It's a Dystopia Out There for Old Media

On this Market Foolery podcast, host Chris Hill and Million Dollar Portfolio's Jason Moser focus on the media sector this week, and most of what they find is bad news for the incumbents. Blade Runner 2049 was No. 1 in theaters this weekend, but came up a good $20 million short of expectations, which bodes ill for movies in general. And according to a well-researched Ad Age article, advertisers are not getting their money's worth out of network TV. Meanwhile, producer Dan Boyd went to New York Comic Con and came back with an increased respect for the companies doing digital media distribution. Plus, the guys offer a quick preview of fall earnings season, which opens next week.

A full transcript follows the video.

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This video was recorded on Oct. 9, 2017.

Chris Hill: It's Monday, Oct. 9. Welcome to Market Foolery. I'm Chris Hill. Joining me in studio today, from Million Dollar Portfolio, Jason Moser. Thanks for being here!

Jason Moser: Hey, man!

Hill: The banks are closed. Not us.

Moser: That was a pretty good tweet.

Hill: We're not closed.

Moser: That was good. We're here. [laughs]

Hill: We're here. And we're going to be talking, I think, the media and entertainment industries are very much on display in today's episode, and our man behind the glass, Dan Boyd, did some on-the-ground research up in New York City over the weekend at Comic Con. I was surprised by the attendance. Dan wasn't, I was a little surprised. We'll get to that. We have to start with the weekend box office. If you're a shareholder of movie theater stocks, you have our condolences, because they're all down today because Blade Runner 2049, a movie with as much buzz around it as almost any movie in 2017 not named The Last Jedi, pretty disappointing, considering it won the weekend $31 million domestically. They were aiming for north of $50 million domestically. Right now, movie theaters are on track for a pretty mediocre-to-bad year. And it's not to say they can't pull out of it at the end here with some of the big releases coming, including The Last Jedi. But right now, this is a really tough space to be in.

Moser: Yeah. You look at these companies, and you see the way they performed all year, 2017 has been a brutal year for most everyone in the movie theater business. You would think that at some point there's going to be an opportunity here to buy something that's of a compelling value. But honestly, I think it's plausible here that it may not actually be the case. Tell me what the tailwind is for these guys. To me, I see movie theaters as becoming less compelling and relevant every day. It's not the same thing as when we were growing up. I think it's a lot more work to go to movie theaters nowadays. It's a neat experience to be able to see a movie in a theater. I'm not going to dis the actual experience. But it costs a lot of money to do. I don't think their pricing power goes on forever. I think there are a lot of options out there, a lot of competitors looking for our time. To me, there are a lot of headwinds that movie theaters are facing right now. I kind of feel like, we talked about that "war on cash" basket I have, I feel like you could probably put together a basket of these movie theater stocks and short them all. And you'd probably come out all right at the end. I don't know. I just don't know what the catalyst is that really turns around, other than the occasional good movie. I guess, maybe we go to the movies once or twice a year now, as a family, maybe.

Hill: For me, it's probably a little bit more than that, but not much more. So, in the last couple of months of 2017, you've got Justice League, Thor: Ragnarok, and The Last Jedi. And those are tentpole, your classic big summer movie blockbusters. But when we talk about margin for error, weekends like this with Blade Runner 2049, the more this type of thing happens, the more pressure it puts on the opening weekends for those three movies to not just be big. I saw an article over the weekend that Justice League, they're targeting somewhere in the neighborhood of $130 [million]-140 million opening weekend. If you're in the business of being a movie theater, you'd better hope like hell they hit that. And the same for Thor: Ragnarok and The Last Jedi.

Moser: Yeah. I think you're right there. Certainly, all of the Star Wars movies in the coming years will serve as, I think they'll all generally do pretty well. There's a lot of superhero content out there, and I kind of wonder if we're not getting to a point where's that stuff's getting a little bit diluted. But I also understand, very big fan bases for those as well. We're heading to the movies, I think, as a company. We had the opportunity to go see some movies on Friday. I was thinking I might see Blade Runner that day, just because we had the opportunity to do it, but I'm still not sure. [laughs] And that's free. It's free for me.

Hill: I was going to say, you're not paying a dime for that. Our company is paying for it.

Moser: It's like, do I really feel like getting off my butt and walking over there? I don't know, man.

Hill: In all seriousness, do you know what would absolutely get me to the movie theater on a regular basis? If some of these theaters started rolling out, pretty consistently, classic movies. If the theater that's just a few blocks from Fool HQ just announced, "Before Christmas, we're going to be showing The Godfather Part 2," just, these movies that hold up over time, that I've seen a bunch of times, but have never once seen on the big screen.

Moser: That's a very good point.

Hill: I would absolutely do that.

Moser: It strikes me that we're seeing a lot of reboots, a lot of movies that were good, and they're going out there and remaking them for a new generation. I feel like Hollywood is really lacking right now for storylines. We talk about it all the time, and we'll probably talk about it a little bit more today, there's so much great TV out there. You could sit there and watch any series, 10 episodes, there's 10 hours right there. So, you have a lot of options out there today as a consumer. Wonderful time to be a consumer. Difficult time to be an owner of a movie theater, and I don't know that's going to get any better any time soon.

Hill: Let's move over to television then. You pointed out an article in Ad Age. Parenthetically, I have to add, Ad Age is one of those, from time to time, particularly when we're talking about restaurants, we will talk about QSR, which is a trade publication for the quick-service restaurant industry. Ad Age is one of those trade publications where, as an investor, you can find some really good information and some good insights beyond, what are hit television shows, and that sort of things. Anthony Crupi, who's really great when it comes to breaking down numbers in the television industry, had a pretty interesting article about advertising and how, on the surface, you can look at television advertising and say, "It's getting more expensive." But, Crupi broke it down in such a way that you can look at it and think, "If you're an advertiser and your advertising on broadcast television, you might want to rethink the way you're spending your money."

Moser: Yeah. Why is it getting more expensive? Is it because they're able to command more dollars? Or is it because the audience is shrinking? In this case, it's pretty clear that the audience is shrinking. They were making a comparison of Seinfeld to Sunday Night Football. The average audience for Seinfeld at that point in time was somewhere around 22 [million]-23 million viewers, versus Sunday Night Football, which is a little bit under 10 million.

Hill: Again, this is apples to apples in that, what's the No. 1 show 20 years ago, what's the No. 1 show now.

Moser: What are people tuning into?

Hill: On broadcast television.

Moser: Exactly. It was very interesting. The Seinfeld comparison was apropos for a number of reasons, I thought, in that the mention of shrinkage in the article was just classic. [laughs] But, it reminded me, a few weeks back, Jerry Seinfeld was on the Howard Stern show. Great interview, always love listening to him. And they were talking about Seinfeld, they were talking about Comedians in Cars Getting Coffee, and how that all came about. And Jerry made this point that the medium is the message. And I think he was spot on there. It's basically looking at how people are consuming things today versus how they were consuming them yesterday. Broadcast TV, obviously, was much more important, played a much more important role in our lives, back then than it does today. He told a story about how with Comedians in Cars Getting Coffee, he was trying to come up with a show and an idea that would cater to this generation's internet audience. He wanted to make them short episodes, make them really just about a couple of people, because he figured people would be watching them on their phones. Somehow or another, Crackle was the only one that really gave him a shot. Initially, Netflix (NASDAQ: NFLX) turned him down. So, now you have this behemoth that's doing really well.

But I think that's the key there, the medium is the message. So, the way that we're consuming our content today, broadcast TV, I think, is in a really difficult spot because when you look at the numbers and see how much money advertisers are having to pay for those viewers today, and the lack of data that they get from those viewers on broadcast TV, it's really hard to justify that kind of spending. So then, where is the spending going? Well, it's going to places like Hulu, places where we're seeing options as far as the way you're going to get this content. Yes, I can watch Hulu on my TV at home, I can also watch it on my phone. Hulu has a pretty neat situation there in that they're getting advertising dollars and they're getting subscription dollars. So, for a while, they were a bit of a laughingstock, but they're building up their content arsenal now and they've got some powerful ownership. I think you're going to see, as time goes on, this disparity continues. And if you're in that space, if you're in ad spending, I don't understand why you would keep on spending money investing in that space, particularly when you see the way the viewership for these sporting events is going. The median age for sports viewership, for example, is getting older by a considerable factor, with the exception, perhaps, of the NBA. And I think that it could be argued that the NBA has been very forward-thinking in their investments and the way that they're distributing their content and embracing social and that interactive dynamic.

Hill: Yeah. I think if you're a Walt Disney (NYSE: DIS) shareholder, you can take some small solace in this article, because it shows it's not just ESPN that's losing subscribers, it's cable sports across the board, and it's broadcast television that's losing subscribers. And again, the No. 1 show on broadcast television right now has an audience that is less than half the size of the No. 1 show just 20 years ago.

Moser: Yeah. And if you look at the evolution, the way that content has been distributed, for a long time, you went to the game. America's favorite pastime, you go to the baseball game, it was a great time waster. But then, broadcast TV came along, and it opened up that audience, so we could watch those games on TV. The economics eventually weren't working out so well for broadcast TV, because cable came along. Then cable was seen as another distribution channel, and it was working out pretty well. Unfortunately, now, people are starting to cut the cord or just rethink how they're going to get their content. So, we've gone from a bundling to an unbundling, back to a semibundling. It's really interesting to see how the economics are working out. I think with sports in particular, I just don't think we're going to see these same sorts of massive contracts years from now. I think the leads would be very wise to try to figure out new distribution in such a way that allows people to personalize and get what they want when they want.

Hill: Let's talk about New York Comic Con, then. I was surprised by the number of people who went. When we talk about Comic Con, the big one is out in San Diego. And for the past decade, there has been the big one in San Diego, and then the one in New York City, a small one here in D.C., that sort of thing. The number of people attending New York Comic Con this weekend was basically equal to the number of people at San Diego. And I saw a chart that the attendance at the New York Comic Con over the past decade has increased by a factor of six.

Moser: Passionate fan base. We were talking about the movies, that's why they're making those.

Hill: First, Dan, from a business standpoint, was there anything that you saw that got you thinking about the entertainment industry? One business takeaway from New York Comic Con?

Dan Boyd: I guess it would have to be that digital distribution is huge. It's really, really big. The Netflix shows, Hulu, Amazon (NASDAQ: AMZN). Amazon is getting into it, they had several booths for exclusive shows that are coming out soon, and there weren't really any cable or broadcast, if we're talking about shows, not necessarily movies, but shows, there wasn't really a presence for ABC or NBC or CBS or anything like that.

Hill: At all?

Boyd: I guess there were some posters for NBC. But they didn't have a big booth or anything.

Hill: Wow, that's damning.

Moser: That's telling.

Boyd: There was a whole Twitch stage. There was movies and all sorts of other comic-adjacent things. Topps had a big booth there. But it was mainly stuff that was digital distribution.

Hill: Earlier this summer on Motley Fool Money, we had Rob Sakowitz from San Diego Comic Con, he's written a book on the business of pop culture, and one of the things we talked about was the rise in cosplay, the number of people who dress up at these events, whereas a decade ago it was maybe about 10% of the people attending, and now it's upwards of 30%, 40%, that sort of thing. What was the most striking costume that you saw this weekend in New York?

Boyd: Chris, as you can imagine, there were a whole lot of costumes. My favorite, probably, was a guy dressed up as the Javits Center.

Moser: You mean the place where you were having the event?

Boyd: Yeah, the conference center.

Hill: That's very meta.

Boyd: It was awesome. His costume was about 12 feet wide. It was cardboard covered in tin foil with the grid of the building drawn onto it. It was all very chrome shiny. And he was wearing what looked to be a silver bodysuit under it. So, it was a pretty good one. But, there were so many. A lot of Deadpools, a lot of Harley Quinns, a lot of Spidermen. There's a ton of people. A lot of the characters are very easy to dress up as, and it's really fun to see how much work people put into it. There was a probably 10- or 11-foot-tall Bumblebee from Transformers walking around. And there was another 9-foot-tall Voltron walking around, too. It was really cool.

Hill: The guy dressed up as the Javits Center, was he just standing in one place? How do you move around?

Boyd: Oh, you don't move around. You can't. He just stood there and let people take pictures of him and in front of him. Whole groups would get in front of him.

Moser: What do you do if you have to go to the bathroom?

Hill: Yeah, I think, when you're looking to get a bite to eat or you're looking to avail yourself of the facilities, that's where you disengage from the costume, have someone watch it while you go.

Moser: I have to believe you're skipping the morning coffee.

Boyd: I think the Javits Center probably had friends with him there, or with them, I don't know if it was a guy or a girl, I couldn't tell, with them there that were probably helping them out if they needed a break or something.

Hill: You have to be thrilled if you're the Javits Center.

Moser: [laughs] On the topic of digital distribution, I saw earlier on Twitter, and this struck me because I remember very well in college when this series came out, and I actually enjoyed watching it, it was Batman The Animated Series. Started back in 1992.

Hill: Twenty-five years ago.

Moser: Well, now, I guess they're apparently releasing it on Blu-ray for the first time ever, and this got a huge response.

Boyd: That came out when I was a kid. I think 1992, I was probably six or seven years old.

Moser: You were a kid, I was in college. Thanks for dating me, Daniel.

Boyd: Sorry. When I was in college, I bought all the DVDs of that show.

Moser: Oh, did you really?

Boyd: Yeah, because I loved that show.

Moser: I've seen critical acclaim that it's perhaps one of the best, if not the best interpretations of that man. I think Batman is pretty cool. I'm a bit more of a Superman guy myself. But I really did actually enjoy the show. It just struck me as kind of odd in that it was such a big deal that it was being released on Blu-ray. I mean, how many people have DVD players anymore? I don't know.

Boyd: Everybody has an Xbox or a PlayStation 4.

Moser: OK, there you go. That's how you play those things, then. Never mind.

Boyd: I mean, I myself have two PlayStations. One for the office and one for the living room. [laughs]

Moser: Well, la-di-friggin-da.

Hill: [laughs] All right, thanks, Dan. Real quick before we wrap up, earnings season starting up this week, what is one thing you're going to be watching?

Moser: One big thing I'm going to be watching, very much in line with what we've been talking about today, it's these media companies' earnings releases. We have Netflix next week, Disney earnings coming out in November. Netflix is the leader in this space. They're the ones that set the trend. It's just very interesting to me to see how everybody's catching up now. Amazon is doing really well on the content front, Disney is going to be releasing two apps, an ESPN app and a Disney app, and I think they were very wise to yank all of that content from Netflix. Because really, content is the big differentiator now. I think Hulu has really stepped up its game, their $40 skinny bundle offering, I think is compelling. We have it, we like it, my kids watch it. We also have Netflix and Amazon. It's just very interesting to me to see how all this stuff is shaking out. We've got Netflix, Amazon, Disney, there's going to be a lot of information coming here in the next month or so about how this stuff is all shaking out, what we can look forward to in 2018.

Hill: All right. Jason Moser, 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. This show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening, we'll see you tomorrow.

Chris Hill owns shares of Amazon and Walt Disney. Jason Moser owns shares of TWTR and Walt Disney. The Motley Fool owns shares of and recommends Amazon, Netflix, TWTR, and Walt Disney. The Motley Fool has a disclosure policy.