the Consumer Electronics Show

The annual Consumer Electronics Show in Las Vegas is never short on buzzy, exciting developments. But at this year's event, perhaps nothing was more unexpected than Netflix's (NFLX 3.81%) announcement that it's beaten its already aggressive growth projection by a year, and its streaming service is now available in nearly every country in the world.

In this episode of MarketFoolery, David Kretzmann is back from CES to talk with Chris Hill about Netflix, what its latest huge expansion means for its prospects, and the unique opportunities it has in the entertainment space. The two also discuss what YouTube is looking into by teaming up with GoPro (GPRO 4.14%) and why investors shouldn't get too excited about self-driving cars.

A full transcript follows the video.

This podcast was recorded on Jan. 11, 2016.

Chris Hill: Let's start, first and foremost, with Netflix making headlines last week, not just rolling out some new shows, but ... 190 countries?

David Kretzmann: Yeah, big news.

Hill: Already?!

Kretzmann: Netflix stole the show.

Hill: How did they do this?

Kretzmann: They were really ramping up their international expansion. You go back to the middle of 2015, Reed Hastings and Co. there, they had basically announced that their aggressive international expansion trajectory would look like them entering a total of 200 countries essentially by the start of 2017. Netflix knows how to put on a show. So, during their keynote address Wednesday morning at CES, to wrap that up, Reed Hastings says, "And now, we're turned on in 130 more countries, so that brings Netflix to 190 countries as of this week." So, certainly accelerating their international expansion more than, I think, anyone would have expected.

Hill: This is a company you know well. You were there with Matt Argersinger, Brendan Matthews. This is a room full of people who are, I'm assuming, not easily wowed, people who are used to listening to company executives talk. Was this a jaw-dropping moment? I just imagine ... were you guys stunned when he said that?

Kretzmann: I know we were. With The Motley Fool, we have a unique perspective from most people there, in terms of the press and the other analysts who were there, because we're looking at it from an investing perspective. So, certainly, for us, it was a jaw-dropping moment. I think all of us were pretty stunned. Like, "Wow, this is a big moment for Netflix and the entertainment industry," because Netflix is now in a position that no other company is in, especially because, you have to remember, at the same time that Netflix is expanding internationally, they're also rolling out their original programming, their original content. So now, Netflix can do something that no one else on the planet in the media space can do.

As soon as they release an original show, like season 4 of House of Cards in March, it's going to be available around the world instantaneously at the same time. So there's not going to be, with their original content, any of this, "It'll be available in the U.S. in March, it'll be available in Australia in July, it'll be available in New Zealand next year." It'll all be available at the same time. So, just something as seemingly simple as that is, I think, pretty revolutionary for the space. This announcement really changes a lot for Netflix and the industry as a whole.

Hill: And I think we've talked about this before. One of the things that's easy to miss with Netflix -- and I don't think Netflix is alone in this regard, but I think they are the leader in this regard -- is the data that they have access to: being able to analyze what their viewers are doing, what they're watching. Not just so they can serve up additional programming and say, "Oh, if you like this, here are five other shows or movies you might like along those same lines," but even going so far as to be able to use that data to plan launches. 

I was listening to an interview recently with Bill Burr, who is a stand-up comedian that I like a great deal, and he has a new animated series on Netflix called F is for Family, and one of the things he talked about in this interview I was listening to was, not just the guidance that he got from Netflix in terms of how to shape the show -- because I had just assumed Netflix was good at identifying people, and others are good at this as well. I think John Landgraf at FX is very good at this, I think HBO is certainly very good at this, at identifying creative people and saying, "We want to work with you, what is your creative vision for a show or movie, etc.?" But beyond that, he talked about how Netflix provided a great deal of guidance in shaping the show in terms of story ideas, in terms of what direction they wanted him to really push it in, but also in terms of, "Here's when we want to launch this show. I know you're thinking of doing it early in the year, we think it's going to set up really nicely for you if ... " And they have the data to back it up.

Kretzmann: Yeah, Netflix is really mastering all the different angles here. They're mastering the storytelling angle, working with the storytellers, the creators, the producers. Then, the distribution and the timing, especially now that they're available, essentially, worldwide. A few countries like China, North Korea, they're still not in. That puts Netflix in a powerful position. I think it also gives them an advantage, if you are a storyteller, a producer, you're going to want to work with Netflix, because they have, as you mentioned, that data, they have a global distribution platform that no one else in the world comes close to, now that Netflix is available worldwide.

So, naturally, if you're a storyteller, you're going to want to work with Netflix, especially if you have an idea for a TV show or miniseries, especially compared to traditional broadcasting, where if you're producer, you get one pilot, and you test the pilot, it's on one night, you see how that works, and that determines whether or not you have a show or it gets nixed. With Netflix, you have the storytelling and creative flexibility to have a 10-episode story arc, which is also unique, and it's released all at once worldwide. So, if you're a storyteller or a content creator, Netflix has a really solid value proposition. So I think they're going to keep continuing to attract talent to them.

Hill: One more question on Netflix, and then we'll move on, because I know there was a lot of other stuff at CES. There was a press availability with Reed Hastings, and his team. You got a chance to ask him a question. What did you ask, and what was his reaction?

Kretzmann: Reed Hastings, you can tell that he knows he's a big shot now, and he's in high demand.

Hill: Not his first rodeo.

Kretzmann: Yeah. And I think he would prefer Wall Street doesn't engage with the company so much, or get in the company's way. He just wants to do his thing.

Hill: You know what? If he feels that strongly, he should take his company private. There's a solution for that.

Kretzmann: That's right. So, yeah, he still has to deal with us. So, my question was, the company has obviously accelerated their international expansion. No one expected this announcement to come right now. As I mentioned before, their aggressive plan was to be at this level at the end of 2016 or start of 2017. So I just asked, "Does that accelerated international expansion change the company's trajectory in terms of breaking even internationally? Does it change your financial guidance at all?" And you could tell he wasn't very enamored with the question. He was like, "No, it doesn't change our financial guidance." That was it, no color or anything. So, he wasn't a huge fan of [the] question. But I think it was still a question worth asking, especially from the investing perspective, because the company is rolling out a lot faster than anyone anticipated internationally. But at this point, it doesn't look like that changes their financial guidance at all.

Hill: But ... to me, that's why -- and this is just me -- that's the No. 1 reason to listen to a company's conference call. Yes, you sometimes get more information, but just getting a sense of, how do the executives react to questions, particularly when times aren't going well. Not that that's the case with Netflix right now. But I'm always curious to see how they react. 

Let's move on to YouTube. Robert Kyncl, who's the chief business officer from YouTube, gave a keynote address. Not a lot of news out of it, but a little bit of a surprise that, at one point, joining him on the stage was Nick Woodman, who's the founder and CEO of GoPro.

Kretzmann: Yeah, we definitely weren't expecting that. YouTube had a lot to follow. This keynote was the day after Netflix essentially stole the show. And I think Netflix is the highlight of CES. We were hoping to, I think, to get a little bit more from YouTube. Some sort of announcement with YouTube Red, maybe some original programming or content, something like that. But really, Robert Kyncl, the first part of his keynote was really just talking about digital video grabbing hold, how cable and traditional TV has peaked in 2009, and has since been dropping down as people are spending more and more time watching video on other mobile devices. And I feel like we all already knew that. But yeah, as you mentioned, there was kind of a surprise when Nick Woodman, GoPro founder and CEO, came up on the stage.

This is really coinciding with Kyncl talking about YouTube's venturing into virtual reality programming. So, this is a 360-degree video where you can essentially have a full 360-degree panorama of any video that you're watching. So, you can watch this on a virtual reality device like the Oculus or Google Cardboard, or even if you're just on a desktop or laptop, you can kind of scroll around the video and get really unique perspectives, you can get that full 360-degree perspective. So, Nick Woodman was out there talking about how GoPro fits into that. GoPro partnered with Google earlier in 2015 with the GoPro Odyssey, which is a 16-camera array, so it's 16 GoPro cameras that capture that full 360-degree perspective.

And now, what I think is most relevant to GoPro shareholders is, Woodman mentioned that at some point this year, they're going to come out with a consumer virtual reality device. So, obviously, that 16-camera array, that's more than $10,000, but hopefully, sometime this year, according to Woodman, they'll come out with a more affordable, mass-market, consumer virtual reality device to capture that perspective. So, YouTube is very focused on virtual reality, and it sounds like GoPro is a pretty key partner to enabling that sort of content.

So, I know our colleague, Brendan Matthews, who's also out there, he's one of my fellow analysts in Motley Fool Supernova, he speculated on Twitter that he wouldn't be surprised if Google bought GoPro, because you can kind of tell, there's some sort of love fest going on there. They both have similar visions. YouTube wants to be a platform for all sorts of video, and especially this emerging virtual reality medium, and GoPro is a key player in enabling that sort of content. So I wouldn't be surprised, certainly, if we see some sort of partnership between the companies. GoPro is trading at a bigger and bigger discount every day, and Google has an enormous cash hoard. So, it wouldn't be surprising, if you saw GoPro get snapped up by Google at some point.

Hill: That was going to be my next question. At any point, do you think, when it was just the two of them backstage alone, Nick Woodman leaned over to Kyncl and whispered, "Please buy us."

Kretzmann: Yeah, you do wonder. Woodman is a very charismatic CEO. Maybe that could be a fault of mine, getting enamored by his vision for the company, because he's a very inspiring speaker. But man, GoPro shares have just been clobbered over the past year or so. So, you've got to wonder, man, is Alphabet (GOOGL 1.49%) (GOOG 1.44%) or Google making an offer to Woodman? Is that the saving grace for this company at this point? It's tough to say, because Woodman still owns 30% of GoPro. This is definitely his baby. And so far, up to this point, he's been really clear that he has a long-term vision for GoPro. So, whether or not he wants to sell out, it'll remain to be seen.

Hill: You mentioned virtual reality. Simon Erickson was on the show last week, one of the things we talked about was the launch of Oculus Rift devices being available for the low, low price of $600 a pop.

Kretzmann: Very modest.

Hill: Yeah. I think you went to an Oculus Rift breakout session of some sort. Was that discussed at all? Were there any questions about that? Any guidance given on, here's how many we think we can sell in the first year?

Kretzmann: We did go to a session, with Mary Lou Jepsen, who is the head of engineering at Oculus and Facebook (META 2.83%). She was formerly one of the creators of Google X. So, this is someone who is very prominent in the engineering space, and really at the forefront of developing virtual reality devices like Oculus. Her main angle was an interesting one. She's also been really involved in the charitable initiative, One Laptop Per Child. And she was mentioning the storyline there, where their challenge there was to deliver affordable computing devices like a laptop to developing countries like in Africa and other places in the world that don't have that sort of technology.

But at first, you have the cost barrier, but then they're able to invest in screens and things like that, and really bring the cost down, when you're able to have, essentially, $100 laptops. And they've delivered millions of laptops around the world now. It's been a very successful charitable initiative. So, she brought that over to virtual reality, where, at first, you have a high price barrier, but now, they've been able to get it down to that $600 price point, and they'll continue to invest in it: the screen, the sensors, all the things that go into that device. She did mention that Mark Zuckerberg, founder and CEO of Facebook, he wants every Facebook user, eventually, to be on virtual reality. So, looking out over the next five to 10 years, you have someone like Mark Zuckerberg who wants, essentially, everyone in the world to have one of these devices.

So, she was kind of coming at it from that angle, didn't give too many specifics as to what their goal is, in terms of how many devices they want to sell this year. Obviously, it's the first launch of the mass-market virtual reality device. With virtual reality, I go back and forth on this, because I think it's similar to what we're seeing with 4K TVs, where you have the device, but you also need the content. So, it's like, what comes first, the chicken or the egg? So right now, other than Netflix and a few other areas, there's limited 4K content. I think you might run into similar issues with virtual reality. You need people to develop that content, whether it's video games, movies, other sorts of videos. So, we're still starting small. But looking out over the next three to five years, you're definitely going to see virtual reality grab hold in some shape or form.

Hill: Last time you were here, we were talking about how a couple of years ago, Matt Argersinger went to CES and was struck by how many 3D printing companies there were, and he just shook his head and thought, "This is not going to end well for the vast majority of these companies."

Kretzmann: Yeah, and there weren't many this year.

Hill: So, what's this year's version of 3D printing? What was the tech that you looked at this year at CES and thought, "This is a lot of hype, and it's not going anywhere immediately."

Kretzmann: I'll back up a little on this. Hopefully, people who are listening to MarketFoolery also know and perhaps listen to Rule Breaker Investing with Fool co-founder and Supernova Chairman David Gardner. I think, in October, he had a week where he was talking about the hype cycle, looking at how companies have the peak of inflated expectations, and that's the stage where everyone is enamored with the tech or trend. Then eventually, reality sets in, it goes into the trough of disillusionment. He gave 3D printing as an example from a couple years ago, when everyone was like, "Yeah, we're going to have a 3D printer in every home, everyone's going to be using this, it's going to change everything, every industry." And then, eventually, it sets in, "This is actually a pretty small market." Not a whole lot of realistic applications today, especially in the consumer space. And in that episode, he mentioned that self-driving cars might be in a similar position today that 3D printing was a couple years ago. And after being at CES, that's what I lean to.

Hill: You're saying David was absolutely right.

Kretzmann: I can see where he's coming from. It's like, man, seems like just about every booth. That's a slight exaggeration. But the vast majority of booths and exhibits there -- every company wanted a piece of connected cars, self-driving cars, autonomous vehicles. And you just have to wonder ... certainly, you can see the world is heading in that direction. But it's not going to happen overnight. You have to give consumers time to buy new vehicles. That's not going to happen fast. You have to give time for the technology to improve, for the sensors to improve, to get into enough vehicles that it's actually realistic to have a lot of self-driving cars on the road, and eliminating car ownership. So, certainly, yeah, I can see the world heading in that direction.

But man, every auto manufacturer there, every sensor company there, the one thing they continuously plugged was somehow their involvement and connection to connected cars, self-driving vehicles, autonomous vehicles. I sort of wonder if self-driving cars might be in the same position today that 3D printing was a couple years ago, where certainly there's relevant uses for the technology, but I think it's going to be a lot further out than people are anticipating right now.

Hill: Well, and a week ago today, Jason Moser and Taylor Muckerman and I were talking about news from the auto industry, General Motors investing $500 million in Lyft, and one of the things I mentioned was that later in the week, at CES, Ford Motor was expected to announce a joint venture with Google. And those were the reports, and that didn't happen. So at some point, either Google walked away, Ford Motor walked away, maybe they both walked away. But to dovetail on what you were saying, it's not just investors and consumers, it's also clearly companies who are looking at this and saying, "OK, this is maybe a future bet we want to make. We want to invest in this. But there's no rush."

Kretzmann: Yeah, and I think you have to remember, companies were doing the same thing with 3D printing a few years ago, and that didn't make it a smart decision. You have Stratasys and 3D Systems writing off a lot of their acquisitions, essentially admitting one or two years later that they tremendously overpaid for a lot of these different companies that they were snapping up. I think we have to be careful with getting too enamored with self-driving cars.

Certainly, I love the technology. I love the direction. It could potentially save a lot of lives and really make the world a much more efficient and better place to be. But you have to keep it in perspective that this is not going to happen within a year or two. This is an industry and a trend that's going to emerge and take place and grab hold over 10-plus years.

Hill: Before we wrap up, you work on our Rule Breakers Investing service, you also work on our Supernova service, which is going to be opening up to new members in a short amount of time. For those unfamiliar, you're going to be heading up the new portfolio.

Kretzmann: Yeah. Odyssey 2, we're really excited about this. For people who aren't familiar, Supernova as a service launched about four years ago. This is really David Gardner's service. We're building real-money portfolios out of approximately 200 or so stocks that David Gardner has recommended over the past 12 years in Stock Advisor and Rule Breakers. So, we're building real money portfolios.

This is giving people direct advice and a model to follow as far as portfolio allocation. So, why are we putting 3% of the portfolio in Google, and 1% in NXP Semiconductors (NASDAQ: NXPI)? Or certain things like that. So, rather than just getting the recommendations each month, which is what we do in Rule Breakers and Stock Advisor, with Supernova, you're getting that real-money portfolio, you're getting portfolio allocation guidance. So, it gives you another perspective, if that's what you're looking for as an investor. And with Odyssey 2, we're geared toward wage-earning investors. We're starting with a base of $25,000, and we'll be adding new money to the portfolio every two weeks. So, this is an ideal portfolio for someone who has a relatively smaller base of capital to start with, and might be able to add money on a bi-weekly or monthly basis. So, if that sounds like something that might be in your wheelhouse today, or fits your situation, definitely give us a look.

Hill: There's a micro-site with more information, including a bunch of short videos with David Kretzmann, David Gardner, Matt Argersinger, not only talking about investing, but individual companies in energy and biotech, consumer tech, restaurants. It's a lot of great information. Just go to supernovaradio.fool.com. I'll put the URL in the description of this podcast, but a lot of great info, and it'll come out very soon, so check it out. David Kretzmann, thanks for being here, man.

Kretzmann: Thanks, Chris, appreciate it.

Hill: Glad you made it back safe and sound.

Kretzmann: Survived the trek.

Hill: We ran out of time before we could talk about how you were partying like a rock star in Las Vegas at night. But we'll save that for another episode.

Kretzmann: Another episode.

Hill: As always, people on this program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against those stocks, so don't buy or sell stocks based solely on what you hear. To David Jones, thank you for everything and rest in peace. That's going to do it for this edition of MarketFoolery. This show is mixed by Dan Boyd. I'm Chris Hill, thanks for listening! We will see you next time.