A Double Shot of Streaming Media Deals for Verizon and Apple

Markets Motley Fool

In this MarketFoolery podcast, host Chris Hill is joined by Million Dollar Portfolio's Jason Moser to discuss some interesting news at the intersection of entertainment and the internet.

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First, they attempt to parse whether the $1.5 billion Verizon (NYSE: VZ) just paid for five years of rights to live-stream NFL games was a reasonable amount. Then, they check out the latest Apple (NASDAQ: AAPL) acquisition -- music-recognition app Shazam -- and consider where this move fits into the broader direction of change in the music industry. Also, they take a look a company that doesn't get much consideration, even if you likely have some of its products in your house: United Natural Foods (NASDAQ: UNFI). It's a supplier to many grocery chains, but it's a particularly large one for Whole Foods. Speaking of which, the Amazon (NASDAQ: AMZN) acquisition appears to have worked out quite well for the troubled company.

A full transcript follows the video.

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This video was recorded on Dec. 11, 2017.

Chris Hill: It's Monday, December 11th. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio today, from Million Dollar Portfolio, Jason Moser. Happy Monday!

Jason Moser: Thrilled to be here!

Hill: We've got a lot going on. We have the world of sports media, we have music streaming, which we talked about on Motley Fool Money over the weekend, more news breaking there. You can always email us, marketfoolery@fool.com is our email address. From Jamie Braswell in Dublin, Ireland, long time listener, writes, "Chris, I try not to pester you, but I could not let the moment pass without saying, congratulations on your alma mater, Boston College, knocking off unbeaten and No. 1 Duke. BC seems to do well against No. 1 in recent years, and it's all the sweeter for me having grown up a Tarheel fan." So, thank you Jamie! I'm wearing my BC shirt today, not that anyone can see it on the audio podcast.

Moser: I'm going to use this as an opportunity, I don't know if you guys saw but, last week, my Wofford Terriers, just a speck on the map --

Hill: In the hunt.

Moser: Well, they're on the hunt for a football championship, and unfortunately, they were ousted this weekend. But, the basketball team beat Georgia Tech on the three pointer at the end. I think it was No. 4 on Sports Center's play today.

Hill: Big wins all around. We're going to stick with sports. Verizon is renewing its contract with the NFL to livestream games to its subscribers. Verizon had paid $1 billion over the past 4 years. Reportedly going to be paying just over $1.5 billion over the next five years. That's a 20% increase, if my math is correct. I don't know. I look at this and I'm a little surprised, but only a little surprised.

Moser: You don't seem convinced.

Hill: I understand that Verizon is looking to beef up their content. This is not a ton of money, in terms of the NFL, even though it has nine zeros attached to it. But I'm still surprised that they went that much higher.

Moser: I think it's a big deal on a number of fronts, and I think the biggest question it prompts for me is, is Verizon paying too much for this? We all know the challenges that the NFL is facing. I think we all know the challenges that sports in general are facing right now, as we see this shake out the new 21st century media landscape. It's not just CBS, NBC, and ABC anymore. Distribution has changed very dramatically over the course of the last decade. We saw a couple of years where Twitter (NYSE: TWTR) made a deal with the NFL to carry Thursday night games. Then we saw this year, Amazon made their deal to carry those Thursday night games, paid five times as much as Twitter did. I think Twitter kind of got that deal for a song. Amazon, I think the feeling there is generally that they paid a little bit more than they needed to. I think it almost does seem like Verizon is paying too much. One of the reasons I think that is that it's not exclusive to Verizon anymore. This is going to be available, it seems, on every carrier. It sounds like Verizon is going to use this as an opportunity to push its Yahoo and AOL properties, which is fine, I guess, but I'm going to be honest with you, I don't tune in to Yahoo ever anymore. And it feels like that's not just me. I think Yahoo has kind of fallen off a cliff when it comes to their Sports and their Finance properties. They just don't carry the same sway. And it's not all their fault. Facebook and Snapchat and Twitter and Instagram and all of these social properties are coming in there and taking a lot of that mindshare.

But another thing to worry about here is, we've seen, beyond football, in virtually every sport over the past 15 years, the median age for the viewership here is getting a lot older. Younger audiences really aren't tuning in. Now, that could be for a number of different reasons. I think one of them is because those younger eyeballs are going to different areas, different media properties. But, I think also, the other problem is, we don't have the same attention span that we perhaps once did. I don't think the attraction is there to sit down and watch a game for three hours like it used to exist. We're finding new ways to consume our content, whether it's in little clips scrolling through your Twitter feed or it's catching something on Facebook that your friend shared, I just can't help but look at this and think, this may be the NFL's last hurrah in commanding any substantial pricing power.

Hill: It's going to be interesting to see the extent to which Verizon decides to share information about what this deal is doing to drive subscribership. In the same way, to go back to Amazon, when Amazon ruled out their deal for Thursday night football, there were a lot of people who looked at that and thought, that's certainly a significant increase in terms of what Twitter had paid the previous year. But, at least in the case of Amazon, presumably, they're going to be able to sell stuff. They know, if you're watching this Thursday night game between Atlanta and New Orleans, there's a decent chance you're a fan of one of those two teams, and oh, by the way, we're going to target you with some ads to buy some swag.

Moser: At the very least, you are a Prime member. If you weren't, you signed up to Prime to get those games, because that's the only way you could watch them in the first place. Really, we've said before, that Prime membership is the pot of gold at the end of the rainbow. That basically dictates everything that they're doing, at least in that e-commerce and media space. Again, I think Twitter, Amazon, even Verizon here, there's this consistency here in non-exclusivity, which I think could be a problem. I have noticed that because we recently cut the cord, so we have the Hulu Live package, which is nice because you can get sports that way. I don't necessarily need to watch it on Amazon. I didn't necessarily need to watch it on Twitter. It was another way to do it, but it wasn't like it was the only way to do it. I think with Verizon, that it's going to span carriers, that there are going to be many different ways to get this content, could pose a problem. On the flip side, we all have a TV in our pocket these days. And I think that's where this really hits. Even if you don't want to sit there and watch the whole game, you're going to be able to tune in and catch clips here and there, which is encouraging, I think. I still wonder about the pricing side of it, because I do feel like the NFL, along with other major sporting associations, are facing a bit of a problem there.

Hill: I think that's going to be the most interesting thing to see, in terms of the major television contracts. When those expire and the next round of bidding starts, it'll be interesting to see what networks that currently have a given sport just come out and say, we're not doing this again, and they decide to walk away. Or, they offer a modest increase. If CBS decides, we like having these AFC games and some of the playoffs, but you know what, we're not doing this again when the contract is up.

Moser: And the economics don't make sense for them. We've seen some of this evolution, you see it go from broadcast TV to cable. Broadcast TV is really having trouble making those numbers meet now. They're not going to be able to outbid many competitors anymore. Cable, you're kind of seeing the same problem there in that a lot of people are opting not to get cable packages, or at least get different cable packages. It's a very interesting evolution in the space, and it's all going more toward mobile. Many different ways to get it, as distribution really has been changed forever thanks to the Internet. So, this is just the beginning, I think, of what we're going to see, a very long transformation of the space over the coming decade.

Hill: United Natural Foods is a major supplier for Whole Foods, and United Natural's stock has had a rough couple of years. Early 2015, it was just over $80 per share. Earlier this year, it had fallen as low as $29. The last few months, it's really started to bounce back. You pointed me to a story that seems to indicate that United Natural Foods might be the hidden beneficiary of Amazon's acquisition of Whole Foods.

Moser: It could be. This is actually a really interesting story that's developing. I think it proves that the Amazon Whole Foods tie-up is more important -- obviously very important in a lot of different ways, but it's beyond just those two big names, Amazon and Whole Foods. United Natural Foods is a company I've covered for some time now, one I started researching back in 2012. On the surface, you look at the business, it's in food distribution, which is really a very low margin game. The only way this makes an attractive investment is either you get a mispricing, or you recognize that you've really got the biggest player in the space and they own that competitive advantage that'll allow them to keep growing and commanding at least some pricing. United Natural Foods has a very strong network across the country. It's the biggest distribution network in the country. They've done a very good job over time of being able to get those naturals and organics and all those sorts of new products that are really starting to stock on those shelves. Whole Foods is responsible for a lot of their money. If you look back to any given year, about a third of Whole Foods' total sales is thanks to United Natural Foods.

Now, United Natural Foods if a supplier to not just Whole Foods. They supply Safeway, Kroger, Publix, Wegmans. They supply all of these grocers. But when we saw this acquisition, when we saw Amazon buy Whole Foods, there was a big question mark as to how exactly this was going to work out for United Natural Foods. On the one hand, you could see, maybe this results in a lot of potential business for them if Amazon is really good about growing that footprint and getting more people to shop at Whole Foods. On the other side, given Amazon's expertise in fulfillment, logistics, and whatnot, it's very reasonable to assume they could disrupt United Natural Foods and do something better at a lower cost. It does appear, at least in the early innings here, that United Natural Foods may benefit from this relationship, because they were surprised a little bit to the upside. They got a lot of extra business here, presumably from Whole Foods. You read between the lines, you can see that it was from Whole Foods. And when we look at online grocery sales, that was $42 billion in 2016, that was up 156% from 2015. Now, with Amazon buying Whole Foods, with all of the new ways that this model is shaking out, this is a number that's only going to continue to grow. So, it would seem, at least, that United Natural Foods should benefit from this. I think the earliest assumptions are that they will. Time will obviously tell, certainly it was a good quarter for the company. It seems like the stock is starting to reflect a little more optimism.

Hill: We're going to get to Apple in just a second. The lead story on Motley Fool Money over the weekend was about the music streaming industry, which I think is becoming one of the more interesting industries to watch in 2018. We started with the reports that Yahoo is reportedly going to make a third go of a music streaming business, launching something in March. And Apple this morning, reports are out that Apple is going to be buying Shazam, which is a music recognition app. This is on the heels of another acquisition that Apple just made, they bought a podcast search start-up called Pop Up Archive. You were not on Motley Fool Money over the weekend, where do you think music streaming is going? You have Spotify, which is probably going to go public in 2018. You have Pandora (NYSE: P), which is already public. You have Apple Music, you have Amazon Prime Streaming. And this seems weird to say, but Google (NASDAQ: GOOGL) (NASDAQ: GOOG) right now appears to be a distant fifth place.

Moser: Yeah. My take on music streaming may be a little different than others, I don't know, but generally speaking, my belief is that music streaming is primarily a form of engagement as opposed to a stand-alone opportunity. And I think that all you have to do is look at the financials of stand-alone offerings, and I think it makes a lot of sense there. We know the challenges Pandora has encountered here since going public. That's a business that's faced with big-time problems, financials that are getting worse and not better, and haven't been profitable yet. And by all accounts, Spotify is very much the same thing. I mean, Spotify is signing up people, and they're bringing in revenue, but they're chalking up losses quarter in and quarter out, they're just not making any money. And I think one of the biggest challenges there is that the economics, for a long time, and even now, really don't seem to work out very well in the musicians' favor, and I think the musicians are pretty pissed off about that, honestly. I know I would be. And I don't think it's a very good time to be a musician, unless you're really committed to touring. I think that's where the biggest success stories in the space are making their hay. They're just touring businesses, and they put their music out almost as a form of marketing, so to speak. That's streaming as a form of marketing. I think, for companies like Apple and Amazon and even Google, music represents a form of engagement. It gets people into their universe and keeps them there for more reasons. When you look at the advent of the home speaker system, whether it's Alexa or Google Home --

Hill: Please don't use the A-word.

Moser: Oh, yes, the Echo. I apologize to everybody out there, as your Echo's light up. But, whether it's the Echo or the Google Home, and now Google has this high-end Home speaker that's coming out, which is essentially the same thing, it does the same things as Google Home, but it costs around $400 and it's a better-quality sound. You have Apple's HomePod, which I don't think it's really going to compete with Google or Amazon on that home assistant, that virtual assistant, so to speak. I think it's more musically based. For me, the Apple purchase of Shazam is simply an opportunity for them to add more to their current music offering. In the current music offering for them, it's not as meaningful for them as something like, obviously, Pandora's offering is for it. Pandora is pretty much a one-trick pony. For Apple, music is just part of the whole deal. I think Apple's biggest challenge is that, if you're not using an Apple device, then you don't really have any incentive to use Apple Music. And while domestically, Apple does pretty well here, we know that probably about 50% of the country here is on the iPhone and the other 50% is on some sort of Android device. Globally speaking, Android is the leading operating system by a mile. So, when you look at it from that perspective, it's really hard to imagine how anybody in this line of work succeeds just as a music streaming company alone. And I include Spotify in that as well. I've looked at the potential Spotify IPO, they're talking about possibly $20 billion. That's absurd. It makes no sense whatsoever. There's no switching costs involved, there's no competitive advantage. I know you can go in there and cater your own playlists and whatnot, but that's not even an advantage, you can do that anywhere. So, to me, whether it's Apple or Amazon or Google, I think music really represents a great opportunity to keep your customers, your users, engaged, and that's why I think they continue to make these little investments, and the Apple purchase of Shazam is just that.

Hill: The fact that Jimmy Iovine, who's part of the Beats sale to Apple, the fact that he came out recently and said point-blank, Apple's not making money on this, the fact that he said it's not profitable for them, you have that, and then your point. I mean, Spotify is the leader. Spotify has 60 million subscribers.

Moser: Something like that.

Hill: Some insane number like that.

Moser: And their losses are getting bigger. And it's not because of all the sales and marketing spend, either. This is really one of the toughest contracts to negotiate in any business. Video is simple, music is really a brutal business. I just can't imagine anyone on their own being able to succeed.

Hill: And the other thing is, we've talked before about video streaming services, and talked about how there can and will be more than one winner, because people will subscribe to more than one service. It's hard for me to imagine anyone subscribing to more than one music streaming service. Even if you subscribe to Spotify or Pandora, or Apple Music, for that matter, and you love it, you're probably only subscribing to one. I can't imagine doing more than one.

Moser: I don't know why you would. It's funny, we've seen Sirius XM has taken a big interest in Pandora, and I think that's actually really interesting, because Pandora is trying to approach the strategy of, we have to be something more than just music, we have to take this to the next level and offer podcast content, other forms of content besides music. And I think that's probably a good move, and I actually wouldn't be surprised at all if at some point Sirius didn't buy Pandora for just a song, so to speak, and incorporate that in to give them a better app presence. Because, that's another thing that Sirius has done a very good job with. They have a very good app presence. You can take it as mobile, it's easy to use. For me, it's hard to understand why you would have a collection of these streaming apps when really, they all essentially do the same thing. There are just a million different ways to get your music, and that ultimately means that there's no real pricing power on this side. And when you have musicians going in there, and they really are commanding more money, as they should, it really makes it difficult to be a distributor of it.

Hill: A couple of housekeeping notes before we wrap up. First, thank you again to everyone who came out to Chatter last Friday. So great to meet various listeners. I have to give a special shout-out to Ryan, who was incredible. I'm always impressed when I mean our listeners and hear their stories and hear the work they're doing. Ryan is a 19-year-old guy who wakes up at 3:30 every morning to go to his first job, which is at a dairy farm.

Moser: Holy cow. No pun intended.

Hill: He's going to community college, and then going into the Navy in 2018. Just a super smart, hard-working young guy. It was great to meet him. Also, I mentioned recently that we're hiring here at The Motley Fool. You can go to careers.fool.com to see our open positions. Also, at long last, the summer internship positions for 2018 are now posted. So, if you're interested in being a summer intern here at The Motley Fool in 2018, go to careers.fool.com. We've got investing interns we're looking for, editorial interns, tech interns.

Moser: My girls are, my youngest daughter is 11, my oldest is getting ready to turn 13, and they're already filling out their applications, perfecting them, because when they're able, they really want to come here and intern. It's nice to be at a place where people want to be.

Hill: It is, it absolutely is. It's a competitive environment, so we always get a lot of great applications, and unfortunately we can only take so many. But, check it out if you're interested. Jason Moser from Million Dollar Portfolio, thanks for being here!

Moser: Thank you!

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!

[The Weather Girls -- Dear Santa (Bring Me a Man This Christmas)]

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Chris Hill owns shares of Amazon. Jason Moser owns shares of Apple and Twitter. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Facebook, Pandora Media, Twitter, and Verizon Communications. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.