$NTDOY: is Nintendo's flywheel actually there? | Accrued Interest

0:01Accrued Interest: You're about to listen to the Yet Another Value podcast with your host, me, Andrew Walker. Today we have on Simeon McMillan from Accrued Interest. Look, Accrued Interest follows all things TMT. And if you know me, you know I love all things TMT. And I just really enjoy Simeon's takes on everything. I'm a happy subscriber. I think he might have been his first subscriber to Accrued Interest to disclose my priors, but he's great. We're going to talk about a lot of stuff. I'll include a link to his website in the show notes if you want to go follow up. But we're going to talk about Nintendo, which is always top of mind for me because I love Nintendo.

0:29Accrued Interest: and I had a stomach bug the other day and had to kind of take off work for a day. So for a few hours, I just fired up the Switch and played some Nintendo games for a while because I couldn't do anything else over the cramping of my stomach and all of the things I don't want to tell you about. So we talk Nintendo and then we're going to talk Netflix and Spotify where he is very bullish on both Netflix and Spotify. Oh, and I should mention, he's controversially quite bearish on Nintendo. So we're going to talk all that plus little quick hits on other things media. I think you're really going to enjoy the conversation.

0:56Accrued Interest: I really enjoyed the conversation. We'll get there in one second, but first, a word from our sponsors. Today's podcast is sponsored by Fiscal.ai. Fiscal.ai is the modern financial data provider for global equities. Look, that's what they have me tell you, but let me tell you how I've been using Fiscal.ai. And I'll remind you, I'm a customer. I paid with my own money to connect to the Fiscal.ai API. There's two things that I've really found it useful for. Number one, this is something super unique. They've got a huge database of fund letters, and the fund letters are connected by the API. So whenever I'm researching a company, whether it's researching the company because I'm interested in them or looking up an event or prepping for a podcast, the first thing I have my AI do is I say, hey, I'm prepping for a podcast on what are we?

1:38Accrued Interest: I'm prepping for a podcast on HIMSS. And the first thing it does is it says, hey, here's all the recent letters on fiscal.ai of people talking about HIMSS. And here's their thesis, here's their bear thesis, all that sort of stuff. So that's the first thing. And that is really unique. And that is really fun. And then the second thing I do is I use it for edited financials, right? I've got my model and I say, hey, I'm looking at HIMSS. Go build me a model. And it says, sure, I'll build you a model. And every line in that model has a link. So I can see, oh, they're pulling this EBITDA number. They're pulling this segment number.

2:07Accrued Interest: They're pulling this number from three years ago. I click on it and it takes me right to Fiscal.ai and it says, hey, here's these company-specific KPIs. Here's these ratios. And I can see exactly where they're getting it and exactly where they're coming from. So it is a super reliable data provider that can connect to your AI. I found it super helpful. I'm a big fan of the podcast. If you want to try it out, you can use my link at fiscal.ai.yav to get 15 % off their AI connector. That's fiscal.ai.yav, and there'll be a link in the show notes. All right, hello, and welcome to yet another value podcast.

2:37Accrued Interest: I'm your host, Andrew Walker. With me today, I'm excited to have, I think it's the third time, Simeon McMillan from Accrued Interest. Simeon, how's it going?

2:44Simeon McMillan: Great, Andrew. Great to be back and look forward to making another great interview, a friend of the show or a friend of the pod, whatever you want to call it. No, there's always something interesting going on in media. So we're never at a loss of topics.

2:58Accrued Interest: Well, A, you stole that from me because I told you that right before we started recording. Synergy. Synergy. I really enjoyed it. I'd say once every three weeks, I get an email from a furious long of some media stock saying, look what Simeon said on this. So you're making waves and I'm super excited to talk with you. I think we talked last at the end of Q2 towards the beginning of Q3. It's now rapidly approaching Q4, the end of Q3. So we were just doing our, we said we were going to do it. People enjoy it. We're going to do our quarterly media check-in. I've been following an accrued intro, so I know you've got lots of thoughts.

3:35Accrued Interest: I think the place you wanted to start with, oh, disclaimer, not the end of this podcast, investing advice, full disclaimer at the end of the podcast and the show notes. The place you wanted to start with was Spotify, but I am super excited to talk Nintendo. So I'm going to pull up my host video card and talk Nintendo, which I'm a 10 out of 10 to talk about. And then we can do Spotify, which I'm a nine out of 10 to talk about and some other stuff that works for you.

3:56Simeon McMillan: Sounds good.

3:58Accrued Interest: Great. So Nintendo, look, I said you were roughly people's feathers. You, I think in August, you published a bearish piece on Nintendo and then you published another one after they did their big conference earlier this year that said, Hey, I watched their conference. I'm, you know, it's everything that the bears said. And I know a lot of bulls in Nintendo and a lot of them were very upset with you. So I just love to start, you know, Nintendo is a beloved company. They finally are kind of getting their media strategy together. You know, the Super Mario Galaxy 1 and 2 do great. Nintendo, sorry, Legend of Zelda live action coming early next year.

4:32Accrued Interest: I think people are bullish for that. Nintendo, the theme parks, all this sort of stuff. Why are you bearish on Nintendo? Sure.

4:40Simeon McMillan: So simply put, I'm bearish on Nintendo or far less bullish than the average bull because I think it's incredibly cyclical stock that has not been able to break out of its dependence. on the hardware upgrade cycle. And that I think what I tell people, I pride myself on my shorts. I went six for six in my short scorecard for the first half of the year. So I'm not afraid to go against consensus. My average short was down over 30 % on the absolute basis and more than on the relative basis. So I'm not afraid to ruffle some feathers. But my issue with Nintendo is that this is not a stock you can put away and forget about, okay?

5:17Simeon McMillan: I think a lot of bulls retroactively, the stock it was down like maybe 50 percent and you know everyone wants to act like they bought it at the low and they say oh look it's it's up a little bit off the low but it is far below it's it's it's high as of last year and you could say that you know okay stocks sometimes overshoot i get it but the whole thesis was that they have a flywheel that is going to let them escape from the console cycle and my only observation my latest piece is that the flywheel is not there If you want to buy it, if you want to buy it, I think you buy it when it's down. You buy it going to major game releases.

5:55Simeon McMillan: But to give you some more tangible information, what I'm always worried about is that when I look at the sales, they've done a better than expected job selling Switch One software this long into the cycle. And for me to really believe that I can hold this for more than a year, because again, I'm not a day trader. I don't get excited if I can just get 20 % pop and then I don't tell you when to sell. They need to sell more Switch 2 software because that's how you bring the audience over to the next cycle. Because eventually, Switch 1, it's going to run out of steam. And so I had an article up. It was last week.

6:36Simeon McMillan: It was coming out of the Nintendo Direct, the 9-9 event. It was a two-day event. And a lot of bulls got excited because on day one, they presented the new Zelda game, which is amazing. Okay. I think working in media, I sort of learned to check my biases. I think that the people most excited about it are millennials or 40-year-old people who played the old game 20 years ago. Because in the grand scheme of things, remakes only get but so much juice. So just simply put, I'm very worried going into this holiday season. Because typically, the biggest time to sell consoles is during the holiday season.

7:13Simeon McMillan: And now we're going into Nintendo's second Christmas without any more flagship titles. to give your listeners or viewers like a quick overview of like the Nintendo ecosystem um in my mind their tier one characters or titles are in no particular order um you have Mario Kart Mario whatever Mario game of of the of the cycle um Super Smash Brothers Legend of Zelda um and Pokemon okay and I'm sure I forgot a couple other ones which your readers will let me know well at launch they gave away in a bundle which they never done before um a lot of copies of the new Mario Kart. Great. Okay. And it helped himself switch to consoles because without that, I think sales have been quite weak.

7:54Simeon McMillan: And now at the direct event, all right, the biggest game they have going into the end of Christmas is Legend of Zelda remake. Now, what the bulls are saying is that, well, it's not a problem because eventually they'll make more flagship titles. But now we're out into 2027. And if you go to 2027, we have visibility on Pokemon coming in in Q1 or in the spring. They don't even have a date. So, okay, maybe you hold Nintendo until then, but I can't wait forever. You know, I think eventually I'm going to want to see more of these other games if I believe that Switch 2 is a viable alternative. Otherwise, they're just elongating the life cycle of Switch 1, which doesn't get me excited.

8:37Accrued Interest: Can I pause you there? So that's a great summary. And I've got in your note, you've got four reasons. You've got a lot of things. And I actually had in my notes, you know, hey, I want to go through the four things I hear from Bulls all the time. And you actually are hitting on the number one thing, right? I hear from Bulls all the time. And it'll be, hey, the next X remake is going to be huge. You know, the Star Fox remake earlier this year was huge. I remember a few years ago they got really bullish on a GoldenEye remake that was coming out. And this year it's the Ocarina of Time remake. And I always get confused because the Bulls, on one hand, they'll tell you, hey, this is the next Apple.

9:12Accrued Interest: And then on the other hand, they'll be like, this new launch is coming up. But I think it's interesting on two places, right? You rightly are saying, hey, this shows kind of the dearth of depth. I mean, if you're buying a Switch, you're doing it really for the exclusives. And if they're not coming out with the exclusives, that isn't driving hardware. And you're looking over at the PlayStation 5 over there and saying, oh, GTA 6. You know, that's not going to. It's really interesting. But on the other hand, look, you and I both follow media. if Avengers comes out with a remake of Avengers Endgame, you know, that's digitally enhanced in IMAX, it'll sell a couple tickets, but nobody cares.

9:45Accrued Interest: But isn't part of the story, hey, this Ocarina of Time, it might be behind Grand Theft Auto. It might be the, you know, it's going to be a top five selling game in the world at the end of this year. It's a freaking remake. And you know, the thing that Buffett used to say about Disney in the 60s, they're like an oil well where the oil seeps in, right? Every 10 years, they re-release Cinderella or whatever it is. Isn't this just kind of, I think a bull, the more, the better case to make would be, hey, what you guys are pointing out is this is the oil well where it comes back in. Like who else could re-release a game and have a bestseller?

10:19Accrued Interest: Like, isn't that speaking to the brand and the legacy and all that sort of stuff on the bullish side?

10:25Simeon McMillan: I think it does. And that's why the stock is bounced up a little bit over the lows. There is life there for the bulls to point to. And I I won't deny that. But using the Marvel or Disney example that you gave, over the last 20, 25 years, Disney did a lot of acquisitions to refresh their IP. They're not just doing Mickey Mouse Part 10. So along the way, they added new franchises and started the cycle over again. And then everyone's hype about Spider-Man. And in a couple of years, honestly, I think no one will care about this because the X-Men will be here and they can milk that for a long time.

11:01Simeon McMillan: but you know we just came out the period where people said marvel's dead it's getting tired they had to bring back robert downey jr and lots of other actors i retirement so i i i hear everyone i think the game is going to do well i think that again i i could see it doing well between now and the spring with the pokemon release but i i just want to see more or at least some release dates you know and the other thing too that's a little bit different i think from other forms of media is that inflation's everywhere, and everyone knows that. But the inflation and the costs for the parts is noticeable.

11:36Simeon McMillan: So this is also the first time – it's the first time that Nintendo has raised the prices of a new console so early in its lifecycle. You're going to lose some demand. You're going to lose some demand there.

11:48Accrued Interest: So this is actually my next question, so I'll just pause and explain. So what you're talking about is inflation in memory, right? The Switch 2, all these consoles have a lot of memory. And if anyone's been following the stock of Micron, memory is in high demand. And they had to, I think they were eating like$150 of costs in memory. So what you're referring to is, hey, Nintendo had to either eat it on margins or increase costs. And they're kind of in this, for the first time, they're in a tough spot where the cost of the hardware is going way up. So that hits them on multiple slots. So I just want to pause so people know what the inflation you're talking about is.

12:23Simeon McMillan: Yes. No, that's absolutely right. And what I'm afraid of is that in order to make this transition, yes, this might work a little bit longer because people love the Switch 1 games and it'll take them a little bit further. I recognize that. This is not like the absolute alpha short. But consoles are supposed to get less expensive over time, typically, and they're supposed to. And in the past cycle, you had it get less expensive because they came out with a Switch 1 Lite, I believe. All right. And by raising prices so early, Nintendo implicitly told you that they don't see memory costs coming down anytime soon.

13:01Simeon McMillan: So I'm not expecting a Switch 2 Lite anytime soon. So I don't know how long they could sort of bridge this gap. And I was also very disappointed. And I just want to point out, because I hear Bulls point this out, the stock started tanking during the presentation. OK, so a lot of people were disappointed with what they saw. I wasn't the only one. And not that you should always listen to angry people on the Internet, but a lot of the fan reviewers on the YouTube community and the gamer community who aren't even talking about the stock. We're like, that's it. In addition to remakes, they also have a lot of third-party games that were already released in other systems, okay, over years old.

13:45Simeon McMillan: So I think that puts even more pressure for a Nintendo to deliver on this Legend of Zelda remake. Yes, they have the movie coming out. They do have the movie coming out. I want to point out to people that not all media franchises are created equal. Zelda doesn't have the same resonance with young kids as Mario does. it just doesn't um i am not calling the box office a bus i'm not i think we would probably do well but this is not the same as like a mario galaxy movie and yeah i i just i just really worry that you know no one's buying a switch to to play resident evil because the graphics are better uh they're not so we'll see how long they can play this game pokemon needs to come up needs to come out as soon as possible you know it's funny you mentioned zelda because like

14:33Accrued Interest: when i think of zelda and i i think i've played pretty not all of them that would be like but i played the major releases right and you don't play zelda for the story you know like yes it's cool you like the zelda and the you play it for the beautiful music and the innovative game mechanics it's kind of like now i guess you could say you don't really play mario for the story too but it is a little surprising that a movie i don't know i guess movies have been made on less i mean i I think I saw a headline the other day that crazy taxi is getting turned into a movie. And if there's a game without any story, it would be crazy taxi.

15:06Accrued Interest: Let me go to the next thing that I think is interesting. You really hammer home the declining attach rate, right? And I think a lot of bulls would have a lot of different arguments against you on the declining attach rate. So for my listeners who, you know, for some reason haven't read your article or aren't as familiar, can you describe what the attach rate is and then why you are so worried about the attach rate? Sure.

15:29Simeon McMillan: So the attach rate, simply put, is the number, and there's different ways to estimate this, and we can get into that. It's the number of games that are purchased with a new system. And it's a measure of enthusiasm or interest or, yeah, yeah. So it's, okay, how excited are people are for this new system? And out the gate, the attach rate, my exact numbers ahead of me, were significantly lower for Switch 2 than it was for the Switch 1 when it came out in a prior cycle. And then I argued it's even, I would argue, worse than it looks because they bundled this free game along with it. And the game that they bundled is literally, I think Mario Kart is actually their top selling franchise, believe it or not, of all time.

16:12Simeon McMillan: So they're giving away their Avengers game. It's like giving away a free ticket to Avengers with it. So I was like, okay, that's a little concerning. But I get it. The attach rate is going to grow over time. I will concede that as you have less bundles in the sample. But I look at the top-selling titles, and the longer these Switch 1 games keep dominating the sales, it just makes me worried. It just does. So I'm curious, what are the Bulls saying as a rebuttal to the Tatch Raider? What have you heard?

16:47Accrued Interest: I think it would be both, right? Like, hey, you're seeing, if you look at a PlayStation, right? You're not seeing last year's or two years ago's games be the top sellers. It's all the new releases. That might change with Grand Theft Auto because I bet that's going to be the top seller for a while. But I think they would say, hey, again, you're seeing that these games carry much longer lives. and the fact that the switch guns games are saying i think they say hey you have the evidence people are upgrading from the switch one switch two they still have the switch one library so they don't need as much attach rate so i think they're saying hey this is the signs of a healthy ecosystem and then the last thing i think they push back is uh is it nintendo direct the subscription service i can't remember off the top of my head yes nintendo direct they say hey maybe one of the reasons the attach rate isn't so high is because people are signing up for nintendo direct so So they're playing the long back catalog.

17:34Accrued Interest: And yes, that's decreasing the attach rate, but that's actually great. We're growing this huge subscription business that makes people very sticky. So I think they would argue you're kind of, and I'm not saying this is right or wrong. I'm presenting a lot of different things and I'm kind of like spreading peanut butter on a lot of different arguments. I think they would say, hey, you're kind of missing the forest for the trees. Like what really matters is this is the best selling system of all time. There is pretty much no argument there. Maybe it's not quite as good as the Bulls' hope, you know, when Nintendo did.

17:59Accrued Interest: And you pointed out in your article that cut down production targets a lot. It's still the best selling system all the time, but it's not like the greatest of all time. So I think that's where they would push back on you.

18:11Simeon McMillan: One point I just want to make about Nintendo Direct, because let's talk about that. Something that Bulls haven't talked about, which maybe I put it too low in my article, is that Nintendo discloses the number of accounts on Nintendo Direct, and it's not growing. So I think that's sort of like an elephant in the room. I also I rarely hear brought up and I actually had to triple check it several times. I think it's been fairly flat, the constant over the last couple of years. So I'd feel differently if I saw the Nintendo wrecked, you know, if I saw the number of subscribers growing. But it's it's not they're milking more and more out of a strong fan base.

18:47Simeon McMillan: And I just yeah, I just I just wonder how long they have to go.

18:50Accrued Interest: That is really I did not realize that I would have just assumed it was growing quite rapidly.

18:55Simeon McMillan: I put that way too low on the article. I should have kicked it out. But for all your readers and listeners, you can go back and read the article and you can see the number of subscribers is not growing. It's actually quite stunning what they're doing.

19:08Accrued Interest: Let me go to margins real quickly because I think this loops into a lot of the things we've talked about. You noted the declining margins that Nintendo has right now. And look, that's expected. When you launch a hardware title, you're going to sell a lot of hardware. Hardware is a lot lower margin than software. And in general, as we talked about earlier, your first – I mean, this is the way it's always working until memory prices went crazy. When you first sell the console, it's much less profitable than a console that's five years old because tech gets better, memory costs come to – everything comes down.

19:35Accrued Interest: So it's not surprising that this year their margins went down. I think where you kind of push back against bulls a lot is you're saying, hey, margins are in for a rough time. And I know bulls who think this becomes a fully subscription service a la Apple with the App Store. and the margins are going like, I mean, I've seen people talking about 40 to 50 % operating margins for this business in the long, long term, which I think is kind of crazy, but they're saying this goes fully light and full recurring revenue, all that sort of stuff. You think margins are low? They're not going to stay probably this low forever, but you're saying, hey, all the IP things people are talking about, if you look at the lines, they haven't really grown.

20:15Accrued Interest: Like the margin is lower. Let's just talk about margins real quick.

20:19Simeon McMillan: Sure. So I absolutely agree that margins are going to expand as we have more software. And that is not in dispute. The best case for margins would probably be if they never released another console. OK, I don't think that's the funny thing.

20:34Accrued Interest: That would be the best case. But then eventually, actually, that might be great for the stock because then they could just sell to Comcast and just be like exactly. But if they're going to continue the exclusive like they have to release a console at some point.

20:46Simeon McMillan: Exactly. Exactly. So I feel margins are more of like a timing issue. So maybe I'm a little off this year and next year, but it's going to ebb and flow. I think I've actually been spending more time offline talking to gaming experts. And I think, again, take aside the fandom. Nintendo is not known for strong online play. They're not. They are not known for multiplayer games, not known for online games. the multiplayer, that the online games are mostly going into the back catalog. I thought it was interesting that Nintendo tried to get some goodwill with the fans by having a tariff discount where they were giving out, instead of giving back money to consumers, they were putting a lot of their back catalog on sale.

21:33Simeon McMillan: And I'm like, okay, that's what every game developer does. So I think that online is actually one of Nintendo's weaknesses. And if that is what the Bulls are hoping for, I think they might be a little concerned because most of the multiplayer games Nintendo are really meant for you to be played with friends who are in your living room or friends you know. It's very different from the PlayStation, Xbox, and PC world where you go, you connect to the World Wide Web. Yes, the games have online versions. I won't doubt that. But yeah, if online is what we're hoping for, then I go back to Nintendo Direct Subs, which have been stuck in place.

22:11Simeon McMillan: Like, show me some momentum there and then I'll concede the point. Otherwise, you're just draining more out the cow until Pokemon comes.

22:19Accrued Interest: No, it's a great point. You know, look, I think a lot of the arguments come down to I've always people can probably hear and I think people can probably hear from you, too. I'm a huge Nintendo fan. And again, I've played a lot of Zelda's Mario Party with kids. My Mario Party skills have gotten really rusty. I can't wait till my kids are old enough to play. But like I since I was a teenager, I've played Mario Party nonstop Mario Kart. But I find them to be very Japanese. Like they obviously should have sold the company. If this was getting run for shareholders benefit, they should have sold the company years ago.

22:50Accrued Interest: Right. Like in 2020, 2021 in particular, they would have committed a huge premium. I mean, people tell you Comcast says all the time they'd love to buy them. The online play, they don't have mobile. It's a great niche company, but I worry that they're very Japanese. It's kind of the legacy of the Japanese company that gets run for a dream and shareholders are there, but it's not ever going to maximize value. I worry about all that. Yes.

23:20Simeon McMillan: And one point that I forgot for margins, which is related, in theory, if the media, if the IP, if the movies, if the theme parks, if they were bigger, if there were more of them, I could say, yeah, you got that great licensing revenue, excuse me, which is typically higher margin coming through the P &L. but I point out in my piece that they don't have that much. For them to really go in on this whole connected universe, I need to see two to three movies a year, every year, not just every, you know, when they feel like it. I don't need just a handful of theme parks. I need a dozen. I need way more TV shows.

24:03Simeon McMillan: You mentioned Crazy Taxi. It's actually a Sega property. And Sega, not to jump ahead, excuse me, I won't mess up your flow, but Netflix announced sometime this week that they did a deal with Sega to create new Sonic shows, new shows around Sega IP. And in a perfect world, I think that's what Nintendo should do. I think they should be in arms deep.

24:26Accrued Interest: Look, that's exactly it. In the long run.

24:29Simeon McMillan: But they want to go it alone. Yeah, go ahead.

24:32Accrued Interest: I think we had slight connectivity additions. that's i i'm completely with you there like i know they've got this high standard and everything but i don't understand i've always said like you know you've always got to be raising the next generation and my daughter she we i don't even let her watch tv shows and she loves mickey mouse and she loves and like there's no mario and maybe she's a little too young for that but they need to be plastering the netflix should have mario shows freaking everywhere or you know legend of zelda is for seven to ten year olds or disney plus it should be on disney play exactly And the fact that they don't like, hey, millennials like you and me, we're going to love that forever.

25:11Accrued Interest: But the next generation, it's easy to if you neglect them, all of a sudden they're 22 and they don't have this nostalgia. And it kind of falls apart. So I actually think they're running a strategy that even though they say they're long term and they're maximizing, I think they're maximizing the fans from the 90s. I think that it's going to be troubling in the long term for them. I think you were spot on. hey it's when you said it earlier millennials are really excited about this ocarina of time remake i don't think 13 year olds are that excited for it you know so i have one last question for you nintendo unless there's anything else you want to sit there uh just last question pokemon i think it's really interesting they own 35 of pokemon they've uh i think it's about 35 there's different theories about like a nesting doll of different things but you know that is one area where i I think people have argued for a lot of upside, and that's one brand that's really managed to stay super relevant.

26:06Accrued Interest: So I'd love to just – how do you think about Pokemon as it relates to Nintendo?

26:11Simeon McMillan: I think – I want to just be saying yes back and forth. I kind of see it similarly. I think this is a brand that I wish they owned 100 % of. If they owned 100 % of, then it could move the stock a whole lot more, and I'd feel a whole lot better of it. But they sold, I believe, Pokemon Go to a gaming company that I think is owned by a Saudi conglomerate. You were talking about the nesting dolls, the different ownership rights and whatnot. I think another thing about Pokemon that we want to sort of keep in mind is that the game sales are still very strong. Yes, but a lot of Pokemon is consumed outside of the game in ways that Nintendo doesn't capture, like the toys and the cards.

26:53Simeon McMillan: I would probably argue that the younger generations are actually more into the collectible cards, which, by the way, I never thought Pokemon cards would have still be a thing and collectible. So more power to them. I didn't see that coming. But, yeah, I think it's – go ahead.

27:09Accrued Interest: Just Pokemon. I would argue the fact that Nintendo has a big stake but doesn't own it. What you're saying, like, that's the sign of really good brand health, right? Okay, they don't have to monetize it only through games. The ecosystem is always growing. and I actually think when you look at Pokemon hugely valuable for Nintendo I mean it might be worth their sake could be worth not I mean Nintendo's like a 70 million company not all of it but it's worth a ton but I think the fact Nintendo doesn't own you shows you like that is what a Mario or a Zelda that is how they should be growing it's not just games monetization I understand Mario might not be perfect for trading cards but there should be more licensing all this sort of stuff Pokemon does that and I think the fact that they're a little more entrepreneurial I think it speaks to the brand strength.

27:51Accrued Interest: And yeah, it's not all through the games, but I think it's actually showing you what an ideal Nintendo would be to me.

27:57Simeon McMillan: I agree. It's the ideal. And I hope to see them do more of that, excuse me, with their brands. But right now it's too lumpy for me to hold it for two years.

28:09Accrued Interest: Well, I appreciate you humoring me and talking to Nintendo for it. It's been 30 minutes. I love talking to Nintendo and I could talk about it for, somebody needs to have me on a podcast to talk for four hours about Nintendo. But let's turn to what you want to talk about in a company that I follow. I follow pretty closely. I've always been pretty bullish on them. And that's Spotify. And I'll just give my bias. I've always regretted in 2021, 2022, I did a lot of work on Spotify when the stock was probably in the 150s. And I ended up passing. And the reason I always liked it was I spent like 12 hours a day just listening to Spotify on background.

28:44Accrued Interest: I listened to all my podcasts. it's a very sticky subscription that's like on the front of my phone and i passed because at the time you know this is when ackman was taking uh umg public through psta and all this stuff i passed because at the time i was also doing work in the music labels and all the music labels i talked to were saying spotify is we're gonna run over spotify in the long term they were and i disagreed but i was having that like imposter syndrome was like man if everybody who studies music labels tells some of you Spotify's in trouble. Anyway, Spotify's done great since then. You are quite bullish on it.

29:21Accrued Interest: I think it's your strongest conviction long right now. So I'd love to just ask, you know, as we end of 2026 stock price, about 550 last I checked. Why are you so bullish on Spotify right now?

29:33Simeon McMillan: Sure. So it's uploaded. It'll be fresh at the top of my page. And I wanted to do sort of a mea culpa of myself because I miss Spotify, probably call it from 2024. I should have been paying attention. And the article is called Spotify is a quiet compounder that I will never underestimate again. And very early in the article, I actually, I alluded to how I mistakenly thought that the record labels were just going to hold them hostage for their margin. I listened to, I don't want to pick on any one investor because a lot of investors had the same sort of theories and theses on universal music. I like to, in my writings, bring into my experiences working in the corporate world.

30:21Simeon McMillan: I've done corporate FP &A far longer than I did any sort of professional investing. And I also worked in radio. And I was turned off from Spotify, one, because I thought they'd never get right with the labels. The labels would keep the margins down. I too mistakenly thought that the Apple tax, well, they're going to have to pay for a chunk of their subscriptions to other people. And they eased up on that. And then something else I missed, and this was a big turning point, was that Spotify made peace with the record labels in a series of deal renegotiations. We don't have to get into all the turns, twists and turns, But I want to say between 2024 and 2025, Spotify set up new deals with all the record labels in which for the first time, I would argue, everyone was incentivized to be on the same side.

31:13Simeon McMillan: And what I totally missed was that the way the licensing agreement is set up is that Spotify's royalty rate actually goes down the faster they grow, the more subscribers they get. It's a basket of metrics. It's not just any one metric. But it incentivizes them to grow, and that helps the whole ecosystem. So that's good. Can I ask you there, Samian?

31:38Accrued Interest: Sure. I had a slightly different takeaway than you there. So I think you said everybody's incentivized. And I actually, when I read that, I kind of, and again, I should have been longer too. Like both of us missed it, but I think I had a different reason. I kind of read it as the label saying this was Spotify winning, right? The label was like, you know, the Spotify argument was always, Hey, we have all the listeners. If one label cuts us off, like we'll shift everyone. And it's, you know, we're going into audio books and podcasts so we can like push people up. And I kind of read it as not just everyone's on the same side, but this was Spotify saying to the labels like, Hey, we own you now, right?

32:14Accrued Interest: Like we're increasingly less reliant on you. And guess what? But the next round of renegotiations, I bet Spotify takes more. So I almost didn't just read it as we're bringing people on our side. It's our way or the highway. So pause there and I'd love to hear everything else plus your commentary on that.

32:28Simeon McMillan: Sure. So that's the more blunt version of it. I think maybe this is like the corporate side of me that likes to soften the language a little bit.

32:35Accrued Interest: You ran it through your PR department and you made sure that nobody came out looking bad even if somebody lost.

32:41Simeon McMillan: Exactly. You want to present it as a win-win even if it isn't. But yeah, it is Spotify winning. because they got better terms than they certainly have before. Another thing that I overlooked for Spotify, and I think even earlier this year or late last year, I said no to it again, was that Spotify has not been as successful as I think some people had hoped in growing their advertising revenue. And for lots of reasons, again, coming back, coming from radio, I'm biased against audio as an advertising format. I think video is just better. I think video is always going to have more share, higher CPM.

33:17Simeon McMillan: So I was like, eh, I don't know. And then I was turned off again when I saw that the advertising tier, so usually in most media businesses, like in the history of media, without pontificating too much, you typically have far more advertising revenue than you do subscription revenue, typically, because people like free. And if you look at the numbers, I lay this out in my piece, the mix of advertising revenue out of their total revenue has actually been falling, whereas some people were hoping that I would be growing. And the more I dug into it, I said, well, actually, advertising, it is underperforming.

33:56Simeon McMillan: And in my risk section, I talk about, okay, well, I do wish it was stronger, and I do want to be stronger. But the mix of advertising has been falling relative to the pie, because the premium section has been growing at the mid-teens Kager much longer than I ever thought it would. And you mentioned how they were bringing on audiobooks, and that's great. And I underestimated or I overlooked the fact that Spotify got a lot more price discipline when it came to podcasts. Podcasts used to be burning money. They were candidly giving out way too many of these trophy deals. I think they're still waiting on Prince Harry and Meghan

34:39Accrued Interest: to deliver some of those Spotify contracts, I think.

34:42Simeon McMillan: Right, 100%. The only one that probably paid for itself was Joe Rogan, but a whole lot of the other ones didn't. But they pulled back. So podcasting went from being like a money pit to a positive one. Audiobooks are great. And what they've also pointed out is that with Audiobooks, they are now able to sell additional hours to people, which I'm quoting management here. So, you know, caveats, they don't break it out. Exactly. But they said that very quickly that they have, I think, like a hundred million dollar run rate business on just extra audio credits. I think something else I underestimated too is that part of the way Spotify was able to make more money was not by necessarily making more money, but by getting a lower royalty rate from the labels who would lower the rate in exchange for marketing and promotion.

35:38Simeon McMillan: Now, what does marketing and promotion mean in digital? Well, in radio, a lot of people think – there's a term for your listeners called payola. Payola. It's a very old word. Yeah, so look it up if you guys ever heard of it. It's the allegation that you, the record label, whoever, are paying the DJ, paying the station to get more spins. A lot of people think that happens, but it's illegal. But in the digital world, well, it's called marketing. We can get you more placement in the playlist and other digital nudges, which technically you don't have to hit the button when you get to the playlist.

36:10Simeon McMillan: You could skip it, but it's a huge boost. And now as everything's more algorithmic, it's amazing for them.

36:16Accrued Interest: it's one of the reasons i i was bullish spotify back in 2021 2022 because what's the best space in media for advertising it's the netflix home page right yes well netflix doesn't let you what's a really good space for advertising in music it's the spotify home page right you open up spotify and you've got the labels right there and if they just start they don't even need to do it you know wink wink nudge if they start putting you on the front page or you know umg you giving us some problems all right we're gonna go have warner is gonna be in all of our playlists and everything like they've got a lot of ability to shift really quickly and without people even knowing they're doing it and i'm describing something a little more sinister but you know all that i thought was uh i thought was realish i mentioned netflix which i'm uh preluding i'm kind of foreshadowing to our next thing but let me go through the three things i wanted to talk to you about spotify with just three high level things you know i think the first we live in the ai world you have to ask how do you think ai is impacting spotify and i know some bears who think AI is negative for them in two ways.

37:17Accrued Interest: Number one, the rise of AI music slopifies a lot of the platform. Or number two, one of the reasons Spotify is so sticky is they know all the music I like, right? The high school music I listen to, the Taylor Swift, they've got all that history. That makes it really difficult for me to go to Apple Music unless I can just have an AI go read all that and import it to wherever I want. And just kind of, I can seek the cheapest just music player all the time using AI to kind of backfill my content. So those are the two negatives. I think you had a positive take on how they use AI for algorithmic and to increase playing time.

37:52Accrued Interest: But I'll just pause there. What do you think about AI for Spotify?

37:56Simeon McMillan: I think it is a net positive for them, but I think it's also probably, it probably gets more oxygen than it deserves on both sides, I think. So I won't repeat all the points that you made in the interest of time. Yes, the smart algorithms, you have a network effect the longer you've been on it, the smarter it lets you – it knows you. Excuse me. I think another benefit that Spotify has that is underappreciated is that because they have the rights and the clearance to all the songs and the publishing and whatever, they can do remixes and other sort of AI creations that another company can't do unless they want to face another large lawsuit.

38:37Simeon McMillan: So I think there's that there. I never want to be dismissive of anyone's opinion, but I actually think AI music is probably the least of their concerns. Okay for easy listening or whatnot, but until I see an AI song really dominate the Hot 100 charts, I'm a little bit skeptical about that.

38:59Accrued Interest: It's coming, but I actually think it's a bull case because AI, it's not represented by a label, right? So if they're just filling it and you're just auto listening stuff, I think the profits go up. Let me turn to the second case. You know, actually, I'll start here. The other interesting thing here is Spotify trades for about, let's call it 40 times earnings, and you can push back if you want, but about 40 times EPS, right?

39:23Simeon McMillan: Yeah.

39:24Accrued Interest: Keep this in mind because Netflix has something similar, but Spotify is growing revenue. just looking, low double digits. I think it's fair to say they're growing revenue. A low double digit grower with 40 times EPS, I would say not crazy pricey, but that's on the pricier side. Like you're really starting to price this at an annuity rate at that point. And for a business that I know they've held off the Apple Music competition, I know they've held off the YouTube Music competition, I know they've held off the Amazon Music competition, but for a business that has a lot of very well-funded competitors that are making this a core part of their bundle, like 40 times earnings on double digit revenue growth, seems priced for perfection.

40:01Accrued Interest: So I think the main pushback I'd have to you is, hey, man, you've got a one category thing with a lot of well-funded competitors, and the market is treating this like a category winner. It's priced pretty richly. So how would you respond to that?

40:15Simeon McMillan: Sure. So not to get off topic, but this also reminds me a little bit of some of the knocks I've heard about Apple, when people from time to time get bearish in Apple, and then they say, oh, well, it's growing at a quote unquote low rate. Here's what I would say. A big crux of my piece, and again, something else I love about Spotify and why I call it a quiet compounder, is that most people, not you obviously, but most people stop right there when they say, oh, just going at 10, 11 % a year on revenue. But this margin expansion that is well underway is actually leading to earnings growth, probably high teens.

40:52Simeon McMillan: I can see them growing actual earnings at maybe a 20 % CAGR over the next couple of years. Because again, for a long time, their operating margins were incredibly thin. I think on an LTN basis, I think it might be about maybe 14 % or so right now mid teams. They have a line of sight to 20 % even margins between now and 2030, which I think is achievable just on the run rate that they are. And because of everything we said before, I think beyond that, it could go to 30%. So I think that this is a situation where, yes, you're always going to get a higher multiple than what some people might be comfortable with because it is an oligopoly.

41:33Simeon McMillan: And actually, I would argue, too, I think Spotify doesn't get enough credit for fending off Apple, YouTube music, and Amazon music. They're never going to slay the beast. They're never because they're always going to be there. But they're the clear number one. I'm most worried about YouTube. But yeah, I think that a low 30s multiple for something that's compounding earnings in the oligopoly for 20 % year over year, you have to look at the earnings growth and the cash flow growth. They're upping the buyback. I think the cash returns are higher than people think. And in my case, I'm not arguing for any margin expansion.

42:15Simeon McMillan: I'm just saying let's just roll the multiple forward a couple more years. and you could see 25 to 35 % upside easily. And then beyond that, if they keep growing these premium subscriptions and lowering their costs, this could be a winner. If anything, I think it even shows how low Netflix's multiple could be.

42:35Accrued Interest: Well, we're going to talk Netflix. Let me do my last Spotify question and then we'll go to Netflix because I think this is also relevant to Netflix. You know, I think the last pushback would be, hey, Daniel Ek stepped down as CEO at the end of 2025, handed it off to co-CEOs and Eck is now the executive chairman. You know, I can't think of many places where the Daniel Ock founder, visionary, CEO, can't think of many places where the founder, visionary, CEO stepped back. Now he's executive chairman, not fully stepped back, but.

43:03Simeon McMillan: Right.

43:04Accrued Interest: You know, I think you need look no further than the Netflix, you know, Reed Hastings steps away. It's been a little bit of a rocky tenure for Netflix since Reed Hastings stepped away. And anytime that happens, you have to look and say, hey, Did the visionary say, oh, the next couple of years are going to be a little bit rocky? Maybe I step back, collect my riches, dial it back a little bit and let somebody else handle the rocky period. So I think that would be the last interesting pushback I would have on Spotify.

43:32Simeon McMillan: And that's fair. And that's fair. And there is a little bit of, I guess, adverse selection because you're right. The CEO knows more than we do. Sometimes they want to run off into a high. Allegedly. Allegedly. Allegedly. You know, not to mix dreams, but, you know, a lot of people were more skeptical on Apple after Steve Jobs left. And, you know, Tim Cook is not a creative guy at all. But I think, look, this is a hot take. In general, I think CEOs are overrated in general, in my personal opinion, having worked for a lot. I think they get like quarterbacks. I think they get too much of credit and too much of the blame.

44:13Simeon McMillan: I think that the current CEO, he comes from a tech background, engineering background. This is very much an engineering product. And what they're trying to do, I mean, they aren't making music. They're doing a platform. They're trying to get the best economics out of it. I think this is a trend that is far bigger than the executive suite. So I don't really read too much into management transition. And I think the proof has been in the pudding with the margin expansion. You know, the margin just in the past three years have exploded without Daniel Ek there. And I think it can keep going higher.

44:47Accrued Interest: You know, on the CEO overrated, I think I would push back in here this way. I agree. I think most CEOs are overrated, but use quarterbacks. So we'll stick with quarterbacks. I think it's one of those things where, you know, there's such a thick right tail. Most of them are overrated. But if you have one of the top three guys, and I'll just use Patrick Mahomes and Tom Brady, like, why are they holding up the trophy year after year? If you have the top guy, I think those are actually underrated and they're always underpaid. If we went to the NBA, the max contract, if you have LeBron at his absolute peak because of the max contract, he's way undervalued.

45:19Accrued Interest: I think Mahomes and Brady have been way undervalued because they also value winning and consistency and all this sort of stuff. Like, I don't know if Daniel Ek, I think building this business from nothing, you know, hey, he's a great founder. He started this great company. I don't know if he was like an A++++ multibillion dollar CEO. I kind of think he was, but, you know, I would agree with you. Most CEOs are overrated, but a Daniel Lack or as much as I disagree with a lot of his stuff in Elon Musk, we could probably find three or four. Like the right tail is just so thick for that thousand ex-engineers to use the tech far lance.

45:50Accrued Interest: Like I would say those guys have been and are still underrated. Mark Zuckerberg, who I know you've done a lot of meta, I would probably put him in that category. I mean, I know people hit or miss based on the spending, but that would be the one area to discreement. Unless you have anything else on Spotify, I'd love to talk Netflix real quick.

46:06Simeon McMillan: I guess the only concluding thought I would have on Spotify is I think another benefit that Spotify got over the last five years to a decade is that they actually have a lot fewer streaming competitors than they used to. I think that it's a little bit hard, I think, to play Monday morning quarterback in terms of how Daniel Ek would have navigated the renegotiation of these rights deals five years ago. Because back then, and people might forget this, there were a lot more streaming alternatives. You had Tidal. You had, I think, Deezer. I'm sorry, I'm butchering the name. I literally forgot them.

46:42Simeon McMillan: So many of these up and coming upstarts have fallen by the wayside. And I think for a while it really looked like, oh, this is a copycat platform. But now they have the scale to compete with the best of the best. And, you know, you can do new things. And maybe this is the point where a B-level CEO can steer the ship because the foundation is that strong.

47:08Accrued Interest: Let's go to Netflix. So Netflix, you know, I think it's an interesting time. If I was a good podcast host, I'd have how much they're down year today and how much they've down since the Warner Brothers bid came up. But it's a lot, right?

47:19Simeon McMillan: Yes.

47:19Accrued Interest: The stock is, it's been a rough run for the stock. I think people are pretty curious. You know, as soon as they did the Warner Brothers deal, you heard skeptics saying, hey, what are they seeing in their numbers that they see the need to go do kind of their first big acquisition of all time? And we've talked about that. I don't think we need to beat them up for a deal that isn't happening in six months in the past at this point. But they've also they've been shifting their KPIs down around a little bit, all this sort of stuff. The stock was down after their most recent earnings report. So it's been a rough ride.

47:49Accrued Interest: And I think you have a different view. And I've heard from a lot of bulls, Bill Ackman, a prominent bull who, you know, he sold it in the doldrums of 2022 and he's back in now. But I know people who followed it all the time. I think a lot of bulls say, hey, yes, it's not going at our like top end A plus stream of what we wanted. But the business is performing really well. This is the cheapest it's been in a while. They think it's really interesting. They've won the streaming war. So I just love to turn it over to you. You know, as we sit here, September, is it September 16th? The stock's in the high 70s.

48:22Accrued Interest: How do you think about Netflix on a go forward basis?

48:25Simeon McMillan: I think this is going to be, well, first of all, I think it was very impressive for Ackman and Pershing to change their mind publicly and in a big way, because I know a lot of people who wouldn't go back to a stock that they were so publicly wrong about. And people dunk on him.

48:42Accrued Interest: It's like, hey, I'm going to make numbers. He bought the stock at 200 and sold it to 150. And this is all not adjusted for splits. And now he's buying it at 500. What a loser. And I'm like, hey, man, do you know how hard it is? I come on this podcast all the time and I say the stock chart is up and to the right. And I feel I missed it. Like whether he's right or wrong, the mental flexibility to be like, oh, I missed something that three X in my face. But I think the opportunities there, I that is incredible mental flexibility. And I think everyone should wish they had the ability to that. So I'm spot on.

49:10Accrued Interest: Great point.

49:12Simeon McMillan: So, yeah, so I think that he was smart to change his mind. And candidly, I think a difficult time, I've had a difficult time discussing sort of the Netflix, Warner Brothers and Paramount wars, because I think a lot of people have been rooting for Paramount as a proxy for how they feel about this administration. because I think that if we want to be hard on any CEO about making uneconomic decisions, I think Paramount's right there. Their UFC deals don't make any sense. A lot of their deals don't make any sense. Their margins aren't expanding. By every objective metric that people obsess over for Netflix, I never see that same smoke for Paramount.

49:59Simeon McMillan: I feel like it's a lot of cheerleading where the only standard of success is, do you get the deal done? But we're not here to talk about Paramount. Look, I think Netflix is, it's a value stock and they're just going to have to, they're just going to have to execute. I think being, I think too many people's minds are still anchored in the old world where I say as in media, a lot of people are biased to, did I like the show I just watched? But when you are a global streaming service, and I remind people, Netflix is the only truly global streaming service other than YouTube. So you can't necessarily judge it purely based on how many Emmys that they've won, which it still is a lot, or the hot show because that comes and goes.

50:44Simeon McMillan: I don't know if Netflix is going to change people's minds. It reminds me of when people a couple of years ago were saying, Apple doesn't innovate anymore. When's the last time that they made a product that blew you away? Well, guess what? Sometimes they don't have to. They changed the metrics and the answer they gave is that they want to focus on profitability and people got mad, tough cookies, suck it up because it's the truth. And if the margins keep expanding like they are, I think the operating margins at Netflix are in the low to mid 30s with a path to 40, okay? People can stay mad, but I'm not going to sit here and say that a company that's growing revenue in the low double digits, expanding margins, which again, if you actually got earnings growth, You're talking about high teens, 20 % earnings growth.

51:32Simeon McMillan: And I said on the last podcast, not to belabor this point, Netflix has gotten incredibly efficient in milking more and more out of the content library that they have. So they're less concerned about winning the war for cool, which ultimately will send you out of business. Like, it's really cool that Paramount Plus got UFC. All right. But nobody in a straight mind could actually argue that it was actually a good monetization thing. So, yeah, let the stock stay low. Let people stay mad. And they'll keep expand their margins. The P.E. of 18, whatever, will go down to 17 and then I'll re-rate. And just to warn your listeners and viewers, I said I think eventually they're going to do, they'll probably go after another big acquisition.

52:23Simeon McMillan: Ooh, there's nothing bad about acquisitions. I think it's absurd that they're anchoring their biases to what someone said three years ago. Three years ago, we said we're not going to do any acquisitions. Well, yeah, yeah. Well, it's five years later, and we killed all the competition, and we have a billion user hours. We're going to have to buy things from the graveyard of corpses of media companies out there. You know, and the one thing I would say about Netflix to watch out Netflix. They're picking off some of the best YouTube stars, sometimes for exclusive deals, sometimes for not exclusive deals.

52:55Simeon McMillan: They're using YouTube sort of as like their pilot season. OK, so they so. OK, I'm I'm very I'm trying to go for more names. People look for a very perception. I think boring and uncool is the very perception here. And I think that Netflix can keep winning on that.

53:13Accrued Interest: Let me start with the most interesting thing. Well, not the most interesting, but an interesting thing. The rise of AI videos. For a long time, I've thought the Netflix mode for value investors and everyone became, hey, as you said, they've got the global distribution. They've got a billion users. When they price any type of content, they price it over a billion users. Everyone else prices over 500 million, 100 million, 200 million. So the price per content is way lower. They've got all these advantages. They can make their own hits. Just think about what they did for suits or choose your legacy media property that flamed out on legacy media and became a huge hit on Netflix.

53:47Accrued Interest: That was all the bullish. You know, nobody could match them in scale. The rise of AI generated content, you know, and this goes in two ways. A, go listen to Facebook's call and hear them talk about how improved AI algorithms are causing people to spend 10 % more time on Instagram and stuff. So, number one, AI is getting better at generating short-form content that keeps you kind of just looped over and over and over again. in the old Netflix argument, our biggest competition is not HBO, it is sleep or whatever, right? Short form content is really getting up there. And then B, the rise of AI content makes it easier to make TV shows, makes it easier to make algorithmically generated AI shows.

54:23Accrued Interest: Netflix might have a lot of rise of AI generated competition. So I just love to ask you, we talked a little bit with Spotify, but I think AI is maybe more pertinent to Netflix, both on the short-form content and on the generated side. How are you thinking about AI as it relates to Netflix? Sure. So when I think about AI-generated content,

54:47Simeon McMillan: the biggest place I see AI-generated content is on YouTube, mostly in the children's verticals. I see a lot of creators who use AI to skirt or just flat-out break copyright law and take clips of, excuse me, of shows or movies or other movies.

55:06Accrued Interest: I wish I could show you my YouTube algorithm because you said children, but they know, hey, show Andrew an old Superman clip, show Andrew a clip from Billions, show Andrew a clip from Scrubs, and he's always going to watch it. Oh, yeah, that looks pretty interesting. Just like cut those videos up.

55:21Simeon McMillan: 100%. And for children, for example, so they know that, let's just use Sonic the Hedgehog, an outside party. So they have clips. again scurrying the laws from all the movies and whatnot whether or not you know Paramount's getting money for that is for a topic for another day but then they have truly AI slot videos where it's like oh trailers from movies that don't exist particularly in the kids ones I see a lot of that and kids don't know any better so they think yeah Sonic 10's coming out I'm far less worried about that for your listeners who aren't who don't have Sonic in the background part four coming out in 2027.

56:02Simeon McMillan: I'm actually way less concerned about AI content.

56:10Simeon McMillan: I need to see some use cases or some examples of actual AI shows that get people going before I care too much about it. I see the novelty of it. Can I just pause you there real quick?

56:25Accrued Interest: I definitely hear you, but AI is a lot about where the pucks is going, not where it is. And, you know, I think of that old video from, it was only like two years ago where it was Will Smith eating the cheeseburger. Do you remember that?

56:36Simeon McMillan: Right.

56:37Accrued Interest: And for viewers who don't know it, you know, they had AI generated a video of Will Smith eating cheeseburger and it's like, Will Smith has eight fingers on each hand and it looks almost like a SpongeBob square pan. It's like cartoonishly bad, but that was only two years ago. And then you fast forward today. And if you did it, you could have like a photo realistic, it would look like Will Smith eating a cheeseburger, right? And I hear you, you haven't really seen AI content take off yet, but it can generate pretty damn good clips. I saw one the other day. It was like, I had AI generated sitcom and it was not entertaining.

57:06Accrued Interest: But if you said, Hey, this was a sitcom and be like, well, there are some weird jumps, but yeah, it kind of makes sense. Like I'm not talking about where it is today, but if I run that for two years and especially maybe you have one writer monitor, like monitoring the AI and say, this doesn't make sense. Change this. I could definitely see a world where in two years you could have AI generate, you know, a friends knockoff, you know, six attractive friends who are just hanging out and cracking jokes with a real writer like monitoring it and creating a show. I could see that. And that feels like a pretty damn big risk to me.

57:39Simeon McMillan: it could happen but look i think that if if if these things are going to take off first of all um the actors who are already on edge are going to step in and and the and the actors and the actors unions and the guilds are going to step in to make sure that they get a piece of that because they're not going to let like their likenesses be uh be used with it without some sort of compensation.

58:07Accrued Interest: Isn't that the worry though? Because yes, if I was doing a friends, like just like, hey, here's extra episodes. Absolutely. I'm paying Jennifer Aniston, right? But isn't the worry I'm going to do, make a lookalike of Jennifer Aniston. I'm not going to call it friends. I'm going to call it acquaintances and it's going to be six lookalikes and it's just going to be one writer having AI generate the entire thing. It's like, hey, who are you going to sue? I'm not using Jennifer Aniston. I'm just using random cute blonde. Like it's no likenesses. I guess I'm worried about the internet getting filled with that slop.

58:34Simeon McMillan: I think that, again, I think this is more of a YouTube phenomenon, in which case, you know, I think this is a chapter, maybe a subchapter of the bigger fight between Netflix and YouTube. And I would just say, in the history of media, in every medium, I think people have thought it's more formulaic than it actually is. in every period of media you take the top show or genre they've had knockoffs of it that have tried to capture the zeitgeist again I keep going back to children's entertainment because with children's entertainment I think you get more cycles because new kids are always being born who don't have a memory of what happened before and so if you look at all the Disney all the Disney hits there are YouTube videos about this where Disney came out with I think A Bug's Life okay and then there was uh you know the b movie that came out or or another movie came out well

59:31Accrued Interest: it was uh disney was bug's life and then there was like ants from dreamworks and dreamworks went forward yep yeah yeah it's interesting it's always going to be there yeah so yeah so i i think that media is tough media stuff go ahead it it is very hard and look dick wolf all the dick wolf or Law and Orr, all the Chicago's, they are very formulaic. But as you're saying, it seems formulaic, but there's a reason that NBC is paying Dick Wook a heck of a lot of money to be like basically all of their primetime schedule. And they're not paying you and me. You and me could probably make a formula, but we're missing that last little 2 % that makes it magic.

1:00:12Accrued Interest: So I am with you there. Let me quickly go to, I just, I don't know if this is asking you for comment, but the NFL is back. And one thing that I thought was really interesting that I think speaks to Netflix's moat is last year, the NFL kind of opening game was in Brazil and it was on YouTube and it got about 17 million viewers. And this year it was in Australia and it was on Netflix and it got about 19 million viewers. Now that is a little bit apples to oranges because I think the Brazil game was on a Friday, which is where all TV ratings go to die. And the Netflix game was on a Thursday. But on the other hand, to watch Netflix, you need to log in and YouTube was completely free and uh you know the youtube game had patrick mahomes probably the biggest star in the nfl the australia game had some good teams but it did not have that and i know a lot of people said youtube played game with their ratings number so i guess what i'm saying is it's pretty wild that netflix can beat or match youtube's ratings like requiring a login so we can talk nfl is king we can talk netflix but i just thought that was a real bull point where hey they've got a lot of power here and they can drive a lot of things if you want to do 60 seconds on that

1:01:21Simeon McMillan: the threat from ai i think it just reminds people that netflix still has the ability to take a whole lot of money away from television they're still not done feasting off the off the decaying corpse of of the linear television market and and taking share from all their competitors and if they can take sports which they're showing that they can they can live off that for a long time because it opens up to new ad categories than they had before, like advertising and sponsorship. So I'm more bullish because I think that Netflix can become more like TV than I'm worried about Netflix losing necessarily to short form.

1:02:05Simeon McMillan: Although we need to watch the whole thing. I agree. All right.

1:02:08Accrued Interest: We are way past an hour, but I'd love to wrap it up with just this question. So we talked Spotify earlier and I said, hey, I'm preluding to Netflix. and you know when i read your articles it seems like you i think spotify is your top pick it seems like you're the most bullish on spotify and you can correct me on or not but when i look at netflix i mean i hear you a little bit more passionate i would say about netflix in this conversation and i look at netflix and just high level you know i said spotify is low double digit growth netflix is about low double digit growth uh spotify is you know they've got this margin expansion story netflix has the same margin expansion story and while spotify trades at about 40 times price earnings.

1:02:44Accrued Interest: Netflix trades at about 20 times price earnings. Now, Netflix has a little leverage on it. Spotify has net cash. So it's a little apples to oranges, different businesses, but just high level. I look at it and say, hey, if I was just quantitative metrics, Netflix is half the multiple. It seems to me that Simeon is equally, if not more bullish Netflix. Why would Netflix not be the top pick versus Spotify? And I know you're bullish both of them, but just if I'm saying, gun to your head, choose between your children, it feels like it should be Netflix over Spotify.

1:03:13Simeon McMillan: I mean, if you want to look over the next maybe five years or more, I could see that argument. I think that I'm more bullish on – I have more conviction on Spotify because I think that they have a lot of the same financial metrics, same story with less competition. Okay, because Netflix, I think a problem with Netflix, I think a lot of Netflix's alpha is going to have to come from earnings because there's so many opinions out there in media that there's always some new upstart. There's always going to be another media competitor around the corner. And honestly, I think that's gone to my head. I wouldn't be surprised if 10 years from now Netflix is trading at 30 times because they've become more of an entertainment super app.

1:03:57Simeon McMillan: I think some of the evolution of Netflix is going to have to take a little bit longer.

1:04:08Simeon McMillan: I sort of rate my conviction in terms of not just upside-down side, but what could go wrong. And I see Spotify having a much better glide path to 30 % than I do seeing Netflix. But, and stay tuned for this, this is going to make a lot of people mad. when Netflix starts bundling other people's services and they start selling access to the other streamers and taking a cut, if people are going to say, oh no, you're changing strategy. But I think Netflix has a lot more levers that they can pull. But I think it's just going to take a little bit longer because again, media is fun. And in fun businesses, you have irrational competitors that are going to stay there a lot longer.

1:04:52Simeon McMillan: Paramount should not be in the conversation. They're only there because the CEO has a father who's one of the richest people on the planet. All right. Like this should have been game over a long time ago if there was any other any other one. So and then you have YouTube as well. You know, I think that Netflix probably deserves a lower multiple than Spotify because Netflix is more of a direct competitor YouTube and YouTube's never going away. But no, I like them both. I think Spotify is a little bit cleaner and I don't want to have egg in my face right now. but no, I think the future is bright for both of them.

1:05:24Simeon McMillan: And you sort of just have to follow the earnings, not the noise. And, you know, we're past hits. It's about, it's about, it's about money. If they can get more NFL games, watch out. Great.

1:05:34Accrued Interest: Well, let's wrap it up there. Simeon McGillan from Accrued Interest. It's accruedint.com. I'll include a link in the show notes. I mean, I can't say I read everything you publish because boy, do you publish a lot, but I, the big ones I follow a lot. And look, you do stuff other than I focus media because I love chatting media, But I know you've been following the big Uber Insider buys and covering Uber, lots of tech stuff. So really appreciate you coming on. Looking forward to having you again in the future. And we'll chat soon.

1:06:00Simeon McMillan: Thank you very much, guys. And to all the students out there, go to the website. I activated student discounts. You can DM me, email me. I'm all the social platforms. I'm going to be having more student-focused content on how to pitch a stock, how to pitch a short, and giving you more versions of my best pitches so you can get ready for your investment clubs, for your internships. interviews, for your job interviews. So I'm going to be doing more of that coming forward.

1:06:25Accrued Interest: I'm laughing because how to pick a stock.

1:06:27Simeon McMillan: I mean, putting my money where my mouth is.

1:06:29Accrued Interest: Oh, sorry. You, you cut out for a second there. I'm laughing because how to pick a stock. I mean, you're stepping on my toes, I mean, and how to pitch a short, the answer is just, I loved your video.

1:06:38Simeon McMillan: I love your video and it was great. And I want to talk more about, you know, some of the components of it. Like how do you get a varied perception? How do you talk about incremental growth and not just top line growth? So there's no right flavor. You know, everyone, if you haven't watched Andrew's video, it's actually very fantastic. It's a great overview. And there's no one way to do it. Just focus on the company that you love and you'll do the work and you'll tell the story.

1:07:06Accrued Interest: I appreciate it, man. All right. Well, hey, this has been great. Looking forward to our Q4 checkup and we will go from there. Simmy, thanks so much.

1:07:12Simeon McMillan: Talk soon.

1:07:13Accrued Interest: A quick disclaimer. Nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.