“Our goal is not to make friends. Our goal is to be right.”

On this episode of Recode Media with Peter Kafka, analyst Rich Greenfield came by the studio to talk about what an industry analyst actually does all day. It turns out, analysts spend a lot of time talking to companies and learning about what is coming next. And, as with any business that relies on predicting the future, they often get it wrong.

You can read some of the highlights from the interview at the link above, or listen to it in the audio player below. We’ve also provided a lightly edited complete transcript of their conversation.

If you like this, be sure to subscribe to Recode Media on Apple Podcasts, Google Play Music, TuneIn, Stitcher or SoundCloud.


Peter Kafka: This is Recode Media with Peter Kafka. That’s me; I’m part of the Vox Media Podcast Network. I am here with Rich Greenfield. If you listen to this podcast, you have almost certainly encountered Rich Greenfield before, somewhere on CNBC, tweeting, maybe quoted in one of the many stories about this business. I talk to Rich periodically. I see Rich all the time. Rich, say hi.

Rich Greenfield: Hi.

Rich, what’s your actual job, besides being a tweeter?

Our job is to put buy-sell holds on media and technology stock, so we have to figure out whether stocks are going to go up or down.

You work for?

BTIG, which is a global financial services firm broker-dealer in New York, and we have 500-plus employees, and the firm is trying to help clients make money.

You’re a media analyst?

Correct. Media and tech analyst.

Media and tech. A lot of media.

Well, what’s the difference between media and tech now? I mean …

That’s the premise of this very podcast and my job for the last … 20 years?

Worlds are kind of colliding.

Rich, I was googling you earlier this morning. I found your LinkedIn; it comes up right away. Describes you, since it’s your choice, as a media futurist. That sets off alarm bells for me.

In a good way or a bad way?

Not the good alarm bells. I think people who describe themselves as futurists usually don’t have a day job. But you do have a day job, so …

I do.

I can verify you’re getting paid. You’re not getting paid to attend this thing.

No.

You’re, like we said, one of the most prominent voices in that media-tech intersection, so that’s a good thing for you, right? That’s kind of your job? You’re supposed to be out there.

It is. We’re supposed to … look, the best way to learn is to talk and meet with people, and I think the more we talk to people, whether it’s you, or industry executives, or investors in the space, the more we learn, the more we think. The more people we meet, the bigger our network, and so for us it’s all about trying to build that network and trying to build around a set of theses, because I think the thesis is what drives good ideas in the long and the short side of stocks.

Do you have a big overarching thesis about media and tech, other than that they’re combining?

Well, obviously they’ve been combining. It’s funny, I started … The building we’re broadcasting from is 85 Broad, where I had my first job at Goldman Sachs, and my first week at Goldman Sachs, it was the Communacopia … it had just been created the year before, the whole concept of Communacopia, which I don’t know how many years it’s been, but I think I started at Goldman in Communacopia 3.

If you’re old, and/or you did this sort of thing, you’ll know that Communacopia was the big Goldman Sachs media conference.

Sure, which was built around the concept of convergence. So look, there’s obviously that convergence that continues to play out every single day, but I think what’s changing now so fundamentally is how mobile is changing people’s perceptions of what has sustainability in media. And by that I mean it used to be that you created great content, you launched a cable network, you got to 40 or 50 million subs and you had really good content, and you were really successful. There’s no rulebook for mobile. Everything is being rewritten.

We’ve seen multiple cycles. You think about the VHS cassette to the DVD, you think about tape to CD … everything is being ripped up in media right now, and I think the mobile phone is so disruptive. Obviously there are lots of industries, but purely looking at media, when you have something like YouTube, or you have something like Facebook, or Twitter, or Snapchat, the amount of content that’s being consumed with no paywall changes everything.

Right. To put a fine point on it, the amount of content that’s being consumed for free, right?

I’m listening to this podcast, I’m assuming …

For free.

For free. That’s pretty different.

Yeah. So the definition of what success is in media is different right now. If you’re a skeptic, you might say: Yeah, this is all gonna revert back to a mean, this stuff is not going to grow infinitely forever on trees. At some point someone will pay, a consumer will pay. There’s actually a big movement toward subscription right now, in terms of models. I think a lot of folks are saying, “Actually, we would like the consumer to pay 10 bucks for this.”

Sure, but imagine the world where you had … well, think back just two years ago. Your average cable network — we’ll take Discovery Channel or USA Network, doesn’t really matter — you had 100 million subs paying you X amount per month, and what was fascinating is, it didn’t actually matter if you wanted the content or ever even watched the content. Imagine 100 million people paying for this podcast whether they actually listened to it or not. It’s a good business.

Yeah. It’s a great business. You can imagine why you wouldn’t want to give it up. And this is one of your theses right now, right? You are very bearish on cable and the cable industry, that’s no longer a unique idea.

Cable networks.

Cable networks.

Let’s be very clear. The cable system business is a very different business.

The people who own the pipes, that’s interesting to you. The people who are bundling together ESPN 1 through 8 and trying to get 14 bucks for that, plus a bunch of other stuff you don’t want, you’re negative on …

That’s a tough business.

That’s a tough business. Up until a few years ago, most smart people said that’s a really great business. Maybe the growth is going to reduce, but it’s a pretty good business, and we can talk about that for a bit, actually.

What I was getting around to in your introduction, or meandering through it, one of the other things I wanted to point out is not only are you one of the most prominent voices in the space, there are a lot of folks, particularly those I think who work at old media, TV networks and cable networks … really upset with you. They dislike you. I don’t know either personally or professionally, so much so that they got Michael Wolff with the Hollywood Reporter to write an entire piece dedicated to you and what a … I don’t know, if you’re a bad person, if you’re a bad analyst. Maybe, he said, well actually you’re closer to a journalist.

That’s a compliment, I think. No, I think it was a compliment.

That was pretty great. This is from February 2016, where he single-handedly, he says … I’ll just read the quote: “No one may have contributed more to the decline of traditional TV stocks this past summer and fall and to the rise of the new tech-centered TV industry, especially his most passionate cause, than this analyst.” That’s tremendous praise, it sounds like. You were able to crater stocks single-handedly. You’re able to push Netflix up single-handedly.

We’re just trying to help people make money. It’s really that simple.

Why do you think you engendered this kind of enmity?

I think we’re really focused on honesty, intellectual honesty. We’re really willing to admit our mistakes. Obviously when we have strong opinions, we’re loud and we keep banging the drum on them repeatedly. I think it’s very hard, especially when you’re negative on companies. Take something like Disney, where we were I think focused on the ESPN challenges way before the market was. It’s hard to get anyone to pay attention, especially on the short side. There’s a natural lift in the market for companies, and so …

You’re going to go follow the market. You’re saying, it sounds counterintuitive to some people, but it’s harder to pay attention to a negative story about a stock than a positive story.

Because there’s not that many people that are negative, and so when you are negative …

This is within the world of finance, right? There’s plenty of people who say …

I’d say the broader media. I’d say the broader media doesn’t pay attention until you really start … I mean, you think about recent events. If you look at some of the big stories that have broken, it’s hard to make that story unless you get really loud. I think you need to make a lot of noise to get people to pay attention to you, and obviously we’re not always right, but we try to be right far more than we’re wrong, and when we do make mistakes we admit we’re wrong. But look, nobody ever likes when you criticize what they’re doing. I think some companies actually are far better at handling criticism than others. Some just don’t like it, and every company’s welcome to their own way of running their business, but we’re not going to stop doing what we do.

Do you think it’s your opinion that bothers them, or you’re that loud? I guess the other thesis of this Michael Wolff piece from a year and a half ago is that you’re quoted too much, and that everyone quotes you, and he’s also running down people like me who are journalists who quote you a lot. Actually, I don’t quote you very much. But a lot of other people do. You’re always available to be quoted. He seemed to think that’s also bad in some way.

He’s entitled to his opinion.

There are lots of analysts who do what you do, right? Most of them are fairly anonymous, unless you’re really in the business, and even then you might not know them that well. If you’re really in it, you might know that, all right, Todd Juenger at Bernstein is also sort of bearish, but he’s not quoted nearly as much. People couldn’t identify what Todd looks like; a lot of people can identify what you look like. When did you decide, “I want to make noise, I want to be more prominent, this is part of my job is to be better known”?

I think it was looking at the … how do you really learn? I think the best way to learn is to be a magnet for information, and so in many ways the louder you are, the more visible you are, the easier it is to gain access to …

You get a flywheel. People come to you because they recognize you.

This is a complete flywheel, and I think the more visible we are, the more information and networking we can do. I’m sure the same reasons you and I run into each other at so many of the same events is that there is that network effect of information, and it’s leveraging that. The bigger your network, the more information you can leverage, and hopefully the smarter decisions we can make on stocks, to make people money.

I think if you weren’t around, most people wouldn’t know what BTIG is. Is the fact that you’re working at a fairly unknown financial firm, is that another reason that you have to be that much louder? If you were at Goldman doing what you’re doing, would you be quieter?

BTIG’s now kind of the … I think we’re the 13th largest broker-dealer in the world, in terms of shares traded. Obviously in the media world, you probably wouldn’t hear that much about a broker-dealer. We don’t do it specifically for raising BTIG-specific awareness.

But that is kind of your job. Part of it, though, is to raise your profile so people might want to come through BTIG and do business with them?

Look, our job is, if we make clients money, they’ll want to do business with BTIG. We’re trying to help our clients make money. The more money we make them, hopefully the more business they’re going to want to do. Honestly, it’s very client-focused.

So leaving aside Disney and the TV guys, on the companies you’re covering on the digital side, who are you most bullish on right now?

Well, look, I think if you look back …

Things change, right? So we’re recording this in late May. You’ll probably get this in mid-June.

I think if you were to look back on the last 18 months, we’ve been highly critical of Disney and really excited about what we see happening at Netflix. And we really see those very much … that thesis is joined at the hip. There is more and more content flowing without the bundle. More and more subscribers are not only just watching but paying for Netflix. They’re getting stronger, and it’s actually causing the legacy bundle to be under more and more pressure. So the more people that …

So Netflix’s success comes at Disney’s pain?

I won’t say it like that. I’d say Netflix’s success, Amazon’s success, Hulu’s success comes at the expense of the legacy multi-channel bundle. The greater the multi-channel bundle comes under pressure … who’s the biggest loser? Who has the most tied to that legacy bundle? You mention the $14 that Disney gets … ABC, Disney, Disney Channel, ESPN … The biggest loser if the bundle breaks? We started the hashtag “goodluckbundle.” If that bundle breaks … I should’ve worn my t-shirt … if that bundle breaks, Disney loses more than anyone else.

Even though, by the way, Netflix is paying Disney a bunch of money right now for access to some of that content.

Absolutely. Disney made a very big mistake, and I think if you talk to people inside of Disney, they very much regret the deal they did. They really empowered Netflix in a way …

And this is what a lot of the networks feel, right? A lot of the networks, for a couple of years, were happy to sell Netflix their leftovers.

Not just their leftovers, their good stuff.

Their good stuff. They said, “Listen, they’re paying, their money’s good, it’s great, let’s take advantage of these digital guys while we can.”

And then some others … it gets even worse than that, right? Because some of them made that decision that you just said. Some of them said, “Oh my god, everyone else is selling. If we don’t sell, our margins will be worse, or our profits will be worse. So even though we know it’s the wrong thing to do for the business, do we sell or not sell? And it’s total prisoner’s dilemma, of it’s going to happen with or without you, and so we’ll sell too.”

And then Netflix actually has all of this content, and they can say, “We don’t need that, and you know what? We’ve learned what people like. We’re going to go out and start making stuff ourselves, like ‘Stranger Things’ and ‘13 Reasons Why,’ and we don’t even need your content as much as we used to.”

And they’re a couple of years into it. When they started, everyone said, reasonably, “Well, what does Netflix know about making content? That’s a whole specialized thing, and they don’t know what they’re doing, and they’ve got a guy who used to run a second-ring video chain in charge of their content business.” They have made it look fairly easy. You throw a bunch of money at stuff, you buy a bunch of stuff that’s already made and people don’t want, and then you start making your own, and eventually people watch some of it.

Sort of like HBO back in the day, right? Or AMC … remember, HBO used to be old people’s movies. AMC used to be American Movie Classics. And remember FX … how about FX? If you had John Landgraf on here, right? FX used to be “Ally McBeal” and “X-Files” reruns. Everyone starts in the media food chain or the entertainment ecosystem with other people’s old stuff.

Right. ESPN was logrolling, literally.

Literally, and Australian Rules Football. But then you build up to bigger and bigger content that you own and control, and I think that’s actually an important distinction that you just raised. ESPN really still is a buyer of other people’s content. I think what is really interesting about Netflix, just like what HBO has done over the last 15 years, is they actually own and control that content, and increasingly own and control it globally, which creates a tremendous amount of leverage and value creation that I think is an important point.

It’s funny, because a few years ago, when you looked at a media business, if they own a studio — a Warner Brothers or a Paramount — generally you didn’t factor much of that into it, right? What you really factored was, what’s their distribution look like? What’s the health of their cable networks? Now things have flipped. Right now, people are much more interested in movie studios again and their content libraries and what you can do with that. Do you assume this stuff is sort of cyclical? Or to pick a different metaphor, there’s a pendulum and things swing back, and eventually distribution becomes very important again?

Let’s look at the word “distribution.” What’s the definition? It’s funny, I used to think of distribution as being … because obviously there’s content creation, which is Disney makes a movie, or Disney makes a TV show. There is this programming and packaging layer called cable networks that kind of sometimes gets talked about as distribution, but it’s really just an aggregation vehicle. And then you have the true distribution, which is the pipes that gets it to your house.

The pipe seems like it’s increasingly being commoditized. Whether it’s broadband to your home or wireless, we have lots of choices increasingly for wireless, how you get it. The hard part in a wireless world is, how do you get an app that people use every day? Nobody’s using WatchESPN on their phone. Nobody’s using the USA Networks app. All of the media companies are struggling to get that destination or that kind of … I want to say app/platform on mobile. The platforms on mobile that we all use every day, whether we’re talking Facebook, Snapchat, Twitter, Google, etc.

There’s only a handful of them that have that kind of usage.

And they’re dominant, in a very different way than you had on the TV set, where you used to have lots of aggregation points, lots of programmers. That’s a meaningful change. Will it ever swing back to where the networks have value? I don’t think so. The reason is, you’ve got people with really deep pockets. I mean, I think the most important thing you said is, “Look how easy Netflix is making it.” And it’s not easy, right? I mean, you have to spend. Netflix …

It’s billions of dollars.

Let’s just be clear. They’re spending $8 billion just this year.

But it turns out that if you can write a check like that — and I’m sure this is what everyone at Google and Apple and, clearly, Amazon’s already doing as well — it doesn’t seem to be a barrier to entry other than cash.

But what’s amazing is four years ago … four years and three months to when this podcast airs, “House of Cards” came out for the first time. So, effectively a little over four years ago, there was no original content that mattered at all on Netflix. And four years later, there’s more content than anyone could humanly watch, and it’s all just about spending money. Talent, content … anyone at NBC, anybody at … any talent that’s out there is going to want to work for someone who has massive distribution, can get you the same awards, and visibility, and success, and fame that you got in the old world, and will pay you the same if not more.

If not more. Ask Dave Chappelle and Chris Rock, who are getting 20 million …

They’re laughing all the way to the bank.

This is a good time to hear from an advertiser who’s going to help pay for this awesome free content. We’ll be right back.

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I’m back here with Rich Greenfield, who has promised to do this all day, but I think we’ll do multiple podcasts. You, Jason Hirschhorn, Bob Lefsetz … these are the guys who want to go, like, hours long on the podcast, but …

We should do one with Jason.

I don’t think the internet is big enough for that. We could try, though.

I love it.

Can we talk a little bit about your job? How you do your job? What your job entails? You’ve been doing a version of this, I think all your life, right? You’ve been an analyst …

23 years.

Right out of school?

Right out of undergraduate.

How do you get to Goldman right out of school?

Right place, right time.

There are a lot of people who want to get to Goldman, right? This is sort of the … that’s the mountain for a lot of people? It’s … they’re running the government, surprisingly, under the Trump administration.

Maybe it was radio broadcasting at Brandeis.

Is that what you …

Running the local radio station, WBRS. That’s where I started talking into a device like this.

You started doing that, and then did you wise up and go, “Oh no, no, no, no. I don’t want to be creating content for a living. I want to be on the financial side of this”?

Look, I think the two sides of my brain was either sports broadcasting or working in finance, and finance was just something I was passionate about.

I don’t want to get too far into the weeds here, but just explain the model of how your business works, broadly. Are you being paid based on the volume of trading that goes on within BTIG? Do you get paid based on the research notes you put out? How do you define success based on what you do?

Adding value. It’s literally — and I’d love to fine tune it more for you — but it honestly is adding value.

But you can’t come to your bosses at the end of the year and go, “I added a lot of value,” right? You’ve got to point to something.

Sure. But I think you can obviously look at the traction we’ve had with research calls and with the impact we’ve had on the overall business that that generates. It’s fairly … I think, honestly, it may seem complicated from the outside, but from the inside, when you actually see the impact that meaningful research has, the value add of the research.

So you can point and say, “Look, I was early on ESPN and being bearish on Disney, and that has led to traction, and we can sort of correlate here”?

Disney … we put a sell on Disney at 111 and a half back in December of ’15. I think people thought we were crazy. I mean, we got death threats, it was crazy the pushback we got. And Disney is still trading below that level, so despite a massive positive move in the market … look at the positive move in Netflix. Being negative on Disney … obviously, it’s bounced off the bottom, but being negative on Disney has either saved investors, meaning our clients, substantial money if they’re long owning and can only buy stocks. If they can short stocks, this has been a tremendous relative underperformer that’s made them a lot of money relative to other things they could’ve bought.

And because you’re making calls, you get calls wrong. When you make a call that’s wrong … you were wrong on Facebook for a long time, right? You were bearish on them. You were wrong on Zynga. Again, the Michael Wolff piece tallies all. Are you penalized for being wrong? What’s the penalty for being wrong on a stock?

Look, if you are not willing to admit your mistakes, I think there’s a very high penalty. I think what we do that I think we get a lot of … it’s really just a part of my own philosophy of this job is that you need to be just as bold and loud in admitting your mistakes as you are in talking about your successes. And so we’re very happy to say, “Look, we were wrong.” Zynga’s a great example. We really saw something in gaming. We came out, we were absolutely wrong, and we came out and said it.

So people who bought Zynga stock based on your advice lost money?

Absolutely.

And you say, “We’re sorry about that”?

It was a mistake.

And then you say, “But trust us, we’re gonna get the next X number of calls right.” Or, “We’re gonna do our best to do so.”

I guarantee if we got the majority of our calls wrong, we wouldn’t be still where we are.

I used to work for Henry Blodget, who made his name calling Amazon years ago when he worked at a firm no one knew, a lot of people didn’t know. And he’s quite frank about the fact that the way you make a name for yourself on Wall Street, at least as an analyst and in media, at least doing a version of what he does, is you take big positions. You say, “I don’t think Amazon’s gonna do well.” You say, “I think Amazon’s gonna hit 400,” back when it’s doing 67 or whatever it is. You take bigger swings, you take louder positions. Does that open you up on the downside more? If you say Amazon’s going to 400 and you get it right, you’re a celebrity. Is the downside equally big, or is there less downside to being wrong in this kind of business?

Well, obviously we’re not investing actual money, so if you had a hedge fund in here and they’re actually investing money, there’s obviously a greater immediate downside. It would be illogical for me not to say that if you were an investor versus an analyst, the actual investor has more direct downside on a bad call. The reality is, nobody bats 100 percent. Nobody bats 80 percent. Stocks and companies are hard to forecast. We think we do it better than most, which is why we are where we are, and hopefully the reputation that we’ve built … and we let our reputation speak for itself.

But the reality is, we spend a lot of time on the thematic side of it. You mentioned at the very outset the futurist side of it, and we really take that to heart because we’re really trying to figure out how the pieces move, how the tectonic plates move. We got excited about Netflix. We didn’t cover it for many, many years. We first got excited about Netflix because we saw what was happening to broadband consumption. So we’re spending a lot of time with the cable companies, which we did cover — the Time Warner Cables, the Charters, the Comcasts — and it was looking at what was happening to those companies and seeing the usage on the network of something like Netflix, and seeing what that meant therefore for a company like Netflix relative to the legacy ecosystem.

But people are paying Time Warner Cable 100, 150 bucks, 200 bucks a month, but you can see increasingly through outside people that, “Holy cow, they’re using a lot of Netflix on this network they’re paying Time Warner Cable for.” Time Warner Cable doesn’t get paid for that.

And they’re watching less ABC or they’re watching less NBC, and you’re going, “Wow, there’s something here.” And so it’s really looking for those thematic shifts, and using that as your way to make a substantial research call that makes investors money.

In the old days, back when Henry Blodget was on Wall Street, the work that he would do, the analyst work, was tightly tied to banking, and so there was this connection. The idea was, stated or unstated, you would write positive things about a company in the hope of getting its banking business. That work has been split up a bit, in part because of Henry, right? Or, Henry was the sort of symbol for what was wrong with that system. You guys are not generally bringing companies public, right?

Look, we have a small investment bank that’s certainly growing. It was very small and is now growing rapidly, but it’s still not the principal part of our business.

So you’re not compensated? And by the way …

We’re not compensated at all.

But there are other folks who are not in that business as well … MoffettNathanson, some of those guys where that business is no longer tethered to banking, directly or even indirectly.

We have one goal. And I think when you look at the way we approach the stocks, and you made a comment about a lot of companies maybe not always liking us. Our goal is not to make friends. Our goal is to be right, and that’s really fundamentally how we think about it. And so we put our research out there, and we kind of walk around with a bullseye on our back every single day of, “Here’s what we think.” We’re going to live or die by what we write, and we take pretty passionate positions.

You look at something like Pandora, where we’ve been viciously negative right from the outset … no longer have a strong opinion because the stock’s fallen to a level where it’s no longer interesting on the long or the short side. But that was a place where there was a tremendous tailwind of investors loving the idea of what Pandora was doing, and we just fundamentally thought competition was going to crush them.

Yeah. Now it seems like the real value for Pandora actually is the fact that they have a user base that someone else might see value in, because there’s so little distribution, like we were talking about a few minutes ago.

When we put out our original sell thesis, it was this thing has downside of $10 because at $10 you’re roughly at two billion, and we thought just the number of users relative to the market cap might make it interesting for someone to acquire. But as a standalone ongoing profitable business? Didn’t really have value.

You said earlier, you and I see each other at these events all the time, again, which is different than other analysts. I tend not to see them at the … especially around startup stuff. You spend a lot of time with startups. You spend a lot of time seemingly either advocating on behalf of startups … Cheddar, you’re a fan of. A company like theSkimm, we’ve had them on this podcast. Those guys aren’t going to be a public company for a very, very long time. It’s much more likely they’ll be acquired by a public company. What’s the benefit to you and your clients for you spending time with fairly small startups? Cheddar is a very small company.

Cheddar, to me … there’s two angles on Cheddar. On the one side of …

We should explain what Cheddar is, for those people who are not following it.

Cheddar is … they call themselves a post-cable network. I would look at them as they are a direct-to-consumer, live-video platform that will either be … you can buy direct, like you buy Netflix, or maybe packaged in with a Sling or other service.

It’s supposed to be digital CNBC, millennial CNBC. They film at NYSE. It’s a very small viewership … couple of hundred people at any given time?

I think it’s actually bigger than that. I think it is bigger than that. You should have John on.

Let’s say it’s a couple thousand. John would also go an hour, but we can have John on.

What’s interesting to me is, content that all of a sudden … so when Cheddar is offering service to an MVPD, they’re willing to go on just for an advertising revenue share. So whereas that $14 we talked about for Disney, when a Cheddar is willing to go on and just say, “Share revenue with me,” that’s a really disruptive business model.

So I get that, intellectually, that’s an interesting idea for you. Aereo’s another company that you spent a lot of time with. But again, if you’re an investor, you can’t invest in Cheddar or Aereo directly for a long time. Do you invest in these things personally?

There are some that are kind of outside of my core coverage that we do invest in.

Just you personally will put money toward?

Sure. But look, Aereo … how could you? Look, ultimately, we were wrong. That’s a great example of where we had to admit we were wrong, because we thought they would win their Supreme Court case.

Because the Supreme Court told you you were wrong.

Sure, six to three. Two votes the other way and we were right. But, you know, that’s the way this game works. There’s no such thing as close in the Supreme Court. It’s you win or lose. But it’s a new court now, so who knows what would’ve happened?

But when you look at Aereo, how can you look at the broadcast ecosystem and not have done a ton of research? You think about how disruptive what they were doing was … and actually in hindsight, the value they could’ve offered in fixing the mobile problem that broadcast has and TV has, they actually offered a solution that in hindsight probably would’ve been good for TV programmers, but they couldn’t see. The threat to retransmission fees was just too high. It was too destabilizing.

This is the company that, again, it’s hard to believe that you’re listening to this and don’t know what Aereo is, but in case you don’t … these guys were pulling down broadcast signals, TV signals from the air, and passing them along. The idea was they wanted to sell that as a service to the consumer.

Correct. Basically a remote antenna that you can’t have … antennas don’t work really well. If you live in Manhattan, an antenna in your apartment doesn’t work well.

But effectively, this is what Hulu offers now, and a bunch of other services offer now, except they’re paying the programmers and they’re selling these bundles for $20, $30, $40 a month, and the idea was Aereo was going to sell it for 10 bucks a month and not pay them.

Correct. They were going to leverage the fact that there is this thing called free over the air, that any of your listeners that are listening to this could go to Walmart, buy an antenna, and have free ABC, NBC, CBS, Fox and Univision at no cost, and yet if they do it through Hulu, they’re probably paying at least $3 per network per month for that same “free” content. And so that was the idea behind Aereo. But look, for us, we spend a lot of time on the technology because all of the things that are disruptive are happening in the private ecosystem. How could you understand … we first met Evan Spiegel when they were 20 people. How can you …

Evan Spiegel is the CEO of Snap … but again, you’re not this deep into this podcast without knowing.

I know, but think about it from our standpoint. How can we be writing research on Facebook and Twitter and not understand what’s happening with Snapchat at a very early stage? And so having that understanding of where the disruption is … we had no idea that Snapchat would be a public company in X years. It was, look, there’s someone with an app that everyone …

There’s this kid in Santa Monica doing something interesting, in Venice.

Yeah, why do I want to meet musical.ly? Why do I want to meet Triller? We want to meet every startup company because the only way you learn about where the world is going is through all of these startups. There’s so much innovation that’s happening.

Someone told me you were doing a west coast startup tour earlier this year. So that’s not just you going on the tour, right? That’s you taking, what … your clients? To introduce them?

It’s funny, we used to do tours going back to when I was at Goldman. We would do what was called the studio tour, and you would go see the studios. We do trips to L.A. We do trips to San Francisco and the Valley, but we see public companies.

But you’re taking people with you, right?

Sure.

So in some ways you’re offering access, right? “We’re going to show you what could be the next new Snap.”

Absolutely. So we’re highlighting companies … I brought investors to see Maker when they were above the taco stand, when Courtney had just started.

This is Maker Studios, which …

Which Disney ended up buying. But we try to see these things, taste make, when they were just beginning. We really try to get in early and see what the disruptive technologies are or not, and some of them obviously we have strong feelings about where they could go, and others are not as interesting. But we try to meet as many as we possibly can to be an edge in our research.

What’s interesting is a lot of investing clients, if you look at some really smart investors, I won’t get into naming names, but they’ve been doing the same thing where they’re investing in both public and private companies. You’re seeing more and more of that in both the institutional and in the hedge fund world, where they’re investing in the private world because it helps them learn, not to mention these companies are growing much bigger before they even go public. But they’re learning on both sides about where the world is going.

This is the Fidelitys of the world.

I’m not going to name names.

But they are. It’s all public, right?

You could certainly look at public files.

Big banks are throwing this money around.

Rich, good news. We have another advertiser. Here’s my friend Lauren with a word from our sponsor, Viacom.

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And we’re back with Rich Greenfield.

Besides Netflix, which you got right and early on the upside, what are you most proud of in terms of calling early?

Well, Twitter, I think, is the one where I feel it’s probably the most differentiated opinion we probably have right now. Netflix is by far still the most controversial stock. Even today, it is the most polarizing stock because they don’t make money, or meaningful money. Even in the U.S. they make, they lose overseas. Netflix is the most controversial; Twitter is the most hated. The investors think Twitter is the next Yahoo or AOL, and we have a very different opinion that there is a surge of interest in news and information. I think whether it’s listening to podcasts, talk radio ratings being at a seven-year high, whether it’s subscriptions to the New York Times and the New Yorker surging, whether it’s CNN and MSNBC’s ratings surging, even in a post-election year … there is a thirst for information.

Right, and this is one of the things people point out about Netflix in the last year is, “Boy, Donald Trump was elected in part using Twitter.” Twitter is … people are literally reporting on the president’s tweets daily … does not seem to have helped the company in a meaningful …

It does though, and I think there is …

Now they’re saying, “Well actually now it’s helping.” But all last year, there was no evidence of it.

The big difference was, if you were to go back a year ago and you saw a hashtag on TV or you wanted to tweet at someone, or someone told you about Twitter, and you went on, it wasn’t such a great user experience. It might’ve been for me and you … I would put us in the category of …

Hardcore Twitter nerds.

We’re nerds.

We don’t even need to modify it. We’re just nerds.

I wish we could get the audio playing from “Revenge of the Nerds.” Nerds! You know, that’s what we are.

But for the average person, you go on Twitter, and it was a reverse chronological feed of stuff, and you were like, “Well, I don’t really care what happened two seconds ago.” Breaking news is critical … I want to know the minute you break a story. You think about the average person, they don’t care. What are they interested in? And so breaking the reverse chronology was critical for Twitter.

So again, if you go to Twitter now, it no longer tells you this thing happened a minute ago and this thing happened two minutes ago.

It may if that’s what’s most important, but it’s probably not.

Yeah, and again, if you are a hardcore Twitter nerd like myself, you find that actually disconcerting because it’s a new way of looking at things, and there’s no real rhyme or reason to it.

But I like it because now, if you wrote something five minutes ago, and I’ve been sitting here for the last hour recording this with you, I get to see what you tweeted out. And I want to know that you tweeted out something.

So you’re bullish on Twitter. I was reading one of your recent … I guess it was today, wasn’t it?

Yep.

You’re bullish on Twitter, and you’re explaining why you think the user base is going to grow and revenue’s going to grow with it, and at the end you say someone’s going to buy this thing, and that’s really why you should invest. Am I summing that up correctly?

Absolutely.

Who’s going to buy Twitter?

Well … look, every company I cover has a legacy media company. So we put in that bucket Disney, Fox, Viacom, CBS … ultimately I think probably come together, but that kind of combination. I mean, all of these companies haven’t figured out how to get onto mobile. They don’t understand mobile. They all want to be in the direct-to-consumer business, but they have no data. So yeah, Disney can use Major League Baseball BAMTech and launch a direct-to-consumer spinoff or carve-out of tertiary ESPN content, but they don’t know who Peter Kafka is.

Do you think that if an old media company buys Twitter, that that is a good thing for the old media company? It’s good for Twitter and for their shareholders, right? It’s good for Twitter shareholders … presumably they’re paying a premium.

If you’re taking a look at it on a three-month or 12-month basis, it may not be a good thing. There’s going to be a substantial cost to buy it … I don’t know, 15, 20 billion dollars with a premium. Obviously it loses money, so it’s going to be painful.

On the flip side, who’s playing for the future? The future is mobile devices. The future is in data. And you watch a TV show, and whether it’s ABC or whether it’s Fox, they don’t know who Peter Kafka is. They don’t know anything about you or your interests.

Right, because they’re in the wholesale business. They don’t have direct contact with me.

None. And that’s why companies like Twitter, companies like Spotify … Spotify’s got 50 million subscribers paying them $10 a month. Tremendous data on what people are interested in and listening to. The world is all about data. Funny, you do any discussion across Recode of where tech is going, and it’s all about data. And here we have an entire industry that’s basically getting beaten up day by day because they have no data, they have no direct relationship with the consumer.

I feel like sometimes, though, especially when it comes to Twitter, people say, “Oh, the data … there’s a data play here.” And Salesforce said that when they wanted to buy it. But Twitter can’t do anything with that data, right? Twitter has a very hard time turning that data into a business, either for itself or somebody else. It seems like if there was a great treasure trove of data on Twitter, Twitter would be using it.

Well, first of all, they are, to show you better tweets. So, think about Instagram. One of the women at Instagram was speaking, I forget her name, at the Milken conference recently, and she was talking about the impact that the moving from reverse chron to an algorithmic feed made on Instagram.

Remember, you used to go onto Instagram, and you had people … I’m sure friends of yours, Peter, that overposted. And it actually created a not-so-great experience because you just see lots of their posts in a row, even if they weren’t the ones that you really were interested in. So their move to an algorithmic feed on Instagram has had a huge impact on their business. They’re mining that data, leveraging that data. It’s translating into ad dollars, for sure.

So you think having that direct connection with users, being able to figure out what they’re interested in and what they’re not interested in, is worth something in and above whatever that core business of the company is? That should be another reason to invest in Pandora, right? They’ve got 70 million users, they’ve got a good sense of what they want.

Let’s go back to HBO for a second. So HBO Now launched, what, two years ago? It was all about direct to consumer: “We’re going to have a direct relationship with the consumer. We’re going to get all the data. We’re going to know who Peter is, we’re going to have that relationship.” Now, probably half of HBO’s two million subs come from Amazon, where you don’t use the HBO Now app, you use Amazon Video. They don’t get the data. It’s an Amazon … it’s basically the old wholesale-retail relationship. Instead of going through Comcast or Charter, now it’s going through Amazon.

Right. Great for Amazon.

But you know why that’s happening? Because this is hard. Direct to consumer is really, really hard.

Right. So a lot of the old media companies are saying we’re either going to invest in this directly, like Disney is, or one day we’re going to get to it. This is part of the Time Warner pitch, or was prior to the AT&T deal, and we’re going to have our own direct-to-consumer business. Is it plausible for these companies to build or buy real direct-to-consumer businesses?

Building from scratch is hard. When you have no data … what Amazon proves is that once you have an existing subscription, actually the cable industry historically … once you have a subscription to HBO, or Showtime, or you pick, now broadband. Having a subscription and then hanging things onto it is much, much easier than starting from scratch. And that may be just overly simplistic, but history proves it out.

Amazon’s doing it now, and it’s just part of the Spotify thesis that we’re selling you a $10 music subscription, but one day we’re going to sell you something else as well.

When you start with nothing. So when you’re Disney … imagine Disney in 2020 says, “We’re not renewing our deal with Netflix. We’re going to launch Disney content directly to consumers.” You’re starting with no data on your consumer, no relationships. All your library’s still on Netflix for years to come.

Right, you’re probably selling through Apple and Facebook or Google.

You’re going to be losing tons of money. So not only are you not taking the money from Netflix … you mentioned before that they’re selling this content and making money off of it. But now you’re going to have a big gaping hole, because it’s not just you’re going to lose money on the service, but you actually have to go out and market and retain. I mean, if I went onto, just because it comes to mind … cancelling Netflix is what, two clicks in three seconds? Think about the friction of what happened in the cable ecosystem. You’d have to actually go return your box to 23rd Street, to Time Warner Cable, and now Charter.

And this is after you spent an hour with them on the phone.

With someone trying to offer you free six months of service so you don’t cancel, or free something so you don’t cancel. That whole world of marketing to you, customer acquisition, retention, dealing with churn … something the media companies are not, they’ve never had that direct-to-consumer skill set, and it’s really difficult.

So I think buying their way in, to answer your question, is critical. The only way they’re going to succeed is by making some bold moves to get into that subscription ongoing relationship. If I were Google, I would do the same thing. If I was Google, I’d buy Spotify tomorrow. I wouldn’t let Disney or somebody else buy Spotify. I would want that business to be mine and to build. If I was Apple, I’d go buy Spotify.

It’s funny, that Google’s mindset … I think, I’m translating fairly from what I’ve heard, is, “Music’s a crummy business. We don’t want to be involved … by the way, we hate the music labels. And also, we own YouTube, so we’ve got that consumer connection. We don’t need to buy our way into a direct connection with the consumers. We’re Google.”

I think that’s the biggest thing I hear about music. Every time I mention the word music it’s, “That’s a bad business.” Look, Pandora is a free, ad-supported business that, 12 years into, it doesn’t make money, and I think it’s hard. Spotify has 50 million people who are paying them every single month, $10 if not $15 a month, and they’ve added 20 million subs in just the last 11 months. That’s sort of hard scale … the speed that this is scaling.

I think that when you have a subscription business that’s grown that large, the things that you could … and again, it’s not just buying Spotify, it’s then going in … and the same thing with Twitter, I would say, obviously it doesn’t have the subscription side … but it’s not just buying these assets, it’s then investing. You can’t just be buying these. You have to be willing to spend billions of dollars to go invest and build all the things that you and I are talking about.

This thesis that you take content and then you add it to an existing distribution relationship, this is the public thesis of Time Warner and AT&T. Does that make sense to you? Do you think that when AT&T says, “Boy, we’re going to take all the content that Time Warner has and we’re going to take our direct relationship with all our phone subscribers and our satellite TV subscribers, and we’re going to make something awesome.” Are you bullish on that idea?

The …

That sounds like a no.

Because you’re still missing … AT&T is a wireless and broadband provider.

Direct consumer relationships … they have my credit card.

They do, but they don’t … you’re not using an AT&T app every single day the way you use Facebook or the way you use Netflix.

No, but surprisingly they think that I will. They think that if they build an app that has content on it, I’ll go use it.

And look, it’s possible. But even if I were sitting at AT&T, I would advise them, go buy Twitter, go buy Spotify. When you open up, just grab any person’s phone, and you look at the home screen. There’s a collection of, call it 12 apps, 16 apps. Most of them are owned by three or four companies. I would want to own home-screen worthy, daily, hourly, minute-by-minute use case apps that — most importantly — people love using.

So when Randall Stephenson … this will be a few weeks from now … says last week, “We’re going to use the data we get to figure out that maybe we should make 20-minute episodes of ‘Game of Thrones.’” You don’t think that’s a good idea. Neither do I. But is it even possible that he’s going to get that data? Does he have the ability to look at what’s coming through his metaphorical pipes and say, “We should do more ‘Game of Thrones’ or shorter ‘Game of Thrones’”? Or does he have to have that direct relationship through an app like a Spotify or a Netflix?

Randall has a huge opportunity, let me underscore that. He owns one of the world’s greatest content creators in HBO. Consumers love it, the brand has incredible value. If I were Randall, we would be spending an ungodly amount of money making sure Richard Plepler can double, triple, quadruple what he’s spending. They should want to take Ebitda margins on HBO down dramatically by investing to build something that rivals Netflix and Amazon. There’s huge potential. We’ll see whether they run it the way they’ve been running it, which is trying to hit Ebitda and basically enable a sale, or whether they really go for broke and gun it on an investment side.

Do you think he believes that thesis, that there’s going to be this synergy between the two things? Or do you think he has one business that’s sort of slow growth, no growth, and he’s going to buy another business with some of that money that is also slowing growth?

I don’t know. It’s a lot more interesting than Verizon buying AOL and Yahoo.

That was my next question. That’s the other content-distribution combo.

If you had to pick, one company’s got some of the world’s most iconic brands … and yes, maybe it’s not Disney in terms of what they’ve had success in content, but I certainly see the potential. First of all, there is a direct to consumer … HBO has always fought, yes there’s the friction of the cable ecosystem, but HBO has essentially fought for Peter Kafka’s and Rich Greenfield’s dollars, because you could cancel it. It’s not so easy; it’s obviously easier in a direct-to-consumer world, but at least HBO …

But they have to go spend 100 million bucks on “Game of Thrones” because they want something that I’ll keep watching.

Correct. And that’s a skill set that I think is really important and could be leveraged into a much bigger vehicle. You take AOL and Yahoo, two applications that don’t even exist on mobile. You want things that people are using regularly and content that people must have.

I understand what Tim Armstrong is thinking, selling AOL to Verizon. Great for him.

I got that, too.

I understand why, if you’re running AOL or Yahoo, you’d want to combine. Those are two similar businesses, more scale is better. What is Verizon thinking? Why does Verizon, which again is not run by dumb people, why do they want to own two arguably … not arguably, two fading internet brands?

I don’t know. I really … I can’t. There’s nothing that makes sense to me. Platforms that aren’t even mobile first.

Because by the way, they’re saying the same thing. The data and the video and something, something, OTT, and … you’ll see.

Look, if I’m a media or tech company, I want to own daily use case loved apps on mobile. That’s the war. It’s the war for your time and attention on mobile, that’s the first screen. You’re competing every day … I mean, think about it. YouTube, you’re competing every day with YouTube for time and attention. You’re competing with Facebook. You’re competing with Snapchat, and there’s more and more content.

How do you win that war? I think unless you buy something like Twitter or like Spotify, or both, you’re just ultimately a loser because I come back to what you said a while ago, which is the quality of the content is easy for all of these companies. If you woke up tomorrow, and Peter Kafka’s writing, “Facebook to invest $9 billion a year in content,” and they hired the right … their Ted Sarandos or their Roy Price, there’s no question that they could be creating TV shows that look like “House of Cards” and movies that look like “Manchester by the Sea.” There’s no doubt that they have the money to do all of this. So does Apple, so does Google. So I think the scary thing is, these companies have that direct relationship with the consumer and have the money to fund the content over time.

Why do you think Apple, Google, Facebook — those are the three ones that are most obvious, and you just mentioned them — aren’t committing a lot of money into content? They’re all nibbling at it right now. They’re all playing around the edges. Facebook is going to pay Vox Media, I just read, to make content. But it’s all not even a toe touch, right? It’s the tip of the toe. Why not? They’ve seen how it works for Amazon and Netflix — and by the way, that amount of money would not be material to any of those companies, to spend $9 billion a year on content. Why aren’t they doing it?

I think it’s kind of walk before you run. I mean, Netflix went into it, saw the success it had, and started spending a lot more money. I think a lot of these companies are data driven. Take Amazon, they weren’t making major moves in music until they realized that 65 percent or so of commands on Alexa were music driven, and now all of a sudden you’re seeing their music team everywhere and Alexa everywhere, and it’s all about music and the opportunity. They’re data driven, and so I think the three companies you mentioned, Apple, Google and Facebook … it’s early.

Google was doing … think about where they basically were paying for people to create channels on Google. That was probably, what, four years ago, I want to say? And then they did YouTube Red a couple of years ago, where it was, “We’re going to create stuff behind a paywall.” But now it’s, “Okay, let’s go hire Ryan Seacrest. Let’s create a show that looks like ‘The Voice’ but actually happens on YouTube.” So that took four years to get to …

Yeah, but why that caution for companies that, again, like Google is the company that paid 12, 13 billion dollars for Motorola, and then a couple of months later said, “Actually, we’re going to sell most of it off.” These guys can move much more quickly when they want to. There’s something about content that either they’re not interested in, or that makes them nervous, or something.

Apple’s doing “Carpool Karaoke” without James Corden, right? So if they wanted to do “House of Cards,” there’s no doubt Apple has the money to produce … you had Eddy at your conference this year. If Eddy Cue wanted to create as much content as Netflix … he may in four years. We may look back in four years and go, “Your conference was that demarcation line of the beginning …”

Do you think they’re waiting on sports, and that’s what they’ll spend their money on first?

Look, Amazon did their first deal, right? Amazon now is doing NFL games.

Right, again. But Twitter, at least, has proven that there’s not a lot of audience for that. And again, there’s Amazon spending $50 million. It’s not much. It seems like one of the ways these guys might do it is they might spend billions of dollars to actually buy TV rights. Certainly the NFL is hoping they’ll bid that much.

Sure. I remember when Rupert Murdoch came in in 1994 and took the rights away and started broadcasting NFL games. What happens to the value …

That’s how Fox was built.

Absolutely. There’s no debating historically, that’s how Fox was built. Imagine in 2019 you hear that the NFL contract for “Monday Night Football” is leaving ESPN and going to Amazon for 2021. What happens? The whole ecosystem shatters if that happens.

We’re at the hour mark, so we should wrap this up. I have one last investing question. I can’t invest in stocks because I write about this stuff. If I didn’t have that conflict, every bit of advice I’ve ever read, sometimes I’ve written it, for personal investors says you should not invest in personal stocks. You should put your money in an index fund and sort of forget about it, basically. You’re in the business of recommending stocks. Should people whose day job is not investing, people who are listening to this, should they be investing personally in stocks?

Look, we don’t invest in personal stocks. I don’t invest in stocks that I cover. I don’t want the conflict of I own or don’t own a given stock. It’s just, I like being as independent in my research on public companies as I possibly can. For consumers … our business is not retail at all, and so I have no advice to give to retail investors.

People should not be trading individual stocks based on your research? If they’re a ma and pa, if they’re a …

Our research is clearly directed at institutional investors who do this for a living.

Don’t try this at home, kids. Or grown-ups.

But we will try to make you smarter, no matter who you are.

And it’s free, right? You can read your research for free, just got to sign up.

You certainly can follow us on Twitter. We try to have an ongoing conversation with the industry about where the world is going.

Follow Rich for free on Twitter when you’re done listening to this podcast. Rich, thanks for talking for an hour. I appreciate it.

Thanks, Peter. It was great to be here.


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Author: Recode Staff

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