Netflix Sends Its Last DVDs & Building The "iPhone of AI"

0:00Hey Fidelity, how can I remember to invest every month? With the Fidelity app, you can choose a schedule and set up recurring investments in stocks and ETFs. Oh, that sounds easier than I thought. You got this. Yeah, I do. Now, where did I put my keys? You will find them where you left them. Investing involves risk, including risk of loss. Fidelity Brokerage Services, LLC, member NYSE SIPC. Tonight on NBC, Jimmy Fallon and Bozema St. John host the highly anticipated new competition show. I hired 10 creatives from all walks of life. They will be battling it out to see who can impress the world's biggest brands.

0:44This is a huge opportunity. This is the battle for the next big idea. This is not play play. We're spending millions of dollars. I'm so excited to embark on this adventure with all of you. Make the best idea win! On brand with Jimmy Fallon, series premiere tonight on NBC. Good morning, Brew Daily Show. I'm Neil Freiman. And I'm Toby Howell. On today's pod, better submit your request for Netflix DVDs because the service is ending today after a 25-year run. Then we'll tell you about the coolest prank ever prunked that involved a group of 20-year-olds that I want to be friends with opening a steakhouse in New York City.

1:20It's Friday, September 29th. Let's ride.

1:28Neil, yesterday during the show when talking about a Vermont town that is barring access to tourists looking to take pictures of its fall foliage, you committed a major internet faux pas. You talked about an awesome food place that we've discovered in New York City, but then refused to give the people any details. Neil, you gatekept. You are a gatekeeper. I did not know this was a term. So for all us olds out there, gatekeeping is a term where you, I guess you talk about a place, but you don't divulge any of the details or where it is. And you're not supposed to do that. So I didn't know that.

1:59I apologize to everyone who I offended, which it seems like there were a lot of you. I will tell the place. It's not that exciting. It is just a smoothie place that is attached to a bodybuilding gym right downstairs here from our office on 19th Street. It is a very good smoothie. Toby can attest. He's had a lot of smoothies. It's very good. Y 'all should come. Say hi. Neil was sad yesterday. He's like, wait, is gatekeeping bad? We had a heart-to-heart, so thank you for setting the record straight. And yes, it is a dang good smoothie. Okay, let's go on with our first story. We begin today with saying goodbye to an old friend.

2:35Netflix is sending out its final DVDs today, rolling the credits on the delivery business that vanquished companies like Blockbuster, changed how millions of people watched movies and TV shows and ultimately set it on a course to disrupt the entertainment industry in a different business altogether, streaming. For a little backstory, Netflix shipped its first DVD in 1998, which was a Beetlejuice, and turns out getting any movie you could ever want sent to your house instead of going to a store was pretty popular. The business grew over the first decade of the 21st century to become a shipping behemoth.

3:08At its peak in 2011, Netflix was the postal service's fifth largest customer, sending 1.6 million discs every day, and it was doing Amazon things before Amazon, offering one-day delivery to 99 % of its user base. Of course, times change, and not as many people watch DVDs anymore. Netflix has long ago pivoted to streaming and producing original content. Yet even in its last year, the DVD business is still cranking out money. About 1 million customers still get DVDs, generating 60 million in revenue for Netflix in the first half of 2023. A 25-year run for the ages, Toby. Neil, this is so nostalgic.

3:45I mean, everyone remembers the first time they got a Netflix DVD, that little red envelope. It's just such good memories. It was similar to the blockbuster experience of going and getting a movie. It replaced it and now it's ending. So I definitely had some nostalgia thinking about this story. But also digging into the operation side of this business was crazy because in the beginning, they did it much like how you'd expect where they were hand-stuffing all the envelopes, which is just wild to think about at this point. I mean, they did that until 2002. So it launched in 1998. They were still hand-stuffing envelopes four years later, but then they finally automated the process.

4:23And the automated process is really cool as well. It was one of the first times that machine learning actually came into play. And the reason why machine learning was such a big deal is one of the big issues for Netflix was obviously scratched or damaged DVDs. And that's a horrible customer experience if you send them a scratch DVD. So they needed some way to identify which DVDs were damaged and which ones weren't. And one of Netflix's chief technological officers said, we literally built the first machine learning algorithm in order to identify these DVDs. And they said it worked really well, dropped reports of these 22%.

4:57So it is interesting to see how you go from hand stuffing an envelope to building machine learning algorithms in the span of five years. What struck me was the parallels between this DVD service and the streaming service that Netflix eventually made its way into. I mean, it's kind of the same thing when you think about it, just a different mechanism for watching movies. It's straight going, straight, direct to consumer. The recommendation engine that Netflix used for DVDs, finding DVDs for people, also laid the foundation for the recommendation engine that you see when you open up Netflix every day.

5:28So I think these things are more intertwined than you may think on the surface, and one easily led into the other. And when Netflix started its DVD business, Reed Hastings, Mark Rudolph, these guys who started it, knew that the DVD thing would be temporary, which is why they named it Netflix. And there were some other names that they went through that they decided wouldn't ultimately be what Netflix was because they had this grand vision straight from the outset. And so just kudos to them for seeing that and using the DVD service to fuel the streaming service that it would eventually become. It was such a moneymaker.

6:04Between 2012 and 2019, Netflix generated more than$2.6 billion in profits just from the DVD business alone. And you're right. It reminded me, honestly, of Elon Musk in Tesla, where he's like, we're going to sell this one type of car in order to power the next generation where we want to make mass-produced cars. And it was the same thing for Netflix. He said, we know this is a temporary stop for our business. We're going to sell physical DVDs or rent physical DVDs in order to power this vision we have for an internet-enabled country. Every dollar that was sold in DVDs in the early 2010s went to make House of Cards.

6:42It's crazy. And House of Cards was the piece of original content for Netflix on streaming that created this behemoth that we know of today. So when you watch House of Cards or any not Netflix original or see Netflix stream anything, it's because of this DVD business fueled all of that development because creating content requires tens of billions of dollars and the DVD service kind of spurred everything. Shout out those little red envelopes. All right, Neil, let's move on to our next story where we have someone pulling a reverse Netflix and moving from software into hardware. And that someone is OpenAI.

7:17According to multiple reports, OpenAI is in advanced talks with both former Apple designer Johnny Ive and SoftBank's Masayoshi-san to launch an initiative to build the, quote, iPhone of artificial intelligence. So who are those two names that I mentioned? Masayoshi-san is the CEO and founder of SoftBank, a.k.a. the man behind some crazy venture investments with his$100 billion vision fund that incinerated money in some cases, most famously in WeWork. He's certainly not afraid to pour boatloads of cash behind one technological trend or the other. And the rumor is he's providing up to$1 billion in funding to bring this product to life.

7:55And the other is Sir Johnny Ive, who's about as legendary as they come in terms of hardware designers. He was behind pretty much every iconic Apple product you can think of. The original iMac, iPod, iPhone, and iPad were all born from Ive and his teams. So this is about a good duo as you can pick to try to ease your way into the hardware space. But Neil, say it with me. Hardware is hard. Do you think open AI can pull this thing off? I think they can pull it off. Sure. I don't know. But it's just an interesting thought exercise when you consider what AI and chat GPT and these new technologies do for hardware, because the way the iPhone is designed currently is for apps.

8:37That's the interface. It's you open up Google Maps, you open up Netflix, you open up YouTube. But we talked earlier this week about how ChatGPT has all these senses now. It can see. It can talk to you. It can hear you. So you may not need these apps anymore, this screen that, you know, we think about as a traditional phone. So I would, when designing this or thinking about this particular product, I would not use the term phone. I would just use gadget. And, you know, the possibilities are endless. So that's kind of where my mind goes. I'm like, all right, well, if it's not a phone, I have this AI assistant.

9:10What is the best piece of hardware that I could somehow attach to my body to get the most use, the most seamless way of interacting with this particular device? Yeah, it is interesting because the iPhone of AI might not look anything like an iPhone at all. So they're using it as kind of a moniker for a paradigm shift rather than the actual physical product. And it is interesting that this is coming to light kind of in the era where we've almost entered a peak iPhone moment, I think. Because, I mean, if you look at the most recent iPhone that just came out, again, we've been kind of subsisting on these small incremental changes.

9:45And it looks like this time, even those incremental changes might have set things back a little bit. There's been reports that the iPhone 15 has been overheating. It's not widespread reports, but some people testing it out found that the iPhone would reach in the hundreds of degrees while charging or while performing heavy activity. So it is interesting. And then also, if you want to do another parallel, Johnny Ive has been talking to reporters and saying that Apple has a moral responsibility to mitigate some of the iPhone's unintended consequences, which are these addictions, these screen time addictions.

10:16So he is almost grappling with this post iPhone world where he's like, my invention that I created may have set the world back in some ways. Now he's looking forward to the future. Can I create another device that maybe doesn't retread some of the mistakes iPhone made? One possible thing this could look like is there's a startup called Humane that debuted a device that runs on AI earlier this year at a TED conference. And what it is, it's a little black puck that goes into your breast pocket. and this camera and projector and a speaker sticks out and you can ask the AI assistant any questions and then hold your hand up and it projects onto your hand.

10:54So that's just one possibility that this could look like. Obviously, Zuck and Apple are going in a different direction. Zuck thinks that the piece of hardware that will unlock AI and the metaverse is VR and AR glasses. Johnny Ive and Sam Altman think that that only blocks your connection with reality, and they're going with something else that has yet to be determined or it may not even happen at all. All right, let's head to our Friday segment, Stock of the Week, Dog of the Week, where Toby and I highlight one stock that defied gravity and another that wasn't as popular. Toby, I think you've got something you want to tell everyone?

11:32Quick disclaimer, we are just humble podcasters. We are not financial advisors, so please do not take any of this as financial advice. Back to you, Neil. Okay, I won the pre-show Thumb War, so I'll go first. My stock of the week is Costco. Now, Costco sells everything under the sun, but in its earnings report this week, an executive highlighted one product that was selling faster than Travis Kelsey jerseys, gold bars. Costco sells two types of gold bars on its website, but its CFO said that as soon as the company loads them onto the site, they're sold out in a few hours, despite putting a limit on two gold bars per Costco member.

12:07For a little context, These bars weigh one ounce, go for a hair under$2 ,000, and are Kirkland branded. Okay, that last one was a joke. So why are people scooping up gold bars? Well, gold is seen as a tried and true hedge when inflation is running hot and traditional investments are volatile. And gold has been a very solid investment recently with there being a global pandemic and all. The price of gold has gained 57 % compared to a 47 % rise in the S &P 500 in the past five years. 24 carat magic in the air. I think it's a super smart play from Costco because what it's doing is just bringing people to their website, even if it is a little bit of a gimmick.

12:44But anytime you can bring people to your website, it's going to be a good play. And then, yeah, gold's in the news. Also, Costco is kind of leaning into this survivalist instinct where a lot of people have been stocking up on canned goods. They sell this 150-serving emergency food prepared kit. And so there is like they're kind of pushing people towards hoard gold, hoard food, kind of like doomsday bunker scenario. I can't think of a better retailer to ride the doomsday wave than Costco. If things really do hit the fan, then Costco, you know, that's where you want to go to. All right, Neil, our dog of the week is a familiar name to many of us, and that's GameStop.

13:24GameStop named the infamous Ryan Cohen as its CEO and chairman yesterday. I say infamous because Ryan Cohen is a notorious activist investor who made his first billions on building up the online pet retailer Chewy, then selling it for$3.5 billion. He then turned his attention to GameStop, where rumors of his involvement with the company were enough to send shares skyrocketing during the craze of 2020 and 2021. He was also a major backer of Bed Bath & Beyond, flipping shares for millions before the retailer eventually went out of business. Sounds like this guy is all right. So why is GameStop our dog of the week?

13:58Well, it appears that the Ryan Cohn effect has lost the luster it once had, whereas in the past, just rumors of Cohen buying more stock used to make the share price explode. The market basically didn't react at all to the news yesterday. GameStop shares were trading 2 % lower on Thursday and are still down more than 80 % from its record highs in 2021. Neil, you're not a big Ryan Cohn guy, and it feels like the market is agreeing with you. It's kind of like a what have you done for me lately situation because, yes, sure, he built Chewy, but he has not done anything as an activist investor in GameStop.

14:34You talked about him flipping shares in Bed Bath & Beyond. Well, he didn't do any. He appointed people to the board, and that company eventually went bankrupt. And now the SEC is actually investigating his trading in it because when he bought in, the stock price rose 34 % in this euphoria, as you talked about. And then he sold it a few days later and pocketed nearly$60 million. And now the SEC and eventually the company went bankrupt. So the SEC is looking into that. Yeah, it was a bit of a pump and dump, but it does seem like he is in the GameStop arena for the right reasons. He's not taking a salary.

15:08So that's kind of the big headline news. He's been on the board for a while. So it does seem like he's in GameStop for a little bit more. I mean, obviously he's CEO now, so he's in it for the long term. So it will be interesting to see if he can sprinkle that e-commerce magic that he's been promising for years now into GameStop. All right, Neil, we got a fun back half of the show. where we'll talk coffee, nutrition facts, and steakhouses right after this break.

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16:13From afternoon coffee runs to stocking office supplies and even team dinners, you can earn miles on all your business expenses. Plus, you can earn 125 ,000 bonus miles for a limited time through October 29th. The Delta SkyMiles Reserve Business Card. If you travel, you know. Minimum spending requirements and terms apply. Offer ends October 29th, 2025. Neil, I can't believe we've made it this far into the show without mentioning it, but today is actually National Coffee Day. This is always a day we've struggled with at the brew because for the first half of our lifetime as a company, We got to convince the world that we are a media company, not a coffee company.

16:50And yet here we are honoring the bean juice on its national day. But on Morning Brew Daily, we go deeper than just celebration. So today I want to dig into the question, are we in danger of running out of coffee? Global consumption has almost doubled over the past three decades as China, India, Indonesia, Malaysia, Vietnam, and growing populations in sub-Saharan Africa all boost their consumption. Starbucks plans to open a coffee shop in China every nine hours to satisfy the demand in the country by 2025. And if the current trends continue, global consumption is expected to double again to 6 billion cups of coffee every day by 2050.

17:28Now, the issue, Neil, is whether we can grow enough. For the past two years, that answer has been no, as demand has outstripped supply, a problem that has only gotten worse in an El Nino year fraught with extreme weather. Now the fear is, what do we do if those deficits keep widening? Drink tea? No. Neil, what do you think about this coffee shortage? It seems bad. I mean, there was this big study that came out last year that made a lot of waves that said that by 2050, up to half of the land used to grow coffee will be unusable due to climate change and changing weather. The problem is there's only two types of coffee beans that we grow for coffee.

18:07There are over 130 species, but we've tapped into two. There's the Arabica and the, I'm sorry, everyone, I pronounced that wrong. Arabica and Robusta. Arabica is seen as the tastier one, and it accounts for 60 to 80 % of production. The problem is this bean is so fragile. It is endangered. It can only grow in like the most perfect temperatures, the most perfect climate. And obviously that's changing. So huge swaths of land that have been used to grow coffee are becoming unusable to grow coffee. And the millions of people who are working in coffee plantations in these countries are saying, look, this is just not worth it for me.

18:47I'm not reaping any of the profits from the increase in global consumption. And there's all these pests and fungus and climate change is just wreaking havoc on my crop. So I'm just not even going to start growing coffee anymore. So it's going to lead to these devastating supply shortages, it seems. Yeah, you mentioned the way coffee is farmed. Over 25 million farmers across the 50 coffee belt countries, which accounts for about 80 % of production, or sorry, 80 % are these small producers. And so a lot of these are not big operations or anything like that. And a lot of the risk falls on the farmers.

19:23Producing countries retain less than 10 % of the retail value of the estimated$200 billion coffee industry, even though experts estimate that they take on 75 % of the risk. So eventually something in that math has to break. If they're saying, listen, all the risk falls on us, all these weather changes are impacting our profitability, and we're not even making that much money to begin with. So you might just see people moving away from producing coffee just because it's so risky. Right. Producing countries retain less than 10 percent of the retail value of the 200 billion dollar annual coffee industry.

19:55So they're not seeing any money that, you know, Starbucks is charging whatever for rent in New York City. That's, you know, what we're paying for here. And the people who are actually producing the coffee aren't seeing as much. One way, you know, there are optimists in the coffee industry that say, you know, look, we face challenges before. We can face them again. All we have to do is maybe innovate our way out of this. We can develop new coffee beans that are more weather resistant, that are more resistant to different fungi that may take us down. So we'll see. Starbucks and other coffee companies are funding a lot of the research into developing new beans.

20:28The problem is they just don't taste as good as this particular one. So maybe we all will end up drinking tea, but there's going to be a lot of collateral economic damage as millions of people around the world work in the coffee industry and they're not going to going forward. I'm still not drinking tea now. I know. For our next story, have you ever looked at the Nutrition Facts label and admired its simple, elegant design that provides you with critical nutritional information in an accessible way? No? Well, I encourage you to take a closer look today because the person responsible for designing that label, Berkey Belser, died this week at 76.

21:02Belser's Nutrition Facts label, a clean black and white color template with Helvetica font, is praised for being one of the best designs ever. In fact, the New York Times said it was the most printed and viewed piece of literature, piece of art in the world. Belser himself compared it to the iPod because, in his words, the detail is so important that you wouldn't even notice it. And if you didn't notice it, it is a sign that it succeeded. Belser's design was introduced in 1994 following the Nutrition Labeling and Education Act, which for the first time set standards for putting public health value on food packaging.

21:32It's bizarre to think about, but before this law passed in 1990, it was not always required to put nutrition information on packaged foods and beverages. And perhaps the wildest part of this story is that when Congress approved this law, they didn't appropriate any money for creating a nutrition label. So Belser did not get paid for any of this work. Toby, I spent a lot of time looking at the nutrition facts label last night. Gotta say, he nailed it. He did nail it. And what's even more impressive is when you consider all the cooks in the kitchen that were trying to influence which way this packaging went.

22:04I mean, you had consumer groups advocating for this and then agricultural groups advocating for that. The agriculture department actually was concerned that the label would cause consumers to eat less meat, which is typically higher in fat and calories and other foods. So imagine all the different interest groups that wanted the design to go this way or that way. And he just ended with this such, it's so simple. That's the beautiful thing is it stripped everything down. Everything has its place. There's no punctuation. There's no commas, no periods. It just gives you the information you need. And yeah, it made it all the way until 2016 without changing.

22:37And when they did change it, they made the calories a little bit bigger. And he was not happy. Belser said the calories are literally shouting like all caps in an email. So he did pop off and say, listen, we made it this far. I'm kind of mad with the change, but I'm just happy that we did a good job. No, it is a beautiful design. I got one quick trivia for you before we move on to the next story. What are the four vitamins and minerals required to be listed on every Nutrition Facts label? All right, I'm just going to go through the alphabet here. Vitamin C? No. No. Vitamin D, I'll give you that one.