Building a thesis: Warner Bros Discovery

Bryce: [00:00:14] Welcome to another episode of Equity Mates, a podcast that follows our journey of investing. Whether you're an absolute beginner or approaching Warren Buffett status, our aim is to help break down your barriers from beginning to dividend. My name is Bryce and as always, I'm joined by my equity buddy, Ren. [00:00:28][13.7]

Bryce: [00:00:29] How are you going? [00:00:29][0.2]

Alec: [00:00:29] I'm very good. Bryce excited for this episode. Reporting season is over. Feels like there's a weight off my shoulder. We can talk about something else. [00:00:37][8.0]

Bryce: [00:00:38] Yes, yes. [00:00:38][0.5]

Speaker 2: [00:00:39] Let's get into it. We have a big show coming up today, going to kick off with what we've learnt this week. Quick chat about the bucks. Of course. Everyone's hanging on. [00:00:47][8.0]

Bryce: [00:00:47] Yeah. What did you learn at the bar? What? I learnt. [00:00:49][1.2]

Alec: [00:00:49] So much. Invest childhood box. God, Bryce wouldn't stop talking about it. [00:00:53][3.7]

Bryce: [00:00:53] And then we're going to do a bit of a deep dive on Warner Brothers Discovery. [00:00:57][4.4]

Alec: [00:00:58] Yes. We're going to talk about building an investment thesis and build both the bull and the bear case. [00:01:04][5.7]

Bryce: [00:01:04] Yes. So just a reminder before we start, we're not experts, we're not financial professionals. We're not licenced. We are here just learning like you. And nothing on this podcast should be taken as advice. Now ran 33 days until Fin Fest, which is proudly powered by stake. We cannot wait. The news here is that first released tickets are running out currently at 47 bucks. This is an investing and finance show. You always want to be looking for a bit of additional money to get in the markets, so get them quick before they get jacked up to the second release of $67. It's going to be first in best dressed for those on the day to grab some awesome merch that is that is going to be available. And if you're interested in the programme and speaker line up, it's available at equitymates.com/finfest. We have over 50 experts from around Australia. Plenty of sessions to cover all level of investor now. 

Alec: [00:01:56] Equity Mates Price mentioned merch. When I first met him back at university, he was starting his sunglasses business summer days. 

Bryce: [00:02:03] Yes.

Alec: [00:02:04] DIY. Is it a. 

Bryce: [00:02:06] Yes? 

Bryce: [00:02:07] Yeah. Yeah, yep. Yeah. 

Alec: [00:02:09] And he's bringing back the sunglasses at Film Fest. If we if supply chain issues don't erupt. Yes. Bryce is going to have Equity Mates branded sunglasses at Fin for free. 

Bryce: [00:02:23] Free of charge. Free, free of charge. Hell yeah. We're going to. Yeah, yeah, oh, yeah. 

Bryce: [00:02:28] We're going to we're going to be dressed like some of the best in the business, that's for sure. So if you want to grab your merch pack not only from Equity Mates but from some of the other sponsors such as our majors, when our Magellan and Coin spot, thank you to those guys for being major sponsors. They're all going to have some pretty epic. [00:02:43][15.5]

Bryce: [00:02:44] Merch as well. [00:02:44][0.5]

Alec: [00:02:45] And people have probably seen Steaks merch on Instagram. Rumours are they'll be they're out in force. So even if you don't hear any of the speakers, even if you just want to get a goodie bag worth. [00:02:56][11.8]

Bryce: [00:02:57] It, that's it. [00:02:57][0.5]

Bryce: [00:02:58] All right. [00:02:58][0.1]

Alec: [00:02:58] Bryce. [00:02:58][0.0]

Bryce: [00:02:59] Anyway, let's get going. [00:02:59][0.8]

Alec: [00:03:01] We want to keep going with this. What we learnt this week segment, the week was dominated by your bucks. It was probably not a lot of learning. [00:03:09][8.0]

Bryce: [00:03:10] I had a great time. [00:03:10][0.5]

Bryce: [00:03:11] Learning. [00:03:11][0.0]

Alec: [00:03:11] A lot about. [00:03:11][0.2]

Bryce: [00:03:12] You. Yes. [00:03:13][0.9]

Alec: [00:03:13] Learn about your poor golf skills. [00:03:15][2.1]

Bryce: [00:03:16] Hey. Hey. I already knew that on one side. Now, what did you learn? [00:03:20][3.7]

Bryce: [00:03:20] We went down to Bond Burger for three days down in Tasmania and played two rounds of golf. [00:03:24][3.9]

Alec: [00:03:24] Third best golf course in Australia. [00:03:25][1.1]

Bryce: [00:03:26] So that's what I yes. [00:03:27][1.3]

Bryce: [00:03:29] It was phenomenal. I had an awesome time. I learnt that you can have a box without getting too ridiculous. We had a lot of fun. A lot of fun. I loved to play two games of golf, watch plenty of footy which so much sport treated to an awesome round, AFL finals round and also the Wallabies who didn't get up. But anyway, it was it was awesome. [00:03:49][19.9]

Alec: [00:03:49] Shout out to Geoffrey. The centre of the sports bar. [00:03:52][2.8]

Bryce: [00:03:52] Chatted to Geoffrey. [00:03:53][0.5]

Bryce: [00:03:54] I learnt that you can make friends with bartenders at sports bars. [00:03:57][3.0]

Alec: [00:03:58] Okay. All right, well, let's let's go back to investing. You've got something here that you did learn, something investing related. So what did you learn? [00:04:07][9.7]

Bryce: [00:04:08] Well, it's not necessarily investing related, but it just continues to surprise me how the power of social media and having a massive following leads to just doors opening in terms of investment opportunities and building businesses. I watched the the documentary you recommended with Ryan Reynolds. Reynolds Yeah, and buying Wrexham over in Wales, a soccer club and one of the whole parts of that is having a massive social following and they can bring exposure to the club. Yeah. And it came out at the time of recording that Kim Kardashian is now going into private equity in partnership with a former Carlyle partner. His name is Jay Sammons, and they're launching their own private equity fund, leveraging the size of Kim Kardashian's social media account. And so they're going to be investing in media companies, skin care, all that sort of stuff. She already has a clothing company worth $3.2 billion. [00:05:06][58.3]

Alec: [00:05:07] That's Kim. [00:05:07][0.3]

Bryce: [00:05:07] Skims. Yes. And so this is just a reminder that I. Personally and you personally need to get our social media accounts up there so we can start like launching side ventures. [00:05:17][9.1]

Alec: [00:05:17] So let me ask you this then. If Kim Kardashian knocked on our door here at Equity Mates, would you take the Kim Kardashian empire? [00:05:23][6.0]

Bryce: [00:05:23] Oh, yeah. [00:05:24][0.3]

Bryce: [00:05:25] She's focussing on media businesses. So, I mean, yeah, this is great for us, but it fascinates me that, you know, a former private equity guy, Jay, who worked at Carlyle now teaming up, it. [00:05:38][13.3]

Alec: [00:05:39] Fascinates you that someone wants to work with a celebrity. That might be the least fascinating pick. [00:05:45][6.6]

Bryce: [00:05:45] For. [00:05:45][0.0]

Bryce: [00:05:46] His sole reason. Well, not sole reason, but his driver was that she's just got a massive account. So it makes the investments that they take. Let's it. Then they just put the might of however many millions of followers. [00:05:57][10.4]

Bryce: [00:05:57] Yeah, yeah, yeah. [00:05:58][0.7]

Alec: [00:05:58] Ashton Kutcher, of all people, was the pioneer of this in the venture world. And so many celebrities have really followed since. But hey, remember how he had the biggest Twitter account for a while and he used that and then went to all these hot Visa rounds and said, let me invest, but give me a discount on the round because of my profile. And he got discount access to like I want to say, Airbnb pay and a couple of other big names in that sort of early 20 tens period just because he had such a big platform. And then then we that when we saw like all the sports stars, you know, the Golden State Warriors who were in San Fran, they were all became bases in their own right Kevin Durant, Steph Curry, and then it's gone on from there. Serena Williams is saying. [00:06:41][43.2]

Bryce: [00:06:42] Yeah, yeah. [00:06:42][0.5]

Bryce: [00:06:43] Just using profile. So the next investor in Equity Mates needs to have over 100 million followers. [00:06:47][4.1]

Alec: [00:06:49] Or Equity Mates needs. [00:06:50][1.0]

Bryce: [00:06:51] To stay behind that. [00:06:52][1.4]

Bryce: [00:06:53] Anyway. Anyway, if you're interested in the story, check it out. Kim Kardashian has teamed up with. [00:06:58][4.4]

Bryce: [00:06:59] We'll do surveys and we'll. [00:07:00][1.3]

Alec: [00:07:00] Do something about that on the dive. Sasha's actually already messaged the group with us, so head over the Dives podcast and. [00:07:07][6.8]

Bryce: [00:07:07] Check it out to that. [00:07:08][0.6]

Bryce: [00:07:08] We're in what have you on Commonwealth Bank. [00:07:10][1.7]

Alec: [00:07:10] This is a message to you your spend tracking on your app sucks. [00:07:15][4.2]

Bryce: [00:07:16] Yes. No. [00:07:16][0.5]

Alec: [00:07:17] I have always been a bit of a vibe guy when it comes to tracking my spending, but this market downturn is such a big opportunity that I figured now's the right time to like squeeze every penny, get more money into the market. I sold my car. There's a bit of a backstory there, but it kind of ruins the headline, which is I sold my car to get liquidity. [00:07:36][19.2]

Bryce: [00:07:37] Yes. [00:07:37][0.0]

Alec: [00:07:38] When I tried to categorise my spending on Commonwealth Bank, they have these broad, unhelpful categories. You can't add your own category, you can't add your own subcategories. And it just it was a mess. Like we we bought a bunch of booze for the bucks. And my choices to categorise that were groceries, shopping or like entertainment. Why can't I make my own category alcohol and then say how much I'm spending or Uber eats? Anyway, we did a whole episode on saving to invest, tracking your spending on get started investing. But in case anyone from CommBank is listening here you have 50,000 head count, you have half a trillion dollar mortgage book. You power half the retail investors in Australia. Surely the might of your company can be turned to add your own category or rename your a category. [00:08:29][50.7]

Bryce: [00:08:30] They I want you to run. Hey, that's my appeal. That's what I've learnt. [00:08:35][4.5]

Bryce: [00:08:35] Good learning. Well let's, let's move to the meat of this episode. And over the last couple of weeks when we've had two major TV show premieres, we've had the House of the Dragon, which was the Game of Thrones prequel. And we've had The Rings of Power, which was the Lord of the Rings prequel as well. Yep. One on Amazon Prime and the second over on HBO. [00:09:01][26.2]

Bryce: [00:09:02] Yeah. [00:09:02][0.0]

Bryce: [00:09:02] And man, it's been a great couple of weeks. [00:09:05][2.2]

Bryce: [00:09:05] I'm loving it and. [00:09:06][1.2]

Alec: [00:09:06] We haven't been thinking about investing, so let's go out. [00:09:09][2.2]

Bryce: [00:09:09] Recaps of the show. Yeah. True. [00:09:11][1.7]

Alec: [00:09:11] No. So Amazon Prime, everyone knows we've spoken about Amazon. Later in March, media talks about Amazon way too much. There wasn't really an interesting story there, but the owner of HBO, Max, is a company that was only created in April of this year, Warner Brothers Discovery. And there's an interesting conversation to be had about this company. I think it gives us some indication of where the streaming world is going, but we wanted to take this company, talk about it because we haven't spoken about it on the show before and then build a two theses do both sides. This company build a bull case and build a bear case to, I guess, sort of show how we would think about building a thesis. So let's start with the company, Warner Brothers, Discovery Bryce. It only started in April of this year, but Warner Brothers has been around since the 1920s. [00:10:03][52.1]

Bryce: [00:10:04] It has been kicking around for a while. Ran and is right. Only been around after the merge of two. Slowly dying cable TV channels, Warner Brothers and Discovery. Hence why we're at Warner Brothers Discovery. [00:10:18][14.0]

Alec: [00:10:19] So these guys were titans of cable TV. You're right. Warner Brothers. So take a step back. Hollywood royalty started in the 1920s, made the first ever movie with talking. That's a little trivia fact for you. You know what it was called? You're not the jazz singer. [00:10:36][17.4]

Bryce: [00:10:38] So singing. [00:10:38][0.3]

Alec: [00:10:39] And talking. Okay. Now, all of the same was they own the DC Comics franchise. Superman. Batman. Teenage Mutant Ninja Turtles. Massive IP from our childhoods. Harry Potter. Lord of the Rings. They own a number of cable channels HBO, CNN, TBS, TNT. Yeah, they love a three letter acronym, and they operate two streaming services, HBO, Max and the very, very shortlived CNN. [00:11:04][25.7]

Bryce: [00:11:06] And then you've got Discovery on the other side, Ren, which was a giant in factual entertainment, plenty of good talkers over on Discovery. They operated a number of lifestyle channels, Discovery Channel, Animal Planet, Science Channel, TLC, the Food Network, HGTV, not sure what that one was. And then Travel Channel. Yeah, HGTV. [00:11:24][18.3]

Alec: [00:11:26] Gives me infomercial vibes to summarise. [00:11:27][1.5]

Bryce: [00:11:28] Maybe. [00:11:28][0.0]

Alec: [00:11:29] Maybe it's like Home and Gardens TV. [00:11:30][1.6]

Bryce: [00:11:31] And then they. [00:11:31][0.5]

Alec: [00:11:32] Keep speculating. [00:11:32][0.2]

Bryce: [00:11:33] They had a streaming channel as well or a streaming service, sorry, Discovery Plus. But in April, AT&T spun out Warner Brothers and Warner merged with Discovery. Getting us to this point now, which is Warner Brothers. Discovery. [00:11:48][15.1]

Alec: [00:11:49] Yeah. So AT&T shareholders own 71% of the company. Discovery shareholders own 29% of the company, but it is now a streaming giant. I guess it's a media conglomerate that is making the transition from the world of cable channels to the world of streaming. They've got four main revenue segments. The cable cable TV is still meaningful for them, although cord cutting is increasing, like the rate of cord cutting is increasing. But TV from cable subscription and advertising streaming, they did quickly shut down CNN. Plus, there's a whole story in that, but they do continue to operate to other streaming services. Discovery Plus and HBO, Max. [00:12:32][42.4]

Bryce: [00:12:33] And I don't know where you sit on on that, but HBO for me is by far and away the best producer of TV. [00:12:39][6.7]

Bryce: [00:12:40] Shows, 100%. Great. [00:12:41][1.3]

Alec: [00:12:42] We'll talk about some of the high pay later. Showtime is also up there. But yeah, HBO is so good. But that is like a that is the lukewarm, sort of lukewarm take. [00:12:53][11.0]

Bryce: [00:12:54] I know. [00:12:54][0.1]

Alec: [00:12:54] That's like everyone agrees that does the best. I wonder why they're the best. So like, is it the people in that building. [00:12:59][5.4]

Bryce: [00:13:00] Must be. [00:13:00][0.3]

Alec: [00:13:01] Just like showing. [00:13:01][0.4]

Bryce: [00:13:01] That they just intentionally are trying to. [00:13:03][1.3]

Alec: [00:13:03] Poach separate. [00:13:03][0.7]

Bryce: [00:13:04] Awesome shows. Anyway, let's keep going. [00:13:05][1.6]

Alec: [00:13:06] Yeah. Anyway, so TV is number one streaming. Number two, they licence content to other media businesses, game studios. Classic example of that would be if us sitting here in Australia, we can't sign up to HBO. Max We sign up to binge yet has all of HBO Max's content that would be there would be some licencing deal there so that's number three and the number four they own some movies or they sent they send some of their stuff to movies. I actually don't think they are in any movie cinemas. [00:13:32][26.2]

Bryce: [00:13:32] No, but they make box. [00:13:33][0.7]

Bryce: [00:13:33] Office. [00:13:33][0.0]

Alec: [00:13:34] Make box. [00:13:34][0.3]

Bryce: [00:13:34] Office like Superman. [00:13:35][0.4]

Alec: [00:13:35] Etc.. There's a whole side note about how they pulled a bunch of stuff off their streaming services, but and to try and push it back into box office. Anyway, you've got some details on the competitors. Yeah. Importantly for this conversation, how they measure up with streaming subscribers. [00:13:50][15.1]

Bryce: [00:13:51] Yeah. So quick recap of of the competitive landscape. So Warner Brothers have a market cap of about 3,092,000,000 subs across everything that we just went through there. But then you've got Disney, Netflix and Paramount. We don't actually have Amazon Prime here either and didn't put in YouTube. So we've got Disney with a market cap of 205 billion, so much, much larger than Warner Brothers. And they have 152 million subscribers. So just just under double Warner Brothers Netflix market cap of about 100 billion and 220 million subscribers. They led the way in that space. And then paramount, they're the smallest of them all with a market cap of about 15 billion and only 64 million subscribers. So Warner Brothers, not the smallest in terms of market cap vs subs doing pretty well for themselves. [00:14:37][46.1]

Alec: [00:14:37] Yeah. Now they're they like the pure play competitors. So that's a really sort of clean look at market cap and subs. Disney obviously have like a Parks business and a business, but that gives you a pretty good idea, some of the other competitors. So Amazon has about 200 million subscribers and they have a $1.3 trillion market cap. But and then they have a Web services business. [00:15:00][22.5]

Bryce: [00:15:00] Yeah. [00:15:00][0.0]

Alec: [00:15:02] YouTube that they don't have a lot of subs like 23 million I think is the number they expect to get like to 25 million subscribers. [00:15:09][7.2]

Bryce: [00:15:11] Apple TV. [00:15:11][0.3]

Alec: [00:15:12] This is a vibe. This is pure vibe. But I feel like Apple TV has been a bit of a flop. [00:15:16][4.0]

Bryce: [00:15:17] Maybe whatever we pay for it. But I just don't I don't really know what we use it for. [00:15:21][3.6]

Bryce: [00:15:21] Anyway, let's just say they. [00:15:22][1.0]

Alec: [00:15:23] Box like that again. Apple Nail products like hardware. That's good. That's epic. Yeah. But the streaming service, like their content creation business. [00:15:31][8.2]

Bryce: [00:15:32] Don't need it. [00:15:32][0.4]

Alec: [00:15:33] Yeah, I think we pay for it as a house as well. Apparently they have 40 million according to Barron's, but they don't split it out, I think. [00:15:41][8.1]

Bryce: [00:15:41] Right? Yeah. [00:15:42][1.1]

Bryce: [00:15:43] Okay. So they've got plenty of franchises as well within Warner Brothers. [00:15:48][4.6]

Alec: [00:15:49] They do. I in our doc I screenshotted something from the company presentation. Which one of those doesn't seem to fit. [00:15:58][9.3]

Bryce: [00:15:59] So in their in. [00:16:01][2.1]

Alec: [00:16:02] Their franchises that they call that someone like their big IP. Batman, Wonder Woman, Superman. Shark Week. The Game of Thrones. 90 Day Fiance Universe and Harry Potter. [00:16:16][14.8]

Bryce: [00:16:19] Shark Week. [00:16:19][0.5]

Alec: [00:16:20] No Shark Week's big like this. That's Discovery's like. [00:16:23][2.9]

Bryce: [00:16:23] It's big thing. I'm just looking at it now. 40 million viewers in the week. [00:16:26][2.7]

Bryce: [00:16:26] Well, what the hell is the. [00:16:27][0.8]

Alec: [00:16:27] 90 day fiancé universe? Suggests that there's, like, a whole world of iPad out there. [00:16:34][6.1]

Bryce: [00:16:35] True. True. [00:16:35][0.5]

Alec: [00:16:36] There was someone who just needed to like. [00:16:38][1.7]

Bryce: [00:16:39] It's like. [00:16:40][0.6]

Bryce: [00:16:40] Philosophy. It's something. [00:16:41][0.6]

Alec: [00:16:42] I mean, like, Lord of the Rings could have gone there. [00:16:45][3.3]

Bryce: [00:16:45] So we've had a merger between Warner Brothers and Discovery to form Warner Brothers. Discovery, after being spun out from AT&T, they've got a four main revenue streams and are in a pretty competitive landscape at the moment, as we know. And we've spoken about a number of times on the show. So then it comes down to, well, how do we formulate an investment thesis? What's the bull case and what's the bear case for a company like Warner Brothers? And after the break, we're going to turn our attention to building both of these bull case and bear cases. So stick around. We'll just take a quick break to hear from our sponsors. MARIN Before we jump into the bull and bear case, I want to give a quick shout out to the new Equity Mates Community Forum. [00:17:24][38.8]

Bryce: [00:17:25] Yes, we. [00:17:25][0.5]

Bryce: [00:17:25] Are off while we are no longer engaging as much as we did in our Facebook community group. Facebook is not great for engaging, curated conversation. We have built our own forum. It is now available on the website Equity Mates dot com. Think of it as reddit, but for Equity Mates. [00:17:44][18.3]

Bryce: [00:17:45] Yeah. That's it. [00:17:45][0.9]

Alec: [00:17:46] Yeah. Think of it like that. But look. Yeah. As Bryce said, the conversation became a little bit unstructured as you scale a Facebook group because it's difficult to search previous questions. So people often ask the same questions. But it's also like there are people of very different investment levels in the same group. And some people want to talk about, you know, the net present value of Apple's cash flows and other people want to ask what broker to sign up with. And those two conversations don't sit well together in a forum. So this forum gives us a chance to structure conversations. But the most exciting thing for me as the person that has to go through and wait out the bots, there are no bots. [00:18:26][39.8]

Bryce: [00:18:26] There are no bots yet. [00:18:28][1.3]

Bryce: [00:18:28] There are no bots. So look, you're going to hear us chatting about it over the next few months. It's an awesome place to be at the moment. We're looking it's now open for for our entire community to come and join. So head to Equity Mates dot com create a create an account and kraken. [00:18:41][12.9]

Alec: [00:18:42] Here's one tease if we haven't sold it to you yet. An expert investor we just interviewed told us about a free book. His book recommendation was free. Tell us where to get it. I'll share that on the forum. So if you want a free expert recommended book, come jump across to the forum. [00:18:56][14.7]

Bryce: [00:18:57] Nice. [00:18:57][0.0]

Bryce: [00:18:58] Alright then. Let's take a look at the bull case for Warner Brothers Discovery. And we've titled it This is the Next Perhaps Better Disney. [00:19:07][9.2]

Alec: [00:19:08] Yes. All right. So now important to keep in mind as we talk about these cases, we're doing both a bull and a bear case. So don't switch the podcast off halfway through this segment and then go and buy because also don't take investing recommendations from a podcast. That's it. But we were taking a look at Warner Brothers Disney, and we wanted to sort of, I guess, show how we would go about starting to build a thesis on both sides of the debate. So, Bryce, this is the next perhaps better Disney. So Warner Brothers is making the transition from cable to direct to consumer streaming. And there will be challenges. There will be costs in that transition. But beyond that, once they get through that valley, there is so much upside and plenty of free cash flow to be had. They have this incredible asset base, the DC Comics universe, all of those superheroes Harry Potter, Lord of the Rings, Game of Thrones. The challenge is to emulate what Disney do, which is what which we've called extend their IP. Now, you're a big fan of Disney, not investment, but now you speak about Disney a lot. So talk to me about the Disney business model. [00:20:19][71.3]

Bryce: [00:20:19] Well, as you said, Ren, it is all about extending their IP. So let's use Mickey Mouse in as an example. They've created an incredibly strong IP in Mickey Mouse or they or they go out and buy it like Star Wars. [00:20:32][12.6]

Bryce: [00:20:32] Yeah. [00:20:32][0.0]

Bryce: [00:20:33] And then they take that and spread it everywhere and monetise it in as many different ways as possible. They have theme parks, they've got Disneyland. They've got Mickey Mouse walking around in, you know, a Boeing mascot. [00:20:46][13.5]

Bryce: [00:20:47] We get what. [00:20:47][0.3]

Bryce: [00:20:50] They have shows Disney on Ice, they have merch, they have you name it. They will leverage that IP in as many different ways as possible. [00:20:58][8.4]

Alec: [00:20:58] They literally have cruisers. [00:20:59][0.6]

Bryce: [00:21:00] Go. [00:21:00][0.0]

Alec: [00:21:00] On a Disney cruise and be surrounded by Disney characters. [00:21:03][2.6]

Bryce: [00:21:04] Yeah. So that that's an awesome example of taking strong IP and leveraging it in many, many different revenue streams is possible. [00:21:12][8.0]

Alec: [00:21:12] Yeah that's what Disney best in class up. Yeah. And the argument would be well this is Warner Brothers opportunity as well. They have incredible, powerful, incredibly powerful IP. Here's a number for you. This year, Emmy nominations have come out. Warner Brothers Discovery won the most 193 Emmy nominations. Wow. Feels like a lot. I couldn't tell you that. I couldn't find it. That was a record or not. [00:21:38][26.1]

Bryce: [00:21:39] Feels like. [00:21:39][0.3]

Bryce: [00:21:39] It. [00:21:39][0.0]

Alec: [00:21:40] Well, I guess I would have been able to find it if it was a record. So. But 193 Emmy nominations and Bryce to back up your argument about HBO. [00:21:49][8.8]

Bryce: [00:21:50] Hmm. [00:21:50][0.0]

Alec: [00:21:50] 140 of them from HBO. [00:21:51][1.2]

Bryce: [00:21:52] Wow. Vega Yeah. [00:21:53][1.4]

Bryce: [00:21:54] Point proven so I. [00:21:55][1.0]

Alec: [00:21:55] Guess. [00:21:55][0.0]

Bryce: [00:21:55] Imagine that. [00:21:56][1.3]

Alec: [00:21:58] So I guess, like, imagine a Warner Brothers world with Superman, Batman. Harry Potter. [00:22:02][4.2]

Bryce: [00:22:03] Game of Thrones. Lord of the Rings. [00:22:04][1.6]

Bryce: [00:22:05] Yeah, yeah, yeah. [00:22:06][0.6]

Bryce: [00:22:06] Epic worlds, which in some instances they do extend all this, but they don't have. [00:22:10][4.2]

Bryce: [00:22:10] Well, yeah. [00:22:11][0.2]

Alec: [00:22:11] They do that in on the Gold Coast movie world. [00:22:13][1.9]

Bryce: [00:22:13] True. Yeah. Yeah, yeah. We'll get to that. We'll get to that. You guys a movie about. Even open? [00:22:19][5.7]

Alec: [00:22:20] Well, it was was it the Bryce when we were talking about extending the IP and building the ball case for Warner Brothers Disney two kids focussed. [00:22:31][11.0]

Bryce: [00:22:32] Well I don't think to kids focus but they just are kids. [00:22:35][2.6]

Bryce: [00:22:35] Focus you know well like building and. [00:22:37][2.3]

Alec: [00:22:37] Building the case for Warner Brothers that's what you would say to kids focus kids sort of disposable. [00:22:42][4.5]

Bryce: [00:22:42] Income. Yeah. [00:22:43][0.5]

Bryce: [00:22:43] You know, you. [00:22:43][0.3]

Bryce: [00:22:44] Say, how powerful is this. [00:22:45][1.1]

Bryce: [00:22:46] Opportunity? [00:22:46][0.0]

Bryce: [00:22:47] Sure you can. [00:22:48][0.5]

Bryce: [00:22:48] Warner Brothers or Disney have an opportunity to go in. Adults exploiting the beautiful case. [00:22:53][5.4]

Bryce: [00:22:54] Yes. Anyway, it's very kids focussed. [00:22:56][1.9]

Bryce: [00:22:57] What do you mean by kids focus? They all their IP, their parks, their cruises. [00:23:00][2.9]

Bryce: [00:23:00] Yeah, yeah, yeah. [00:23:01][0.7]

Bryce: [00:23:01] It's driven by the kid. [00:23:02][0.7]

Alec: [00:23:03] Mickey, Star Wars, Pixar, like the incredible IP. But the the IP is focussed on kids. Yes. Now kids is a massive advantage because parents are willing to spend a lot of money on their kids. Kids don't understand the value of a dollar, so they'll pester you into paying $15 a day to skip one line at a theme park or to go to Florida to go to a theme park in the first place. Pester power is incredible. You can sell a lot more merch like toys and stuff like that. So decent kids, they have a good strategy. They're cute company. It's the interesting conversation with Warner Brothers is all the adult facing I pay, all the adult facing content, like what are there opportunities there that are different to Disney? [00:23:44][41.1]

Bryce: [00:23:44] Yeah, it's a good question. I don't have an answer, but I'm just thinking that your your appetite, the older and older you get, like you have to be very creative in how you extend the IP. [00:23:53][9.2]

Bryce: [00:23:54] Yeah, well business isn't easy. I just. [00:23:56][2.4]

Bryce: [00:23:57] Yeah. Anyway we got, we've got some other examples of shows here, all of which I'm looking at and I've loved all of them. Kerb Your enthusiasm, band of Brothers, True Detective Sopranos, Game of Thrones Succession Yeah. Like they are all epic. [00:24:10][12.9]

Alec: [00:24:10] Show and we could have kept listing, but we just figured like, you guys, you got to know what HBO does. Yeah, they're pretty good. [00:24:16][6.3]

Bryce: [00:24:17] So this is just a very high level understanding of building a thesis when obviously, if you're going to do this properly, you'd think about other things like management. You'd look at balance sheet, you look at the competitive landscape in a bit more detail. But this is just one sort of way that you could approach it and look at what is their growth opportunity. And, you know, they've got a large bank of assets here. [00:24:38][21.1]

Alec: [00:24:38] Just to close out the adult conversation. I have some ideas. [00:24:40][2.1]

Bryce: [00:24:41] And I know that. [00:24:42][0.5]

Alec: [00:24:42] So like stage shows like Harry Potter had the stage show knock off. You could do something like that with some of these things. The Sopranos on Ice. [00:24:50][8.1]

Bryce: [00:24:52] Is nothing that I like that. [00:24:53][1.1]

Alec: [00:24:53] And I've got more spin off movies. So all these TV shows like Where's the I mean, HBO did an Entourage movie, not great. But like where's the true detective movie? The Sopranos movie that the succession movie? Like, there's a bunch of money to be made there. Video games. Warner Brothers have a video game studio. How can I play is Wyatt Roy and the succession video guys. [00:25:15][21.8]

Bryce: [00:25:17] Right while video. [00:25:17][0.8]

Alec: [00:25:18] So video games are board games. Yeah. Monopoly. Succession Monopoly. Yeah. Like, where's that out? Oh, famed bars. [00:25:25][7.5]

Bryce: [00:25:26] Good one. Yeah, I like the kerb. [00:25:28][2.0]

Alec: [00:25:29] Your enthusiasm, theme bar. Or like in the latest season of kerb, your enthusiasm, Larry, starts us like a spiked coffee shop. Knock a few of those up around L.A.. [00:25:38][9.0]

Bryce: [00:25:38] Like, let's go, let's go. [00:25:40][1.7]

Alec: [00:25:40] And my last question to you, Bryce. What does an adult theme park look like? [00:25:45][4.7]

Bryce: [00:25:45] Not fun for me. [00:25:46][0.7]

Bryce: [00:25:47] Yeah. What about? No, you know, I. [00:25:48][1.4]

Alec: [00:25:48] Think about, like, golf simulator driving, right? Yeah. [00:25:51][3.0]

Bryce: [00:25:52] Other things that I think, you know, because normally when we. [00:25:56][4.3]

Alec: [00:25:56] Think of theme parks is they've been optimised for. [00:25:59][2.4]

Bryce: [00:25:59] Kids. [00:25:59][0.0]

Bryce: [00:25:59] Yeah, yeah. [00:25:59][0.3]

Alec: [00:26:00] Like what's like what's emerging where we could have gone at the Warner Brothers Box Party theme park. [00:26:06][6.0]

Bryce: [00:26:07] They would have made it out for me. [00:26:08][0.9]

Alec: [00:26:09] Anyway, that's a few free ideas for Warner Brothers. But then I guess, I guess the serious part of this conversation is, to your point about this is the start of a thesis, then it's what does that revenue look like? What does that coastline look like? You would probably look at like a Netflix to take the streaming business and model out those costs, content costs, platform costs. You probably didn't look at a Disney to take out the extending the iPad business their parks stuff like that. What the cost and revenue looks like there. Then you model that out for a number of years and you discount the future cash flow back to the present value. [00:26:46][36.8]

Bryce: [00:26:46] And of. [00:26:46][0.3]

Bryce: [00:26:47] And you've also got to have. [00:26:48][1.5]

Bryce: [00:26:48] Some indication that they are going to do something like this. [00:26:52][3.2]

Bryce: [00:26:52] Yeah, yeah. You can't you can't just be like, yeah, you can't see like they're. [00:26:55][3.0]

Bryce: [00:26:56] Going to create adult theme parks and this is my valuation. [00:26:59][3.3]

Bryce: [00:27:00] Well, that's what you become an activist investor. [00:27:02][1.6]

Alec: [00:27:02] You buy 5% of the company. You write an open letter to the board and you say, if you don't do. [00:27:07][4.3]

Bryce: [00:27:07] It, I'm going to cause trouble. Well, let's. [00:27:09][1.9]

Bryce: [00:27:09] Turn to the to the bear case. [00:27:11][1.5]

Bryce: [00:27:11] Before we do. [00:27:12][0.6]

Alec: [00:27:12] There is a clear and obvious rebuttal to the bull case that I think it is important to say, which is that Warner Brothers. This has had multiple opportunities to do this. These extend your IP like they've had this epic IP for ages. They owned DC Comics since 1969. They owned Six Flags. So that massive chain of amusement parks in America up until 1998, they've had this opportunity and they haven't executed it. So my challenge with the bull case is why is now different? Why is this latest merger going to spark the opportunity that didn't spark when AT&T owned them or when they merged with AOL? That wasn't a great period for them. Or like any of the previous iterations of Warner Brothers, they never really became the Disney. Yeah. [00:27:59][46.5]

Bryce: [00:28:00] What's what what's different now? Yeah. [00:28:01][1.5]

Alec: [00:28:02] And so that's when you talk about management and stuff like that. [00:28:04][2.1]

Bryce: [00:28:04] Well that brings us to the bear case side ran and whilst we did say that the ball is perhaps at Warner Brothers becoming the better at Disney, the flip side is that you could say and argue that their assets are shit and their balance sheet is shitter. [00:28:18][13.9]

Bryce: [00:28:20] And that all. [00:28:21][0.8]

Bryce: [00:28:21] Depends on which side of the content fence you sit on. [00:28:23][2.3]

Alec: [00:28:23] I mean, the balance sheet is pretty objective. [00:28:25][1.5]

Bryce: [00:28:25] So let's get let's. [00:28:26][0.7]

Bryce: [00:28:27] Let's start with the content because we did just spend 20 minutes talking about how good a stable of assets and IP Warner Brothers has. But then when you compare it with some of their competitors, arguably it might not be as strong. [00:28:41][13.8]

Alec: [00:28:41] Yeah, I think this is a this is a six of one, half a dozen of the other. Like there's so much debate about Marvel, they say, yeah, Pixar, I think is pretty outstanding. Incredible. But you put Pixar up against Harry Potter. Pixar probably just wins Mickey Mouse against Game of Thrones. Like who wins either way? They're like incredible assets. Yeah, I think that's the point. But are they as strong? [00:29:06][25.1]

Bryce: [00:29:07] Yeah, yeah, yeah. [00:29:07][0.8]

Bryce: [00:29:08] Well, they certainly don't have the extension that we've just spoken about. So let's, let's move to. [00:29:12][3.8]

Bryce: [00:29:12] Oh, and. [00:29:12][0.1]

Alec: [00:29:12] I think the reason we say that is you just want to invest in the best like over and over again. What we've learnt in this world of investing is like you look at the mistake a lot of investors make is look at the second best and think if they can just. [00:29:26][13.2]

Bryce: [00:29:26] It's going to come back. [00:29:26][0.5]

Bryce: [00:29:26] To yeah, yeah. [00:29:27][0.7]

Alec: [00:29:27] Yeah. Like if they can just trade at the price to earnings ratio that the best trades are. Yeah, I'll make money. Yeah. But like the best. [00:29:34][6.8]

Bryce: [00:29:35] Of the best for a real. [00:29:36][0.8]

Alec: [00:29:36] Reason. They trade at the premium for a raise and that's just something we sort of learnt in so many industries over our few years of doing this. [00:29:43][6.9]

Bryce: [00:29:43] So let's have a look at the balance sheet then again, because the transition from cable to streaming is absolutely killing Warner Brothers and streaming across the board is hurting a lot of companies. [00:29:53][10.2]

Bryce: [00:29:54] Yeah, it's a cash. Cash black hole. Yeah. Yeah. [00:29:57][3.2]

Alec: [00:29:58] And like you lose operating leverage as you transition out of cable because like cable, high fixed cost, low variable, I mean like some variable costs, but it's like the content cost is fixed and then you spread it over more subscribers. So you get more revenue, you have more eyeballs. So you get more advertising revenue. As you lose those subscribers and those advertiser eyeballs, you lose that leverage that you had. And if your content cost stays fixed, you lose more and more money as people cut the cord. So it's a really difficult transition to make, but the alternative is you just withdraw completely, then you're breaking contracts and you there's probably cost there, but then you have to recoup it all on the subscription side. So like it's a really difficult transition to make. And at the same time as you're making that transition, you're cannibalising your cable business with the subscriber business. So it's difficult. I don't envy those executives at all. [00:30:50][52.1]

Bryce: [00:30:50] Let's have a look at their cash position when they got four big ones, 4 billion on cash on the balance sheet, $4 billion cash on the balance sheet, but gross debt of 53 billion. [00:31:00][9.9]

Alec: [00:31:02] Heaps of the hates. [00:31:02][0.7]

Bryce: [00:31:03] Of debt. [00:31:03][0.2]

Alec: [00:31:04] They're paying hundreds of millions of dollars in interest on that debt every year. So $53 billion in debt, $4 billion in cash means they've got $49 billion net debt. Now, to put that in context, this company makes $10 billion in revenue a year and about $1,000,000,000 in profit a year. [00:31:24][19.2]

Bryce: [00:31:24] So do the maths. On paying off $50 billion in debt. [00:31:27][2.5]

Alec: [00:31:28] Yeah, yeah. It's going to take a while. And the important thing to say is that the streaming industry is slowing. Like, yeah, people are going. [00:31:35][6.9]

Bryce: [00:31:35] To get hot. [00:31:35][0.1]

Alec: [00:31:35] And people are cancelling subscriptions because it's too crowded and the cost of debt is rising. So interest rates are going up. [00:31:43][8.0]

Bryce: [00:31:43] This is a dumpster fire waiting to happen. [00:31:45][1.5]

Alec: [00:31:46] Yeah, we did right out of the doctor. Remember, this is if you're making the bet, you would say if you're making the bad guys, what you could say is a fire sale on some assets to free up cash to service the debt. Now, that's not great. [00:32:03][16.8]

Bryce: [00:32:03] I don't want to be doing that. [00:32:04][0.8]

Alec: [00:32:04] That has happened before for in Warner Brothers history. They got acquired by AOL in like 1998 or 1999. You know what happened to AOL in like 2000, 2001? Past the tech bubble burst. I think they actually ended up just selling AOL for like a fraction of the valuation when the merger happened. But you wouldn't want to see them have to, like, sell. [00:32:25][20.9]

Bryce: [00:32:26] Yeah. [00:32:26][0.0]

Bryce: [00:32:26] It's just it's just like basic personal finance. You want to sell assets to cover. [00:32:29][3.2]

Alec: [00:32:30] Imagine if they had to sell. [00:32:31][0.8]

Bryce: [00:32:31] Like, payments. [00:32:31][0.2]

Alec: [00:32:32] And they had to sell. [00:32:32][0.4]

Bryce: [00:32:33] HBO. A lot of. [00:32:34][0.7]

Alec: [00:32:34] Thought. Oh, well, imagine that. But Lord of the Rings. Yeah, I paid to that. To Disney. [00:32:39][4.9]

Bryce: [00:32:39] Yeah. [00:32:39][0.0]

Alec: [00:32:40] Or like DC Comics, you probably can sell Disney, but you'd sell it to, like, Netflix. Yeah. I mean, I'm not saying that's going to happen, but like that's the risk if a highly levied company that they have to sell a prised asset at some point to cover that debt. So that's the downside. Now, Bryce, I want to put it in some context into some research that we found. So Warner Brothers Discovery, their net leverage is five, five times, according to one media analyst we found like an analyst of the media industry. They don't want to look at companies above three times. For comparison, Comcast is about two and a half times. Disney is about 2.2 times. So they're more leveraged than they've got more debt than their competitors, I think is the first thing. And we spoke about the one risk of debt, which is the risk of having to sell assets. Yeah. The other risk is can you keep up in the content arms race because there is a content arms race. Amazon have spent $715 million on buying the rights and making the first season of the rings of power. Yeah, $715 million. This company has $4 billion on its balance sheet. For context, remember who you're playing against Apple, Google and Amazon in the streaming wars now as well as like Netflix and Disney Cash. [00:33:56][76.1]

Bryce: [00:33:56] Say. [00:33:56][0.0]

Alec: [00:33:57] Apple, Amazon, Google. I think all of them have like 50 billion plus cash on their balance sheet. [00:34:01][4.6]

Bryce: [00:34:02] Easy. [00:34:02][0.0]

Alec: [00:34:02] Yeah. So that is the challenge. Can Warner Brothers keep up in the content, arms, race and service that debt? [00:34:09][7.1]

Bryce: [00:34:09] Yeah, it's a great question. I mean, doesn't Apple have something like 200 pay or something on their balance sheet? Probably something ridiculous, but. Yeah, and that that really is a quite a compelling argument to add to a bull case. A bear case. [00:34:22][12.6]

Alec: [00:34:22] I'm actually not done. I've still got one more point. [00:34:24][1.6]

Bryce: [00:34:24] Oh here. [00:34:25][0.2]

Alec: [00:34:26] So we've spoken about debt. The quality of the assets are as good as Disney, the debt that we've spoken about. The final one is the difficulty in streaming. So streaming isn't profitable for basically anyone at the moment. The company Warner Brothers have said streaming will start to become profitable for them. At 130 million global subscribers, there are 90 million to 40 million more. Do you reckon that's doable? [00:34:51][25.3]

Bryce: [00:34:52] Well, I'm surprised at how some of these streaming services have grown from zero to close to 100 pretty quickly. [00:34:58][6.7]

Alec: [00:34:59] Yeah, but then others haven't. Like Apple. [00:35:00][1.6]

Bryce: [00:35:01] Yeah, but others have sort of fallen. I think they're in a good position with the assets they've got, but they're putting on another 40 million. In this day and age. It's hard to. [00:35:09][8.5]

Bryce: [00:35:09] Tell starts really. [00:35:10][0.7]

Alec: [00:35:10] Hotstar The other thing to keep in mind is the company have said they're going to merge their streaming services, so HBO, Max and Discovery Plus will become one with all of CNN's stuff in there as well. I don't know what the overlap between those two is, but there will be some overlap, so they'll take a step back before they take a step forward. I reckon they'll get 230 mil. I mean, if HBO Max was here in Australia, I feel like we would both be signing up. [00:35:33][22.9]

Bryce: [00:35:34] Not to cut binge. [00:35:35][0.8]

Alec: [00:35:35] Well, no, but binge would lose their content. They would lose the licencing deals. Yeah. Yeah. Anyway, so that's the bear case. [00:35:40][5.0]

Bryce: [00:35:41] I can't say 40 million is a lot. [00:35:43][2.6]

Alec: [00:35:45] They added net to all net 1.7 last quarter I think. So like that's something but it's. [00:35:51][5.5]

Bryce: [00:35:51] Something but like you've got like the time to get to 40 million versus the costs that are going to continue to increase to compete with everyone else who's sucking away those potential 40 million is only going to get more and. [00:36:02][11.5]

Bryce: [00:36:03] More. Yeah. So that's because that's the bad guy. So people. [00:36:05][2.7]

Alec: [00:36:06] They better that's how you build it. [00:36:07][1.4]

Bryce: [00:36:08] That's how that's a high level. [00:36:09][1.0]

Alec: [00:36:11] Then you get into. [00:36:11][0.4]

Bryce: [00:36:11] The Financial. [00:36:11][0.1]

Alec: [00:36:12] Times. But that that's not that's not easy to explain. [00:36:15][2.6]

Bryce: [00:36:16] I mean. 

Alec: [00:36:16] I'm moving to sell, say, three. 

Bryce: [00:36:19] Well, we could do it. 

Bryce: [00:36:20] We could do a deep dive on management, for example. We could do a deeper dive on some of their competitors. But this is just a high level starting point for how you can think about building a bull in a bear. So if you have a bullet, if you have a company that you'd like to. 

Bryce: [00:36:35] Get a high level start at a starting

Bryce: [00:36:37] Point of hit us up, we'll give it our best. That does bring us to the end of today's episode. Make sure you go and check out the dive where we've done plenty of content on streaming and also most recently a deep dive on House of Dragon. House of the Dragon and Power. 

Alec: [00:36:56] Power of the Rings of Power. 

Bryce: [00:36:58] And Rings of power

Bryce: [00:36:59] And how much Amazon has spent. Yeah, on, on making that TV show. 

Alec: [00:37:04] It's phenomenal. And I think one final thing, we have a whole stage at Fin Fest where the best investors in Australia will be pitching the thesis for their best investment. So if you want to learn more about building. Faces. There's no better place to do it than Finn Fest. That's it. Thanks to State for powering it.

Bryce: [00:37:22] Thank you to Steak for Powering Fan Fest as well as our other major sponsors when our coins, spot and Magellan. We cannot wait. There's only 32 days to go. 33 days to go. 32, whatever.

Alec: [00:37:34] 15th of October. 

Bryce: [00:37:35] 15th of October. 

Bryce: [00:37:37] Ran. It's been an absolute pleasure chatting stocks, as always. And we'll be back next week. 

Alec: [00:37:41] Sounds good