Ep.50: Microsoft Bet BIG On The Metaverse & Netflix Shares Crash On Outlook

Okay, welcome to episode 50 of the Market Maker podcast series. So yeah, hard to believe we're, we're at the 50 marker, Piers, but, but here we are. And living up to what we committed to in our last episode, we put out to the community, um, people to email me in terms of their favorite episode. And yeah, the inbox lit up. There were, there were tons of really great responses actually, and from people all over the world, which is just truly amazing when you get people messaging you from Argentina, South Africa, India, as well as obviously in the UK where we are, where the majority of people are. Shout out to Punit, who is in India. He agrees with us about Tesla, doesn't like it. Also, shout out to Praveen, who actually reconsidered his Facebook strategy after you pretty much decimated them, I think, in episode 47 about where they're heading. But he likes the Google Play. And then Declan. Declan pretty much wrote me a thesis about all the different things he liked, which was great. He actually really enjoyed episode 27, going all the way back, when actually I did a conversation about trading crypto. So obviously—

Oh, what, with Tim?

With Tim, yeah, our senior trader. So Yeah, he said he got a lot of great advice out of that. So if you trade crypto, go back, episode 27. There's some really useful nuggets in there that will be really useful. Because I always think it's either complete novice or you're so that far down the crypto wormhole, it's hard to have a conversation with people. But Tim did a great job at giving an even-handed approach. But the person who I chose is on the call is Kati. So Kati, how are you doing?

I'm doing great, I'm doing great this morning. Uh, how are you guys doing?

Yeah, yeah, fantastic. And, um, you know, I, I chose you just to give this a bit of a, um, stage here, is that I remember you from when we, when we as the company were working with Credit Suisse. I think you were a summer analyst last year at the time, and I remember it was during the break I was delivering a macro lecture. Everyone turned their cameras off. You left yours on during the break. And I could see you beavering away on your laptop during the break. And I said, hey, Cathie, what are you looking at? And you said, oh, I was just looking at— you mentioned about the yield curve inversion. I'm just seeing what that is and how it works and when it's happened before and what the— and I was just like, well, this guy's serious. He's really committed. Committed. And I remember you were always very, very much engaging when we were having conversations. So I thought that was great. And then, you know, you gave the shout out for the 10-year investment episode that we did, where we gave a stock pitch, which was your favorite. But yeah, maybe then the purpose of this was to really give you a platform. So tell us a little about yourself, and where you're from, and where you study, and we'll go from there.

Yeah, no, I really enjoyed the Fridays we had at Credit Suisse. It was definitely like a highlight of my week. To be able to trade using fake money, as it were. But the bit about me, so I'm a PPE student, which is Politics, Philosophy and Economics at the University of Nottingham. And I chose PPE because I initially came from the International Baccalaureate, which is not so well known in the UK, but you just do 6 subjects with philosophy on top. And so it gave me a bit of a broader outlook on my surroundings. And then a bit about me, in my free time I do loads of sports. I do rugby, karate, badminton, and I do chess. Don't know if that counts as a sport, but we'll include it nonetheless. Yeah, the biggest one of them is definitely karate. I got my black belt when I was 15, but now chess has definitely taken a predominant role. I'm a nationally ranked chess player now, so we're going, we're going on strong. And then, yeah, I started off just doing banking from internships. I got interested because my brother was talking to me about private equity. Something called a poison pill was the first thing that got me, um, or— and a Pac-Man defense. So yeah, I, I watch the podcast a bit religiously, um, when I'm just out for a walk or going to do some shopping. Um, so it's great to be on it.

Oh, that's, that's incredible, going from karate to and chess national rank. That's awesome. That, that for me, Piers, and about you, if I was interviewing someone, that came up, yeah, that's the guy.

I think my position on this podcast, I feel threatened.

I'm not here to take your position, Piers.

So where's home? Where's actually home for you? Are you, you in, are you from Nottingham?

Yeah, so currently right now I'm in my Nottingham studio, but I live in Southeast London in Lewisham. Yeah, so that's home. And I'm from Jamaica and Ghana.

OK. Yeah. Cool. I now know why—

one of the reasons why you've picked— Ant was at uni in Nottingham, right?

Oh, yeah.

You just missed him, though, because he graduated about 71 years ago, I think.

And I used to live in Southeast London. So yeah, there's nothing like keeping it within your tribe, you know?

What I'm most impressed about, Kati, tell them what you're doing. You've managed to sandwich us in between interviews with— tell us, you've just literally just stepped off an interview, right?

Yeah, so I'm currently at an assessment centre. I won't say who, but it's a pretty big firm, so I really hope that, you know—

Well, I know who it is, and yeah, it's definitely a big firm.

Yeah, so I have— my break was at 10, they overrun to 10 past 10, and I'm back on at at half past, but I just figured I'd do this quick podcast interjection, um, get my blood flowing, and then I'll go back and tell them why I love IBD so much.

I'll tell you what, you're an absolute champion for, for taking the time out given the, the stress that most people feel in the middle of an AC. You're jumping out onto a podcast. That's just Yeah, that's unbelievable. But look, what I'm going to do is I won't take any more of your time, but I'm going to put your LinkedIn— your LinkedIn address. I'm going to drop it in the bio of this podcast. So on Spotify, Apple, I'm going to share it on LinkedIn, give you a shout out specifically. So to live up to the promise, I want you to get some visibility. So everyone, you must connect with Kati. Go out there and do it. Build the network.

Check him out, guys. It's definitely worth a look. Check him out. Yeah.

Forget IBD. It's the karate chess future that we're heading for. All right, Karti. Well, look, fantastic to have you on. And stay in touch. And all the best for the rest of the assessment center.

Yeah. Good luck.

Thank you, guys. Appreciate you having me on.

All right. Take care.

Bye.

All right. Usual plan of action then for the rest of the episode. And Piers, just before we begin, I mean, I definitely wouldn't even consider taking on— I'm just going to jump out of an AC, jump on a podcast, and be cool as that.

Balls of steel. I mean, I'd hire him just for that alone, actually. Forget about— just stop the assessment center. That man's hired.

Yeah. Oh, what a, what a star. But, um, but yeah, look, it took— going back to the, to the pod then, let's, um, let's move things forward and get, and get back on track. And yeah, the episode 50, um, one thing that I did see and I wanted to mention, um, because I know we obviously have quite a few recurring listeners, anyone new to the channel, but Spotify, I found out just the other week at the end of 2021 have added now a rating feature on the app.

Ah, finally.

Finally, they've woken up. And that I've read is going to be one of the calculations that will feed in, as we know, these secret algorithms that help promote the pod and so on. So you know where I'm heading. We did the Apple push, but now it's the Spotify push. And I know certainly a big portion of our community is UK-based. And I think most UK people use Spotify rather than Apple, just from what I talk to many people. And so all you need to do is go onto the main Market Maker channel page and there should be a star rating. You literally, it's way easier than Apple actually. You just hit it, give the star, done. 5, please, not 1. Yeah, that will massively help us. Um, at the moment, uh, before I even noticed it was there, it's already on 40, which is, which is fantastic. So thank you for those 40 people. I'm going to set a stall though and a marker. I want to hit 250 by the end of Q1.

Okay, 250.

It's much easier, it's much easier to do Super quick, takes 2 seconds. It helps us out massively, spreads the, the words. Um, so yeah, I'd just be thankful if you could do that.

All right, so we could rate ourselves, right? Just going on and rating, I'm rating ourselves.

All right, so look, let's, um, let's move on. So I'm going to give a bit of a wrap of the week. Feel free, as ever, Piers, to interject if you feel it's needed, and then we'll talk about the main topics, which we're definitely going to discuss Microsoft, the acquisition of Activision Blizzard, and then also what that means in the race for positioning in the metaverse. And we're also going to talk about some of the kind of classic stay-at-home trades which got hammering last night, which was Netflix and Peloton, down around 20-25% each respectively. So they're going to be the main talking points, but, uh, give you a bit of a flavor and a wrap-up of the week. So beginning of the week, and actually they've gone twice now, the Chinese Central Bank have been cutting their benchmark lending rates. We have seen GDP there continues to slow down, obviously just in the wake of the pandemic. So the economic slowdown, the world's second largest economy, resulting in their central bank taking action this week. We've also had in the region, North Korea tested two tactical guided missiles on Monday. And it is now the biggest string of missile launches since August of 2019, uh, at this point in time. Um, before anyone gets too nervous about that type of headline, it is relative commonplace. Certainly during the 2018 period, I remember, and during the Trump period, it was definitely something that was happening biweekly, essentially.

You always remember, uh, Rocket Man What was it Trump was saying? His famous fire and—

Fire and fury. Oh, yeah. I remember that because when he said the statement fire and fury, and obviously the S&P got whacked on the back of that because people thought, oh my God, this is like escalation to the next level. You know where he said that comment, the context?

Where was he?

What do you think he was doing when he made that comment?

Probably eating a burger in bed.

He was, he was, uh, he was just come off the golf course in the clubhouse.

Of course.

So hard at work. Yeah, working the, you know, the back nine. So, so other things this week, we've had Biden, and on the theme of, of kind of North Korea and China, he said he's not ready to lift tariffs his predecessor imposed on Chinese imports despite calls from US businesses to relieve the duties. That's totally unexpected. We talked about this many times before. He hasn't changed the direction of that and is very unlikely to do so going into the midterms. Then, of course, lots of talk about Russia preparing to invade Ukraine. US Secretary of State Antony Blinken is meeting his Russian counterpart today, in fact. Of hopes of lowering the temperature a little bit after recent diplomatic efforts in Geneva were deemed a failure by Moscow. And there's not too much of a unified front in NATO either at the moment. So any feelings on that? And I know Macron's been fairly vocal.

I mean, this is it. I think it's quite interesting. I mean, Putin loving this, right? Kind of perfect for him in that he's being strongman, you know, amassing troops on the border. Yeah, yeah, I'm not intending to invade, is his kind of pretense. But, um, he's, he's being the strongman, uh, and he's— his rivals are kind of at— are, are not unified, right? So this is the perfect situation for him, um, and this has kind of been definitely a strategy for his— for years. And he's definitely in a what he will feel is a positive period. And yeah, you saw that with Biden. And when you throw Biden in, he made that bit of a gaffe in his press conference, which just again, I think you probably— I think my views on Biden, I've been fairly consistently clear on what I think about Biden on this podcast. But just again, another example where I just don't think he's cut out for this. But yeah, I think, look, there is a lack of unity, but there'll be nothing like an invasion to concentrate the minds of the allies, shall we call them. I think until— yeah, I think we're on the back foot. I think we just wait. I think the West just wait for Putin to do something and then go, oh my God, right, we better act. So Putin's always on the front foot, which is where he wants to be, of course.

Yeah.

And what timing is also optimal given the kind of wholesale gas situation at the moment as well.

Yeah. And I guess hard one with that Nord Stream 2 pipeline, which the massive expense, you know, Russia connecting to Europe. It's not open yet, right? And You know, that is leverage on the West's side, if you want to think about it like that, because we don't have to open that pipeline, right? So, you know, from a sanctions point of view, you know, there's been plenty of financial sanctions in the past which have hit hard in Russia, by the way. Those financial sanctions is absolutely a form of warfare, in my opinion, and creates a huge amount of economic disruption. Which then creates a lot of hardship, right? And I think, you know, in the, in, in the last time Russia invaded Ukraine or Crimea, you know, the sanctions got slapped on hard, and that definitely hurt. So, you know, they are effective, it's just they're not visible. So, you know, there's nothing like a show of strength and amassing troops on the border. Obviously, that's that picture, and that image is, is you know, delivers a much bigger punch to, to kind of the population.

But yeah, and to add a, add a few more kind of layers to how complex the geopolitics gets, as I said, the US Secretary of State is meeting his Russian counterpart today. But what is also happening today that's really interesting is there's joint military drills happening— China, Russia and Iran.

Is that right? I didn't know that.

I mean, how divisive is this world we're living in right now? I mean, yeah, I think that says it all, right? That this is a— this is the, the kind of confrontations and the, the— what Biden needs to deal with is there's also China as well as Russia. And so it makes strategic sense if I was China or Russia, yeah, to somewhat align with themselves because yes, Russia wants the Nord Stream, but also China wants to deliver the Silk Road kind of ambitions over the long term, which requires Russian territory.

Yeah. And I think if you listen to the Ray Dalios of this world, very much it's kind of front and center of his thesis is these massive super long cycles and that we're due a conflict, right? I think we've gone the longest Is it the longest ever where we haven't had some kind of— Yeah, the longest ever peacetime. So in his eyes, it's inevitable that we return to some kind of global war. I know it just sounds weird to say it, our generations, where we haven't ever been directly exposed to anything like that. It just feels like such a parallel universe that could never happen, right? But—

Yeah, he's got a great chart. That he always shares, Ray Dalio, which is the— it's like a multi— it's like a 500-year chart and it looks at civilization change. And it's got at the moment the descent of America, which obviously hammered the British Empire back in what, the 19th century or so. And then looking at it now, the acceleration of China and how that's what's really underlying the current state of play. Yeah.

And it's the change in superpower and it's the change in the global reserve currency and it's a period where you've got a lot— the rich-poor divide gap widens, which creates a lot of diversive bipolar political climates. And then you get more extreme political parties getting into office, which then leads to more extreme policies, and then the divisiveness rises. I mean, I think even Ray Dalio, I think he puts the chances of an American civil war I think it's up to 35% chance in his eyes. I mean, and that sounds just so sensationalist, but then we did just go through the anniversary of storming the Capitol. So it's kind of, on the one hand, you might say it's a fair assessment. But I think this is something for investors, right? It's always been, for my whole life, it's always been a risk you know, of some kind of conflict. And when Putin starts rising up and getting a little bit more aggressive, you know, it's always on the agenda, but it never happens. That's been the default for our generation. The risks are there, but it never happens. And I think we always kind of live on that level. But yeah, it's got to be something obviously to monitor because, you know, if anything did escalate dramatically, then obviously it's a complete game changer and all cards are off the table and it's just an entirely unique event for our generations. And so I think investors are, look, let's carry on regardless and obviously monitor those risks, but for now not take them too seriously, I think.

Right. So the important take-home point here is that as much as there are always multiple macro kind of topics or themes concurrently ongoing. It's about forming a hierarchy of what's going to be the influential factors over your investment period, I guess. And then assigning appropriate probability to the risks of those materializing. That was kind of the thing about the whole— I remember whenever North Korea would fire one of their intercontinental ballistic missiles, said to also have mastered miniaturization of a nuclear warhead device strapped on the top. You'd think, "Oh my God, this is the end of days." And yet the S&P would bump down a percent and everyone would load up and buy into it. And by the end of the day, it would be 2% above where we were before the dip. And that would happen every time. It was just an opportunity to get long in this ever-rising market. And that's not to say that these things don't go without risk because one miscalculation, and certainly when you're relying on technology and things to make assessments on direction and travel of things, of missiles to counteract things, things could go wrong pretty quickly and escalate. But yeah, these are all assigned probabilities, I guess is the key thing. But okay, other, other things we've had are Brent crude oil moved to its highest level since October 2014, um, this week. So kind of, I guess, diminishing kind of impact of Omicron, or at least the belief that people have as we go further forward. Um, supply is tightening as well. We've had outages in Libya to North America. We had the drone attack on oil facilities in the UAE. That was actually this week on Monday. Geopolitical tensions, we just mentioned, are kind of simmering at this moment in time. So there's a couple things at play there. Goldman Sachs, they raised their Brent forecasts through 2022 to 2023. They were obviously listening to you and they said we predict $100 in the third quarter. So thanks, GS, for listening to the pod. Yeah, but one thing I would say is you did get called out, and I do want to address this. Someone said you said $100, but you didn't say when specifically.

Well, I said, uh, didn't I? I said in 2022.

But yeah, this person wants, uh, it's more accurate. You've got year, quarter, month. Well, it's going to be how far you want to take it.

Be on the 14th of, uh, it's going to be 11:31 AM. No, hold on, run your model and then I, I, uh, yeah, yeah, I'd say second half of the year.

Okay. Okay, okay. So, so I said to you the year, the quarter, or the month, and you went, yeah, I'm going to throw in a fourth element here. Okay, well, I'll let you off for that second half of the year. Page 2.

Well, like quarter 3, quarter 3.

Okay, so you're in line with the GS view, or they're in line with—

I think they're in line, whatever you want to see it. Okay, they're in line with me.

Yeah, so it's just talking of, talking of Goldman Sachs then. Their shares were down about 8%. Earlier in the week, we have earnings season. It's really going to pick up actually next week in terms of volume of companies reporting. Now GS, just from memory, I think they had record investment banking, asset management, wealth management net revenues. But this is already, you know, just to make the point, record-breaking numbers there. The stock fell 8% because don't forget Markets are forward-looking. A lot of this stuff is well known given the deal activity we've had over the previous period that these numbers were going to be sensational. The problem that they had was weaker trading revenues and just rising expenses. I mean, I don't know if you've read some of the headlines, Piers. I wrote about it in one of our newsletters. They are paying out some serious dough to their employees to stop them going elsewhere at the moment.

Yeah, bonuses have, bonuses have been good this year, right?

And then for the senior folk that I think the partners, um, they were not only getting uplifts on their pay, increased sizable bonuses, they're also getting one-time additional million-dollar type on top of one-off, one-time sweetener, just given how competitive the space is at the moment to, to retain talent. Yeah. So the other thing then is Morgan Stanley, and I wanted to give them a shout out because they posted better than expected fourth quarter profits on strong equities trading revenue. And they've kind of held the line a bit more on the compensation costs. And I guess investors just liking that. Because one thing I would say, generally speaking, the downside is, is like, right, I don't want this person to leave this company. So I'm going to throw some money at them. The problem is now you're not going to have record-breaking advisory fees growing year after year after year after year. It doesn't quite really work like that. But now you've thrown a couple million bucks my way. What do— my expectation now is, well, you paid me X, now I want X plus Y going forward. And how are you going to do that?

And that's why the stock's down 8%.

Yeah, I mean, it's— yeah, I think it's a tough one. Obviously keeping workforce happy, retention is obviously key, but ultimately, is it a sustainable model? I'm not sure. Anyway, elsewhere to wrap up the week, crypto, and talking about it at the best time actually, because it's just thrashed out new lows. Bitcoin down about 8% in the last 24 hours that we're recording this on a Friday. Ether also down nearly 10%. Other layer 1s such as Solana, Cardano are down as well. Generally, the theme here being the crypto market's just freaking out over higher yields like everything else is that's tech and growth-oriented at the moment. But look, let's get onto the first the first conversation piece, which is that of Microsoft nearing its deal to buy Activision Blizzard, which would be the biggest tech deal in history, topping the Dell-EMC merger of 2016. So I mean, it's a— it's an absolute giant transaction. One thing we did earlier in the week is when this news broke, Eddie and I jumped on, we discussed the deal and its terms more more there. So if you just go back one episode, you can check that out. Couple things I want to say, then I want to pivot this to more a conversation about the rationale and the kind of strategy for betting on the metaverse, which I guess ultimately, fundamentally is what this is. So a couple of things is I was reading about Activision, and in 2006, they bought Guitar Hero. Did you remember Guitar Hero?

Guitar, actually. Yeah, I do. Yes, I do vaguely remember that.

Yeah. Oh, this is when— this is when the air guitar, um, this is when they had like a little miniature guitar that you'd play and you could play like Metallica and things like that, and you would just press— you do, you do the keys on the actual guitar. But I mean, oh, I mean, I heard the news, so yeah, RIP. Um, But yeah, 2006, I think, was when I'd moved in with my brother and we were sharing a flat, me and my older brother. And he's a big metalhead. And so he went out and bought Guitar Hero when it first came out. I remember this. And you know what we did? We went out, we bought the guitar, we bought the drum kit. And what we would do, we'd go out and then when we used to come home, we would put it on full volume. I'd have the drums, he'd have the guitar.

Jam it up.

Just be jamming till like 5 AM in the morning, much to our kind of neighbor's delight. But yeah, so in 2006, Activision bought Guitar Hero, and they bought it for $100 million from a company called Red Octane. $100 million. That game actually would later make the top 10 best-selling lists of all time. Wow. So $100 million they paid for that. That was an incredible acquisition. This is Activision. Then 2 years later, Activision merged with Blizzard, the studio behind the PC hit Warcraft, which was then owned by Vivendi. And that transaction was just under $20 billion. And then they gobbled up Candy Crush. Yeah, from the Sega Maker King for just under $6 billion in 2015 to tap into the fast-growing mobile market. Remember, this was 2015. I know we all use our smartphones, you know, we probably spent too much time on our smartphones 2022, but this was 2015. So those 3 acquisitions gave them gaming for mobile, console, and PC. Yeah, so Quite, quite an interesting backstory actually. So how they perform— there's a lot of negative stuff as well that's been going on more recently. An interesting character, um, Kotick, the main guy there. But look, the, the timing of the deal is what's interesting. There's so much conversation about the buzzword that's metaverse and Web3 and so forth. Gaming is seen as kind of the key to really strategically move in that direction because of the existing online communities there. But I know you've got some stats and some thoughts about that.

Well, yeah, it's obviously when you get a big deal like this, and don't forget it's not happened yet, and there's definitely some possible barriers in the way, and I don't know what the regulators might say, but anyway, When you get big numbers, and it's like, wow, massive move, especially if it's one of the big tech firms, it grabs all the headlines. What I would say is that, yeah, it's obviously gaming/metaverse. It goes hand in hand. There's a big race for this. I'd say if you step back, if you think about the big 5, tech firms, then obviously they're all kind of rivaling each other— Big Five: Alphabet, Amazon, Apple, Meta, and Microsoft. And, um, essentially what they're trying to do— obviously in the last decade they've absolutely smashed it, and they have become the absolute giants of global companies. Um, and I think where they're at now, right now, is that they're at this kind of bit of a crossroads where now it's like, okay, well, what next? Because history is littered with absolute giant organizations that then actually a few years later or a decade plus later, and actually they've kind of disappeared. There's quite a few examples of these. There's stuff like Fairchild Semiconductor. You ever heard of them?

No.

They were the biggest company in the world in the 1950s.

Not anymore.

IBM in 1983 was America's most profitable firm. 8 years later, it was losing money. Nokia is probably— well, I was going to say more recent, and most people will know about it. But actually, that was like 20 years ago now where kind of Nokia got smashed off its perch, or perhaps not quite 20 years ago. But you get my point, right? So I guess what all these tech firms are right now thinking is, right, What they want to do is they want to make and own the future. And I guess the issue is we don't quite know what that future is because we're at this point, this crossroads between Web 2 and Web 3, let's say. And that whole Web 3 environment, whilst we think, hang on, there's this metaverse idea and there's, okay, there's blockchain and there's DeFi and there's There's AI, and there's VR and AR, and they're throwing all the money under the sun at all of these. But actually, we're still at that point where we're not quite sure in 10 years' time, what will we all be doing as people? How will we be interacting with each other? How will we be consuming products? Products and services, how will we be spending our time? And they're throwing money at it. And this Microsoft deal is definitely another example of how aggressive they're being. I mean, when I say aggressive, in the last year, just thinking about— well, yeah, in the last year, right, $280 billion has— those 5 have spent $280 billion in the last year on like R&D projects. That's 9% of the entire American business investment. 9% of the entire country's investment is from those, um, 5 companies. And if you go back 5 years, their proportion of investment, um, was 4%. So they've gone from 4% to 9% in terms of their proportion of company investment. Obviously, a function of that is their growth, of course. And there's a great chart, actually, if anybody has The Economist subscription, they've actually done a pretty good article on this. But when you're looking at the stats in terms of how their investment has changed, it's interesting on the one hand, if you look at it from a percentage of revenue point of view, then for some companies, it's actually relatively stable, like Microsoft. Actually, this year Microsoft have invested less than they did in the previous 2 years. I'm talking about 2021 here, sorry, rather than this year. They've invested less even though— from a percentage of revenue point of view, but because their revenue's gone up so dramatically, the amount of cash that is, the amount of cash is way, way more than ever before. Before, right? So you've got this wall of cash as these Big Five, in terms of how they invest in R&D, they do it as a percentage of their revenue. And they're always trying to innovate. And as revenues grow, well then these cash— the cash that gets thrown at this stuff is quite extraordinary. So actually their R&D and capital expenditure was at 53% of cash flows in 2021, which is up from 32% from the year before. Obviously, they're throwing it at what we call frontier technologies, which is, right, what's next? What does that future look like in 10 years? What are consumers going to do? The frontier technologies have been split into a few different areas. The metaverse, obviously, but then there's stuff like autonomous vehicles. We've spoken about this with all these big tech firms throwing huge amounts of money at autonomous vehicles. But then stuff like healthcare, is really important. And again, something that they're investing in hugely. There's side projects like space, robotics, fintech, crypto. Quantum computing is a big one, because if you want your metaverse, then the computing power that you need to enable that to happen, I mean, we can't do it yet. So they're investing a huge amount into these cool new chips that can make this computing power go forwards. But in terms of research, the big 5 companies just themselves have published 16,000 scientific papers in the last 5 years. So it's definitely the race to win— to create and win the future. And obviously, what they're trying to do is not go extinct. Be the graveyard of these giant companies of the past. They're trying to avoid that. And I think it's going to be a really interesting decade. And we've spoken about this on previous pods, where I think both of us were kind of leaning towards Google as perhaps being kind of best place to maybe win that race. But I think, yeah, in terms of what happens next, They're all big movers. This Microsoft deal is just one of many, many, many. And I think they've bought 110 companies in the last 5 years. These 5 tech firms have bought 110 companies.

With all these numbers, like that volume and the cash number, I mean— there's a regulator knocking on my door here.

Right.

So this is right. This is right. This is a really good point. Historically, all those companies that kind of got nailed and died, actually, most cases it wasn't the regulator. Even though you might think, right, these massive companies, OK, they're going to have to get taken down a peg. It actually isn't the— it's normally not the regulator. It's normally they just don't evolve onto the next thing. Nokia is such a good example. They just completely screwed up the transition to the smartphone. And so this is what they're desperately trying to avoid, which is why they're throwing money at everything, even though a lot of it's going to be entirely wasted. You could argue Apple's attempt at an electric vehicle, you could argue is an entire waste of money. But They're just throwing money at the wall and seeing what sticks. They're so afraid of not being in the right space.

So I wonder here, more of a philosophical approach of R&D, let's say. So you have these small, more agile teams that create these new innovative products or services or games. In a lot of this conversation, I was reading about the kind of culture at Activision Blizzard. And yeah, as much as there's like sexual discrimination, lots of other things going on, the other thing was apparently they had a work culture that was just, you know, really squeezing their employees. It was a lot of pressure to develop. There was— so I guess one thing is then you go into this kind of— it's weird, I kind of have this perception of like the Microsoft being like they give you this big handbook and it's like, this is how a Microsoft employee or or acquired company must behave, and it's the Microsoft code. But at what point then do you not allow these smaller companies to have the, the room to maneuver to fulfill the potential of these ideas and execute on those plans before they then get into that more rigid structure where, because they're so large, the innovation speed will decrease? But then If I just start buying up all these innovative companies, not only am I capping the rate of innovation, but surely that also increases the regulatory risk because I'm just buying everyone.

Yeah, I think you're absolutely right. The ability for a giant organization to innovate, it's a lot harder than a startup, almost kind of by definition. And I think that's what has been the failure of these gigantic institutions over the centuries. And yeah, it's hard, isn't it? Because you buy— and of course, the more companies you buy, and they're buying a lot of companies, then it just becomes harder to have that— yeah, how does that have that one sense of that one mission, that one, what do we do? I know at a top level, what does Amazon do? Well, they're a distribution company, right, for products and getting products to the doorstep as quickly as possible. And okay, you might say, well, hang on, they're also AWS cloud, but then they're also— well, hang on, they own 20% of Rivian. But you might say, well, hang on, that's because that's playing into their core business because they want to make that distribution cheaper from a cost point of view because they don't want to have to pay drivers and But then when you get these giant tangents, I don't know, Microsoft, for example, in April, they agreed a deal for Nuance Communications. That's a healthcare-focused cloud and software provider. And it's like, wow, okay, well, that's then— that's way off-piste from their kind of core business, isn't it? And that's just because they're trying to cover that base, because the other tech firms are all all in amongst that healthcare side. If you think about Google bought Fitbit, for example, for a couple of billion, whenever that was, a couple of years ago. And so hang on, if Google are buying Fitbit, hang on, Apple are all over the healthcare with their watch and stuff. So Microsoft, they're forced to have to cover that base just in case that becomes the kind of booming one. They don't want to They don't want to be left behind if any one of these big elements is the real— the one that really takes off. But it's so far away from their core strategy, it just then becomes more messy from a message. But obviously, they've got enough cash that it's worth a punt. And I think a lot of the time, some of these are just punts.

Um, is it not— I mean, forgive my naivety, but would it not be better to break up the companies into their own segments so they can be more focused on the, the priority and objectives of that one singular department within, within, I don't know, a group organization sense, but listed on its own? And then you satisfy regulatory threat.

And I guess to play devil's advocate here, Can you really claim that— this goes against stuff I've said in the past on this podcast, but have they got too much market share? I mean, just think about this Microsoft deal with Activision. Even if that went through, they'd have like 10% to 15% market share. So I mean, that's not— from a regulator's point of view, that's not like, wow, dangerous. In any way. If you look at the electric vehicle market, of course, they haven't got massive market shares, even though they're buying electric vehicle companies left, right, and center. No one of them has a market share that is anywhere near getting under regulatory scrutiny. But then you think about AI, and I think here's the problem. AI is such an important thing, but now it's not a single thing. AI really now goes into everything. But how do you be good at artificial intelligence? Well, you need data to learn from. And who's got all the data? Well, the big tech firms. So it's a really difficult one for the regulator. They've got all the data. They're much better positioned to be absolutely at the forefront of the AI revolution. But then what's that a monopoly on? You know, so, and anyway, there's 5 of them. So if they're all in each other's space, and I think actually we're up to a record amount now. I think now 40% of the Big Five's business activities now overlap.

Right.

I think it was like 25% 10 years ago, it's now up to 40%, right? So they're overlapping and they're competing. So because there's 5 of them, does anyone have a monopoly anywhere? And so I think from, from a regulator's point of view, it's, it's going to be hard, but it does destroy innovation, and that's, that's proven time and time again. And if they're not careful, they will be victims. Not all of them, but I think of those 5 you know, in a decade or two decades' time, you're not going to have all five of them at the top table anymore. Which ones survive, obviously, is the big debate.

Yeah, you've seen those infographics. There's only one company that survives long term. Yeah, Microsoft, Microsoft, Microsoft, Microsoft. Always, always there. Always a bankable podium finish. Maybe not number one, but always right there in contention. All right, well, let's, uh, let's move it over to Netflix because they beat top and bottom line last night. So how much did they go up? They went down 20%. They went down 20% after hours. That's the lowest levels now since June 2020. Main thing, slowing subscriber growth. So they added just 8— just, I say— they added just 18.2 million customers in 2021. So it sounds like a lot, but actually that's 50% down from the record year obviously that they had. Now I do find this a little bit challenging as the way the market reacts in, I think, a slightly irrational way because of it's being probably caught up with this whole exit of the pandemic with the whole yield move and the growth stocks getting hit. But of course, we were going to come off the boil after the meteoric subscriptions that came on the back of the fact that— When we say lockdown, that's not strictly true because there's a degree of severity to the restrictions that get implemented. If you think about 2020, It was literally peeking out the front door. Can I leave or the Gestapo gonna like shoot me down? Like, 'cause I don't know what the deal is. Like, am I gonna catch this virus? Are the police gonna come in and arrest me? Like, cast your mind back to March, April. You didn't really know what the deal was. Like, how do I catch this thing? What actually are the rules? Whereas now it's kind of part of life, right? And thankfully, touch wood for now, We're heading in the right direction in the sense that, yes, transmissibility is high, but obviously symptomatically it's lower. So the point being is I don't— I'm not that shocked by this, but hence is management of expectations from a listed company's perspective. And so by numbers, their global paid net subscriber additions were 8.28 million, and that was versus 8.19 million expected, but that's fewer than essentially 8.5 million they added in the prior quarter. Um, the biggest point arguably was their outlook, as is always the case with particularly growth names. And they expect to add 2.5 million subscribers during the first quarter of this year. That is below the 4 million it added the same quarter last year. And analysts— what analysts were expecting Bearing in mind they came out saying they're going to add 2.5 billion. Analysts were expecting 7 million.

What?

So check that out for an outlook. I mean, that by any stretch is a disaster of an outlook that they put out.

Yeah, but you know why they do that though, right? To avoid exactly what's just happened.

Yeah.

It's like, well, let's not keep making the same mistake. Let's now lowball our forecast so that actually we can start beating it. And then our share price will go up and everyone will go, wow, we're amazing.

Yeah. And so, yeah, short-term pain, long-term gain. Because I mentioned to you just before we came on, need I remind everyone that Netflix is up 6,000% in 10 years. So a little bit of 20% off the top, in order for then managing the share price thereafter. It doesn't seem like such a big deal. Yeah.

And look, that share price spike, the peak, it was just shy of $700, wasn't it? I think it peaked in Q3, Q4 last year. But that's overbought. I mean, that's bubble. And obviously, you then layer on the inflation problem. And of course, a lot of these tech firms firms, that future kind of profit needs to start getting discounted because of higher inflation expectations. And so I think when you look at the share price— wow, down. It's down, down, down, down, down. You've got to realize it wasn't justified being up there in the first place. And so it's kind of correcting back lower.

Yeah. And we're trading— we're set to open around $400.

Yeah.

And you know where we were trading before the pandemic hit? 400 bucks. So, so basically we're, we're exactly where we were. It just sounds sensational because we've gone so far, essentially. So yeah, a couple of other interesting things, obviously Netflix related this week. Um, they did mention on their call post-earnings about the increasing competition, part of the rationale for the slowdown— Apple, Disney, so on— having material impact on their growth. Yeah. Um, the other thing as well that some analysts were noting is the slate of shows for the current quarter apparently isn't as strong, and those big titles that are in the pipeline are not going to actually debut until Q2. And so they've got a bit of a dearth of like new content coming at this point in time. They raised prices in matured markets, um, this week, so US, Canada. This is, I guess, the struggle here is raising prices is one way to counteract this slowing growth situation short term, but That's fine in matured markets, but that's fairly saturated anyway. Where they need growth to come from are the Asian markets. And you cannot raise prices there because you need to start at the lowest possible price. It's kind of like Netflix back when I used to get the CDs delivered to my flat. It was cheap because no one used it. And so you've got to get that. You've got to build that up. Um, so that's problematic. But then, um, also as well as the whole move to gaming— I know we talked about Netflix a few episodes ago, we were talking about there, we're contemplating going into gaming and they were thinking about, yeah, R&D or acquisitions. But as we've just discussed, that is a, as you said before, a fierce space to compete in right now.

So especially when you, especially when you got the Big Five who are, you know, you can't compete with that. Even Netflix, I know, you know, it's, uh, they're nowhere near the Big Five, right? Even though they've been in this FANG thing, but they're nowhere near them, so they can't compete in terms of checkbook size. So yeah, it's tricky.

Come on, what are you watching on Netflix right now?

Um, I've just finished watching, um, I can't remember the name of it. It's got Eddie Izzard in it. Uh, okay, I can't remember. Go on, what are you watching?

Uh, so I started watching last night, um, about the Times Square serial killer in the late '70s, '80s in New York. I don't know if— I mean, I'm— my mind always gets blown when I hear about what New York was like not that long ago.

Yeah.

And obviously they had like the crack problem in the '80s, and they— this was prior to that. Times Square was a seedy place back in the '70s. It was where they had the boom of like the peep show, and yeah, just, just, you know, really an interesting time and place. And yeah, there was this guy and You've got to watch it. I don't know, people listening, I'm sure they have, but there was basically this flat that got set on fire on the— in Times Square, and they went in there to put out the fire, and there was two decapitated bodies with their hands cut off, right, in the room. And actually then it was followed up with subsequent copycat thing, and it's just like, oh my God, this happened in New York in like not that long ago. Check it out. I'm sure some people are already watching it. Um, well, it depends what you're into, but it's pretty fascinating. The Times Square Killer, I think.

Okay.

All right. Yeah, yeah, pretty gruesome but, um, compelling watching, I guess. Um, but yeah, anyhow, moving back to the conversation of some of the, the big movers— Peloton.

Yes.

So two pieces of news here. One is They basically came out in a CNBC exclusive last night and they said they're going to temporarily halt production of bikes and treadmills, essentially because demand is waning. Earlier in the week, I read reports as well that Peloton executives and insiders had sold $500 million worth of their own stock as well, according to an SEC filing. Basically, they've just been— like what you were saying with Netflix being overbought, they've got in and the selling started when their shares surged past $80 in the fall of 2020. The sales have just been gaining more and more as the stock got towards and above $100. Shares down 25% yesterday. Actually, I think they went down about 27% at the bottom.

I mean, look, I think they're definitely different. This is definitely a different story to Netflix. It's not— I mean, whilst they are a pandemic stock for sure, there's definitely differences between these two stories. I mean, I think that Peloton have had a few issues along the way. They've certainly suffered from the supply chain constraints for sure. So customers shelling out for thousands, because it's such an expensive product. So it's a slightly different ballgame. So if you're spending a couple of thousand dollars on a bike and then it doesn't show up, then you're like, well, where's my effing bike? I want my money back in terms of how the customer feels about that. Of course, Netflix, A, it's a super cheap product relatively, and B, it isn't physical. So you're not having the same issues in terms of delivering the product. Now, so that's the nuance. I mean, I think with Peloton, once you've got the product, then fine, it becomes a bit more Netflix-y in terms of being a monthly subscription. And you're subscribing to these workouts and you can find— then, I mean, so Peloton's on the one hand the same as Netflix, monthly subscriptions. But they've got this massive barrier in the way where it's a massively expensive physical product that's got to be delivered. And because it's a physical product as well, they've had issues with— I don't know if you remember when they launched their treadmill. Unfortunately, a child died in an accident on the treadmill. And then the way they dealt with that was horribly bad. They just didn't do any— they didn't deal with it. And then Then there were more injuries. And then finally, they said, all right, fine, we're going to recall— optional recall of all treadmills. And of course, this was a disaster. But yeah, I mean, I think for— like Netflix, though, they've got a lot of competition, more competition now than when the kind of pandemic started. Here's a few for you. I don't know if you've heard of any of these. Tonal, Hidrown, Mirror. Actually, I know you were talking about the Mirror. You've got a Mirror, haven't you?

I'm on my Hydro looking at in the mirror.

Uh, Tempo, Climber. So these are the ones that have kind of just come out.

Well, I haven't heard of the last two.

Yeah, nor have I. Okay, but they, they are, you know, so, you know, there's plenty of competition. And look, they're suffering from new user growth decline, of course. So very much like Netflix, they're coming off that pandemic, just one-off peak that will never be repeated, hopefully. And so they're suffering from a few angles, but where it's worse for Peloton, I mean, yeah, mentioning the kind of directors selling their own shares, clearly that's never a good sign, but also they have now called in McKinsey. And they are doing things like halting production, calling in McKinsey so that they can look at opportunities where they can cut costs. I mean, this now starts to sound actually— wow, this sounds potentially incredibly bad, rather than just, oh, we've just got a slight decline in user growth numbers. This suddenly starts to feel a bit more— hang on. We need to restructure here. Yeah, I mean, I'm not saying it's going to be fatal, but I think they haven't managed the— maybe they could have managed the pandemic better. It's never easy when you just get a tidal wave of demand. It's obviously incredibly hard to manage that, and I think perhaps they could have managed it better. And because of their failings in management, they're probably now suffering, and then without some major change change, then fine, it might be fatal. But I think they're probably doing the right thing, even though the share price is getting hammered and may well continue to do so. It's probably right, let's reset now before it's too late. And I think that's what's happening. They are raising prices as well, like Netflix, apart from their Bike+ product, which is their— it's the better version that's more expensive. So all prices are going up apart from their Bike+. I think what they're trying to do is make that bike plus product feel better value, even though the price isn't changing. So they're trying to play a clever trick there, I think.

Well, I think being a Peloton customer yourself, I think you should email your representative, whoever you deal with. You should say to them, look, we have this podcast, we talk about different types of things. Peloton comes up from time to time. I can sound super bullish. I can help you guys out. Well, just kick me back some of that Peloton Plus for a 12-month period.

To be honest, I'm still in my 4-week trial period, so now the news overnight, I'm tempted to send it back, get a refund.

That's it, hit the man when he's down. Let's do this. Cool. All right, well, look, we'll wrap it up there. Um, obviously a huge thanks to, to Kati for joining us at the beginning of the, of the podcast. And remember to check out his profile, connect with him. You know, your network is super important for any student, regardless of whether you're going into finance or any profession. And you never know when those connections might give you value in the future. So yeah, connect with us and connect with him. I'll drop his, his, um, link for LinkedIn in the bio description. And yeah, don't forget to rate if you're, if you're listening on Spotify, be much appreciated. And Thank you, Piers, and thank you, everyone. We'll see you next week.

Yep, see ya.