Sunday Finds + 3 Thoughts From Last Week
Podcast episodes on Autodesk, Mercadolibre, and Pacifico Airports this week
Welcome to Chit Chat Money’s Sunday Finds + 3 Thoughts From Last Week. In this newsletter you will find three topics I thought about last week, links to shows we’ve recently released, and links to some interesting articles, podcasts, and tweets. Check out the archive here.
Podcasts From Last Week:
Does Pacifico Airports Have An Impenetrable Moat? With Ian Bezek (Ticker: PAC)
Investing Power Hour #36: Holiday Spending Data, TSM Bets Big on AZ, BREIT Halts Redemptions
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1. Why is HBO so good at making TV shows?
The season finale of the White Lotus is out this evening. It is the best show on TV right now, with viewership momentum building each Sunday. If you haven’t heard of it, go try it out. Trust me.
Unsurprisingly, the show is produced by HBO, the leader in high-quality TV. Before White Lotus, The House of the Dragon reigned supreme, and in early 2023, Succession will likely carry the baton forward in this category. All are produced by HBO.
Netflix crushes HBO in viewership, but they — at least in my opinion — have failed to build a studio that can pump out quality TV shows like their streaming competitor.
But why? What makes things so different at one studio vs. the other? They use the same actors, lighting, and technology, and have roughly the same budgets. And yet, after tens of billions of dollars invested in original content, Netflix has failed to capture the magic that HBO has. For all intents and purposes, producing TV shows should be a crapshoot and unpredictable, but it isn’t.
Culture clearly drives some sort of competitive edge for HBO, because Netflix has the advantage in almost everything besides the actual production of content (which is why they bring in much more revenue).
Something to consider: HBO has a reputation as being the most creative TV studio. This attracts the most creative and talented TV workers to go there out of all the choices they could make. Along with an established brand built up over decades, this combination leads to a competitive edge in producing the highest quality TV shows. A dynamic like this feels similar to investment/commercial banking, where the industry leaders have been the same for decades even though at its core the service is a commodity.
It makes things all the more disappointing that HBO was owned by AT&T and now the monstrosity that is Warners Bros. Discovery. Apparently, executives are thinking of naming the combined streaming service of Discovery+ and HBO Max “MAX.” First, you don’t want to combine HBO shows with reality TV stuff over at Discovery. That’s just common sense. And second, how are they not leading with HBO in the name of the streaming service? The brand has so much value, but they don’t want to use it. Crazy.
HBO probably has a strong enough brand to survive these missteps, but I wonder what the business will look like five years from now if its parent company keeps fumbling the bag. Can they survive another bad merger and come out clean on the other side?
2. Video game console supply soars in November
The NPD Group released its November update for the video game market this week. Long story short, it was a great month for the industry:
U.S. consumer spending on video game content, hardware and accessories reached $6.3 billion in November 2022, an increase of 3% when compared to a year ago. Performance was driven primarily by 45% growth in video game hardware dollar sales compared to November of 2021, led by PlayStation 5.
The most important metric from the report was that hardware (i.e. console) sales were up 45% from a year ago. The large console makers Sony, Xbox, and Nintendo have all seen supply shortages over the last two years or so, really since the new Xbox and Playstation generations came out.
Now, the supply shortage is finally ending. Last year, during the holiday quarter Sony sold 3.9 million PS5s. If November’s growth is an indicator for the entire quarter, Sony may sell 6 million consoles around the world this holiday season.
What does this mean for the industry? Well, quite simply, more consoles equal more game sales. More game sales equal more revenue, both from full-game purchases and add-on content. Unless this is a head fake, I would expect the industry to return to growth over the next few quarters as more and more supply hits the market. It will also be great for publishers that have a lot of exposure to the console market.
On top of this, the industry seems to be finally moving on from the $60 per game price barrier for premium titles, which has been in place since the early 2000s. Microsoft made a semi-official announcement that its first-party titles will now cost $70 apiece, and EA’s new premium Star Wars game will be $70 at launch.
With how much value customers get from a single game (typically playing dozens of hours, at least), there is plenty of room to move beyond $70 as well.
3. BREIT and the problem with the illiquidity premium
Real estate investment trusts (REITs) are typically a snoozefest. But this week, Blackstone’s decisions around its $69 billion private investment fund called BREIT have thrown the industry into the spotlight.
BREIT, for various reasons, had to recently gate investor withdrawals, and investors are angry.
Phil Bak, who is very knowledgeable about the space, did a Twitter thread on what’s happening:
And he had a Substack post:
Without getting into the details too much, here’s what it looks like happened:
Blackstone started a REIT that was not publicly traded called BREIT.
Since it only appraised the value of its assets periodically, the fund had low volatility.
This low volatility, along with a booming real estate market, attracted many investors to BREIT. People started crowding into the fund.
When the real estate market turned in 2022, most REITs put up poor performance.
BREIT’s performance looks better than publicly traded REITs in 2022 because of how little it appraises its assets.
Investors saw the writing on the wall and tried to sell out of BREIT at a high asset value.
BREIT had to gate withdrawals due to an increase in redemption requests.
Investors are angry at them because they know fund performance is about to tank.
This is a clear example of why illiquid assets deserve a discount over liquid ones, no matter what the stated “volatility” is. Because you never know when a manager will be forced to postpone your redemption request. Who cares about volatility when you can’t get your money back when you want it?
See you next week,
Brett
***Our fund, Arch Capital, may own securities discussed in this newsletter. Check our holdings page and read our full disclosure to learn more.***
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3 Good Reads
Ally Financial (ALLY) - The 10th Man Blog
Aside from actual loan balances, which I believe should remain relatively steady over time, there are three key drivers of profitability for the Consumer Automotive business: Net Interest Margins (NIMs), Net Charge Offs (NCOs), and overhead. Exhibit T illustrates what ROE for Consumer Automotive looks like under various scenarios if we flex some of those variables - you can play around with these simple inputs in my model (here). Using this simple illustration, the steady state ROE in the auto business is somewhere in the low teens range, but a relatively small shock to NCOs or NIMs has a large negative impact to ROE, particularly if we assume that overhead is largely a fixed cost (which the data seems to suggest). That’s clearly what the market is worried about in the near-term.
Exploring The Lithium Industry and Its Future - Lawrence Hamtil
However, product differentiation is a key criterion we use to determine if something is a specialty chemical. For battery quality lithium, which is the majority of demand, the product is specialized based on the customer’s (battery producers) requirements. Currently, each battery producer sets different requirements for the maximum impurity levels allowed in the product. As a result, a lithium producer is typically unable to sell the exact same product to different customers. For example, the lithium producer Albemarle may sell lithium hydroxide to both Panasonic and LG Chem to be used in batteries, but the product sold to Panasonic may not meet LG Chem’s requirements and vice versa. The reason for this is that the impurity profile of lithium affects a battery life. Given this product differentiation, we classify lithium producers as specialty chemicals producers.
Hacker News Post Comparing Google and ChatGPT - Hacker News
Large language models like GPT are one of the biggest areas of active ML research at Google, and there's a ton of pretty obvious applications for how they can be used to answer queries, index information, etc. There is a huge budget at Google related to staffing people to work on these kinds of models and do the actual training, which is very expensive because it takes a ton of compute capacity to train these super huge language models. However what I gathered from the talk is the economics of actually using these kinds of language models in the biggest Google products (e.g. search, gmail) isn't quite there yet. It's one thing to put up a demo that interested nerds can play with, but it's quite another thing to try to integrate it deeply in a system that serves billions of requests a day when you take into account serving costs, added latency, and the fact that the average revenue on something like a Google search is close to infinitesimal already. I think I remember the presenter saying something like they'd want to reduce the costs by at least 10x before it would be feasible to integrate models like this in products like search. A 10x or even 100x improvement is obviously an attainable target in the next few years, so I think technology like this is coming in the next few years.
1 Good Listen
Iran’s Protests Show No Signs of Slowing Down - The Journal
In September, 22-year-old Mahsa Amini died in the custody of the morality police, who arrested her for allegedly violating Iran’s dress code. Afterwards, protests erupted across the country. WSJ’s Sune Rasmussen explains how the death of one woman has led to calls to overthrow the government.
Smart and Funny Tweets:
