Critical Open Letter to Zuck & Meta, Saudi Arabia’s $38B Gaming Investment, and Netflix’s Sub Rebound
What We’re Reading
3 articles + RockWater analysis to make you a better investor and operator.
Time to Get Fit — an Open Letter from Altimeter to Mark Zuckerberg (and the Meta Board of Directors)
Altimeter Capital 10.24.2022
The RockWater Take by Chris Erwin
This week is a big learning moment for our Content X Commerce Economy.
2 days ago Meta released earnings and the stock dropped 25%, to its lowest point since 2016.
Below are my 7 key takeaways…
🔷 FACE REALITY. In past 6 months capital costs got much more expensive and consumer willingness to spend decreased. You must adjust operating plans and growth forecasts for next 2 years. If you haven’t yet, you’re behind.
🔷 LAND OF EXCESS. “Too many people, ideas, and too little urgency.” It’s time to question what team members and business ideas are a distraction. Time to revisit your core biz model, and assess how to improve it.
🔷 WHEN NOT TO INNOVATE. “Innovation” is exciting, but it may not be what you need. Perhaps the easiest path to more profit is improving your fundamentals. Unsexy? It will be for those lots-of-talk visionary types. But I believe providing clear value to clients, having good sales and mktg systems, and earning each new revenue dollar at lower cost is ultra sexy.
🔷 KNOW YOUR PEER PERFORMANCE. Meta is wildly underperforming its peers on core metrics like P/E. Do you know your performance VS peers? Are you spending more / working harder to earn the same amount of revenue? This benchmarking is harder to do as a private company, but can be done with the right partners (ahem, RockWater Industries). As they say, “if you don’t measure something, you can’t improve it”.
🔷 PEOPLE MATTER. People are not numbers on a spreadsheet. I used to think that way with some bad early Wall Street training, but I outgrew that when I ran teams and had hiring / firing authority. But overstaffed teams means inefficiency, and everyone loses. So re-think your minimum team org; I bet you can do more with less. Your company performance will improve, and you’ll free up great talent to build anew at exciting startups. The hiring market is very tight at 3.5% unemployment, so the economy will thank you.
🔷 SET CLEAR GOALS. Brad proposed 3 simple steps to “get fit and focused” via reductions in headcount, CAPEX, and metaverse investment. Do you have simple operating plans going into 2023? Are they easy to communicate, execute, and account for? If not, your plan will not bear fruit.
🔷 EXPLAIN LONG-TERM BENEFITS TO OWNERS. Clearly detail the benefits of your operating plan changes. And ensure those benefits align with your biz vertical. At the intersection of Content x Commerce, many investors seek a clear pathway to profitability, higher efficiency of capital invested, and improvement of core fundamentals. Of note, this must not be at the sacrifice of LT shareholder value creation, but in support of it. If you can’t reconcile the ST with the LT, here’s a wild idea…return capital to shareholders and build anew.
Savvy’s $38B plan to make Saudi Arabia a Global Gaming Hub
The RockWater Take by Michael Booth
Saudi Arabia is doubling down on gaming and eSports — committing $40B for investment via their Public Investment Fund (PIF); $13B of which is reserved for acquiring a “leading game publisher”
PIF already holds large stakes in gaming: $3B in Activision, $3B in Nintendo, $1.9B in Electronic Arts, $1.4B in Take Two Interactive, in addition to a variety of smaller investments
At RockWater Industries we’ve covered extensively how new buyers are driving up multiples for IP across film / tv, sports teams / leagues, audio, digital publishers, and videogames.
Gaming in particular has seen many new buyers enter the scene in the past year: Netflix bought 3 different gaming studios, NYT bought Wordle, Spotify bought a Wordle competitor, financial exchanges like Binance invested in P2E games, Bytedance acquired 2 gaming studios, and much more.
Now sovereign wealth funds are entering the mix with a big splash.
Not a bad time for operators at gaming studios to explore an exit
More deal announcements to come!
Netflix Adds 2.4 Million Subscribers, Reversing a Decline
New York Times, 10.18.2022
The RockWater Take by Alex Zirin
It seems, in fact, that all is not yet lost for the stalwarts of premium OTT streaming.
While increased competition has accelerated consolidation and cost-cutting, Netflix has shown considerable signs of life. Notably, the majority of its new subscribers have come from international markets, snapping its streak of customer losses this year.
Notably, these positive signals are coming before Netflix introduces its lower-priced ad-supported tier, and turns on its password sharing prevention tools. Therefore, it’s not unreasonable to think that, once these changes are implemented, subscriber growth could continue.
Earlier this year, Mike Booth commented on a quote from a Hulu executive who intimated that he was unconcerned with which subscription tier a user chooses. In fact, Hulu earned about $0.50/month more in ARPU on ad-supported users than those that are ad-free.
Assuming that Netflix will earn similar revenue figures for each user, the path ahead certainly looks less fraught than it did in quarters prior.
An interesting note: throughout the expansion of modern streaming, Netflix has served as the market bellwether for its peers. When they show signs of struggle, media symbols respond in a similar fashion. Therefore, and somewhat counterintuitively, what is good for Netflix is good for its competitors.
There is still much unknown about how hard this “hard landing” will be, and how it will further impact media businesses. That said, Netflix’s resilience is encouraging.
If these insights are relevant to projects you are thinking through, ping us here. We’re always excited to riff through ideas!