The Super Mario Bros. Movie recently crossed the $500 million threshold at the domestic box office, placing it on an exclusive list of just 19 films. Globally, it has now amassed $1.2 billion and is now the fifth-biggest animated movie of all-time. For Nintendo‘s (OTC:NTDOY) first film venture in nearly 30 years, the film has been an astounding success.  

7investing Lead Advisor Matthew Cochrane invited Ryan Henderson and Brett Schafer of Chit Chat Money to sit down to review Nintendo’s investment thesis. 

Henderson breaks down the movie’s economics, explaining that Nintendo partnered with the animation studio Illumination, meaning that Nintendo does not take home all of the movie’s profits. Still, after trying to use reasonable assumptions, Henderson and Schafer believe the movie can meaningfully impact Nintendo’s bottom line.  

Henderson and Schafer then discuss Nintendo’s future plans for film and theme parks, and whether Nintendo’s famously conservative management will finally look to monetize its intellectual property through additional channels. Inevitably, the question of the Walt Disney Co (NYSE:DIS) comes up and whether Nintendo has aspirations and the capabilities to mirror the entertainment giant’s flywheel that includes theme parks, movies, TV, and merchandise.  

Cochrane wonders if Nintendo is destined to be a cyclical company, following a pattern of hits and misses with the consoles the company has released over the years. The Nintendo Switch was a hug success, selling over 125 million units, but this followed the disastrous Wii U which only sold 13 million units. Henderson and Schafer discuss Nintendo’s past mistakes but believe the company has learned form them and will release an updated Switch sometime in 2024.  

After wrapping up their discussing on Nintendo, Cochrane asks Henderson and Schafer what they think about the U.K. blocking the pending Microsoft (NASDAQ:MSFT) acquisition of Activision Blizzard (NASDAQ:ATVI) and Electronic Arts (NASDAQ:EA) latest results.  

You can follow Henderson and Schafer through the podcast that they co-host, Chit Chat Money: https://open.spotify.com/show/4SBtOWGEOmD9pmltgIXO8r 

Henderson and Schafer also are the portfolio managers for Arch Capital Fund: https://www.archcapitalfund.com/ 

Nintendo 7investing Podcast Transcript:

Matt: Greeting fellow investors. I’m Matthew Cochrane, a lead advisor at 7 Investing, where it is our mission to empower you to invest in your future. We do that by providing monthly stock recommendations to our premium members in educational content that is freely available to everyone. Listeners today I am very excited to welcome back Ryan Henderson and Brett Schaffer of Chit Chat Money Fame.

Matt: As many listening undoubtedly know Ryan and Brett host the podcast Chit Chat Money, where every week they interview special guests, riff on the market and dive not so deep on a wide range of companies. Brett and Ryan are also the co-portfolio managers of Arch Capital, a concentrated long-only equity fund aiming to compound capital at an above market rate.

Matt: Today we’re gonna be discussing the video game industry, spending most of our time talking about Nintendo, on the heels of the Super Mario Brothers movies smashing Success, and [00:01:00] if there might be an opportunity there for investors. But we’re also gonna dive into some other news and companies from around the intro industry.

Matt: Jenz, welcome to the show.

Ryan: Glad to be here. Thanks, Matt. Thanks, Matt.

Matt: Yeah, now, no. So my first question is for you, Brett Ryan flew all the way down to Florida just to have a coffee with me long ago. Only reason, it’s the only reason. There’s no other reason he flew down to Florida. You know, and just to like just soak up all the wisdom I have to offer him.

Matt: I’m just wondering when you’re gonna come down and visit

Brett: wh when the Super Nintendo world in Florida opens up. That’s when I’ll, that’s when I’ll come down.

Matt: All right. That’s a deal. That’s a deal. So, guys let’s talk about Nintendo. Full disclosure, I believe you guys have a position in it and are bullish on it, but like there’s a lot to talk about, especially now where like on the heels of this, like huge success from the Super Mario Brothers movie.

Matt: It’s always takes me a while, but I’m sharing your screen if you’re watching on [00:02:00] YouTube. But if you’re just if you’re just listening on the podcast like the Super Mario Brothers movie like just. 500 million at the domestic box office becoming one of only 19 films that ever surpass that benchmark.

Matt: And its fifth weekend of release, the movie collected another almost 19 million from North American Theaters, and it was in second place in its fifth weekend behind Disney’s guardians of the Galaxy Volume Three. At this point, the animated video game adaptation from Universal Illumination and Nintendo is the highest grossing movie of the year in North America with I believe Ryan.

Matt: We were talking before the show. I think now it’s 1.2 billion globally. It’s the first movie from Illumination, the company behind Despicable Me and Sing to hit the 500 million mark at the domestic box office. And last weekend, Mario surpassed Toy Story four to become the fifth biggest animated movie of all time.

Matt: Gentlemen, is there. [00:03:00] Is there more opportunities for Nintendo like this and what does this mean for Nintendo?

Ryan: I can go through like maybe the financial implications and then Brett can talk about maybe the bigger picture. But yeah, you mentioned it. Basically 1.2 billion at the box office globally.

Ryan: It was actually the bestselling animated movie of all time on its opening weekend, but it had like a five day opening weekend versus other movies that have had a three day. So, not really apples to apples, but yeah, just all in all, it was much better than probably management or anyone expected in terms of it, its opening release and a lot of the financial work kind of requires some guesswork because for one Nintendo’s not always super transparent with the finances behind it, but It’s also you’re pulling together a bunch of, I guess, random figures.

Ryan: So apparently today, and I’m basing this off of kind of other people’s work, but only box office sales, only account for [00:04:00] around 20 to 30% of a movie’s total revenue. So they also earn money from at-home sales, TV distribution, streaming deals, especially in today’s world where so many people are watching stuff at home.

Ryan: So if we think that. It’s doing 1.2 billion to 1.5 billion, let’s call it. I don’t know how much it’ll end up with after after it finally leaves the box office. That means potentially four to 5 billion in kind of total sales over the life of this movie. However, Nintendo does not get all of that.

Ryan: So on average, theaters get 50% of box office sales. Nintendo obviously paid to make the movie at least paid part of the cost. They also paid 50 million in marketing and they split the revenue, I believe. I’m not sure if it’s 50 50, but that’s kind of the rumor with illumination slash Universal.

Ryan: Brett, do you know

Brett: it’s undisclosed? Yeah, we’re, when we do the estimates, when I do any estimates, I just assume 50 50 could be slightly different, but we [00:05:00] don’t know. They don’t disclose that.

Ryan: Yeah. So if, I mean, if you just. Kind of assume a 50 50 split there, it would net Nintendo around 200 to 300 million in earnings from the box office side of things.

Ryan: Which is, like I said, a small portion of it. And since they don’t have to split the streaming rights the stream, the streaming or the at home portion is much higher margin. You could see a world where this potentially generates them almost, you know, upward of half a billion, maybe a billion dollars in earnings from the movie over the life of it.

Ryan: For context, they did three and a half. Nintendo did three and a half billion dollars in net income over the last 12 months. So for anyone that’s thinking like, oh, this is a nice movie, but they make all their money from games. Yes, that is true. They make. Basically all their money from games, but this could be, I mean, a billion dollars in potential earnings versus three and a half billion in earnings of the last 12 months.

Ryan: It’s, you know, that could be a huge contributor. Yeah, that’s not

Matt: the actual bottom line. That’s not peanuts right there

Brett: for no to buy. And a [00:06:00] billion might be more lifetime. I mean, in the first year, probably closer to 500 million than a billion, but probably if you include box office, depending on how it shakes out, over 500 million in earnings within the next few quarters, which is again, that’s still not nothing.

Matt: So if listeners are familiar with Disney, it’s a much larger company. And like the thing you have to know about Disney is you can see like a huge movie comes out and like, you know, you might like think like, oh, this is gonna be like a big deal for the stock, but it’s not right because it’s just a such a small fraction, like no matter what a one movie does such a small fraction to Disney’s overall market cap to their overall revenue.

Matt: But Nintendo was a much smaller company. So this is like, this could potentially just one huge movie like this, it moves the meat needle

Brett: a hundred percent.

Ryan: The other thing, last thing I’ll add here is, and this is probably what excites investors about the movie doing well, is that people came home. They love the movie.

Ryan: And so they bought the games. We didn’t see it necessarily in the first quarter, but there was[00:07:00] UK figures came out that said basically all the Mario titles the game sales of the Mario titles jumped week over week. And they kept doing that as long as the movie was out in the box office. So I suspect that they’ll have pretty strong sales of a lot of the Mario titles, even though the Mario titles, I think Mario Cart ate the current Switch, Mario Cart was released in 2017.

Brett: So earlier. Earlier. Yeah, even earlier than that. But yeah.

Ryan: It’s been out for a long time. I imagine it’ll still sell well. And I think that’s kind of one of the, one of the sort of big implications here. And I know I might be stealing some of Brett s Thunder, but they can interact with. The IP or these characters in a number of ways.

Ryan: Now they can see it in the movie, they can potentially buy a switch, buy a couple games, and then eventually down the road maybe go to one of the theme parks that, that

Brett: they’re building out. Yeah. And then just to add on, I think the big question for investors that first came up is how many of these movies are gonna come out?

Brett: Because the key thing with [00:08:00] someone like Disney that Matt, like Matt mentioned, is what they probably have across all their different franchises. Pixar, the Disney animation, star Wars, Marvel, probably 10 or so, at least flagship films throughout a year. And Nintendo, it took them six years to make one. And I think the first one they wanted to really get right, because the last movie they made in the nineties was a big debacle.

Brett: It did really bad. And I think when investors are looking at this, they say, okay. Maybe 500 million bump in earnings for a year. And then the residuals would be nice, but it’s not gonna be a game changer. We’re not gonna release one of these every year. And that could be true, but the, with Nintendo, they don’t share like a roadmap, kind of like Disney will do.

Brett: They don’t say like, Hey look, this is our five year plan, this is when they’re gonna get released. They’re very secretive until the thing actually gets announced and you kind of have to read through the tea leaves. So understanding the company and understanding the management when they talk to the [00:09:00] producer of the GA of the movie, who is the creator of Mario.

Brett: And a lot of the characters forgive me if I’m mispronouncing a name, but Shairo Mia Moto. If you’re interested in Nintendo, I’d definitely research this person. There’s a lot of information on him, a lot of interviews with him that I think is important for understanding their culture. But besides the point they asked whether there’re going to be more Mario movies or more Nintendo movies coming down the line.

Brett: And they said, he basically said yes. Without any sort of details on what they’re going to be. And this was in, I believe, one of the Japanese newspapers, or one of the gaming blogs. And then second, the Illumination. Founder CEO is now on the Nintendo board of Director. So him and Miyamoto have Dr. Have a really nice business friendship.

Brett: And I think all indications are that they’re gonna make more movies. So from our seat, yeah, they might not make one next year, it might be one every couple years, but they’re gonna be coming out at a regular cadence. And there’s also [00:10:00] something where, you know, the actors aren’t allowed, typically are told not to give any details about future plans and stuff like that.

Brett: But Chris Pratt, who plays Mario, I believe accidentally said that in an interview that over the next 10 years, there’s gonna be a whole world of these movies coming down the line. And if you look at all the games that they have, just for example, looking at the ones that on Nintendo Switch, you have. You know, this one is probably based on something like Super Mario Odyssey ish.

Brett: You know, there’s stuff like Luigi’s Mansion, which is kind of a mystery you know, friendly, family friendly horror thing. There’s Super Smash Bros, there’s Mario Cart, which may not go well for an actual movie. There’s tons of different things. There’s Super Mario Galaxy and these are just things they can take from old games that can bring to the movies.

Brett: There’s not really a, you know, lack of potential ideas for making a movie. It’s just how fast Nintendo is going to produce them. And we think, I mean, I wouldn’t bet on one coming out every year, but we think that all [00:11:00] indications is it’s gonna be a regular cadence. Now, Matt, have you watched the movie?

Matt: I haven’t.

Matt: So actually like, I was planning to take my kids, but then my my oldest son offered to, to drive them because he drives now and took every, all my you know, so regular listeners know, like I have four kids. And but my oldest drove them and they all went to go see it. They all liked it and enjoyed it, but my wife and I went in and had a date night without kids,

Brett: so, that’s nice.

Brett: The driver’s license, it worked

Matt: out. Close, worked out. Yeah. Yeah. So I’m not complaining but I haven’t seen it and I kind of want to see it. Look, I think everybody my age and probably younger have like, you know, it brings up fond memories, right? Like, I mean, like we, I, I remember summer days where like, you, you ride your bike over to your friend’s house and like you played Mario all day, you know?

Matt: And you know, those are fun. Those are fun memories for me, you know? So, I think there’s like I actually, I do, I want to see it, even though I think it’ll be, you know, like a kid movie obviously, and stuff like that. But all my kids enjoyed it. And you know, I’m looking forward to seeing it at some

Brett: point.

Brett: Yeah. And I think just, yeah. [00:12:00] Before we go onto the next topic, it does, this is a perfect time to release it because an Nintendo has data on this that. They’re fans. And it really goes back to like when they started, if you were kind of 10 years old, it you became a fan. But if you were a little older than that, you’re probably too old to kind of start out as a fan of Nintendo.

Brett: So kind of the 40 to 50 year range, their active player base just totally falls off a cliff. And one that’s kind of a hint to us that maybe over the next few decades their active player base will get older while they’re still, you know, getting these younger kids to play as well. But second, there’s a lot of people like yourself that have kids that play Nintendo in, you know, the late eighties and the nineties that wanna play these family friendly stuff with their kids and watch the movies.

Brett: And as we may talk about later, go to the theme parks as well.

Matt: Sure. So now we talked about the movie a little bit, but you’ve mentioned theme parks a couple times. What are, what is Nintendo doing on the theme park front?

Brett: Yeah. Do you want me to start with this, Ryan? And maybe, yeah. So this [00:13:00] one is again, in a partnership with Universal.

Brett: So that’s their big partner for all things expansion outside of video games, and they’re building the theme. Well, universal is fully building the theme park. So unlike the movies, Nintendo is not putting up a lot of capital costs. They’re not putting up a lot of the marketing costs. All they’re doing is consulting for the design.

Brett: Miyamoto again is the, I think head say, calling the producer on these things for design. And they’re also obviously licensing the characters. They’re really opening four these across the globe. One in Japan was the first one to open one in Hollywood California, that was at. And these are all at Universal, you know, existing universal theme parks and one in Florida where I’m assuming it’s right where Disney World is.

Brett: And then one in Singapore at the Universal. Studio’s there, and they’re all gonna be open, fully open by 2025. And they’re called Super Nintendo World. They only have a couple rides to start. But from what we were able to ascertain, and we don’t know the [00:14:00] details yet, but from one of our, I guess, friends in the investing world, found some sort of info on what the potential, you know, for these could be.

Brett: And Nintendo’s not gonna earn since they, you know, they’re not putting up all the capital costs here or none of the capital costs. They’re not gonna earn a huge chunk of the revenue, but it’s very low cost and high margin revenue for them. So on ticket sales, they probably earn about four to 5% plus a flat fee each year.

Brett: And that could come out before any sort of expansions get launched. And they’ve already announced an expansion in Japan for a donkey Kong land that I assume will have, you know, it’s, could be a very fun one with like a Donkey Kong mountain roller coaster. They’ll probably earn somewhere between 150 million to 250 million in licensing revenue annually if these parks succeed.

Brett: And that’s probably in the 2025 range. So not remember. They generate about three to 4 billion in operating income a year. So this is not a huge game changer, but it could be very steady, you know, 250 million in licensing revenue to smooth out [00:15:00] some of the lumpy gaming sales,

Ryan: almost like franchiser economics, I guess if it’s just a four to 5% take rate and they’re not really putting up the CapEx potentially.

Brett: And the key ROI here is going to be building fan fandom. Say you’re someone in Florida and you have a kid that’s five years old and you were a Nintendo fan, you’re gonna say, Hey, you know, we’ve been to Disney World once, why don’t we go to Super Nintendo World? And I think if they meet Mario, they meet, I don’t know if they, you know, they meet Princess Peach, they meet whoever, whatever character it is.

Brett: And they become a fan that they’re a fan for life. They’re gonna buy games. It’s very similar to Disney we think, in that regard. Anything else, Ryan on that? No

Ryan: I don’t think it’ll, if I had a bet, I think movies would probably be a bigger chunk or a bigger business for them than the parks would be.

Ryan: It’s not gonna mirror like a Disney’s

Brett: parks business. These are much, much smaller theme parks. Think they’re [00:16:00] only side? Yeah.

Matt: Like are they separate parks or are they like part of a larger, like is like, is it like the one in Orlando?

Brett: It’s that it’s gonna be at the Universal. So I think Hogwarts land is there too, but it’s kind of separated out with the whole thing.

Brett: So you enter into, it’s funny, they get it really right. You enter in through the green tube. And then you’re in Super Nintendo world. It’s kind of, it looks like it’s its own theme park, but yeah it’s a subsection, sort of like one of the sections at a Disneyland or Disney World.

Matt: And now, is the one in Japan like that too, or is that its own separate world?

Brett: It’s at, I don’t know exactly what Universal Japan looks like, but it’s at the Universal one. But I believe they have much more room. You can look up their rendering on their website for the Donkey Kong land. It’s gonna like double the size of it. And again, that one looks pretty cool. It’s gonna be, you know, jungle themed probably have a roller coaster, all that stuff.

Matt: Sure. Sure. So let’s let’s, we’re gonna talk about like Nintendo’s main business line in a second with the console and the games. But like, let’s keep going down this rabbit hole a little bit. Like, this was like a drawing like Walt Disney did in the late [00:17:00] 1950s to talk about like, Disney’s business and how, like, you know, like how it’s I guess to me maybe the best word for it is like flywheel, but just how like all the businesses come back and like feed each other, right?

Matt: Like, The example you gave, like, you know, if I take my kid to the theme park that might like foster a fondness for Mario with that kid, and then they might, they’re gonna be more inclined to buy the game, you know? And and they’re gonna be more inclined to see the movie. When they see the movie.

Matt: They want another game and things like that. They can all feed each other. And so when I was like I did some work on Disney a year or two ago, and this is like, I was trying to update it, but just how, like the IP is what really, what powers all that, right? Like you have like the movies, the toys, the theme parks, the experiences, the cruises, the shows on Disney Plus and everything else.

Matt: And it’s all powered by the ip, but they all like, can, like feed each other’s success. Like how much potential is there here for Nintendo to like mimic this kind of business model? And like, maybe not be the, to the sheer scale and size of Disney, but like, is there a potential here for them to like, [00:18:00] like kind of mimic this business

Brett: model from Disney?

Brett: A hundred percent. Yeah. Ryan, do you wanna go first? Maybe I’ll add on. Yeah

Ryan: I think it could be I think it could be similar in terms of just diversifying revenue streams and maybe, I, I think the bulk of the business will always be driven by gaming. Maybe the movies are more successful than I’m thinking and it could be a huge line item for ’em, but it’s gonna be driven by gaming.

Ryan: But all those other touchpoints, whether that’s they’re doing a live in-person event in Seattle this September, or the theme parks in Florida, or the theme parks in Japan, or

Brett: Flagship store in New York City. Were the diehard Mario fans flock to come see these events and stuff like that.

Ryan: I think just all these touchpoints. We’ll feed back on the game sales. They’ll give more reason for people to buy the next Mario game, the next version of whatever it is, or the expansion pack on [00:19:00] the next Mario cart, that kind of thing. So I think it’ll help really drive, it can be incremental in terms of the actual business streams themselves, like the revenue streams from the parks or the movies.

Ryan: But I think more so than anything, it’ll really feed back into driving the, both the switch hardware sales and the actual game sales.

Brett: Yeah. And for example the video game business can be much more profitable than the visual content business on a per item basis, because Nintendo will release across one of their franchises, maybe a mainline game once every three years.

Brett: And you compare that to Disney, which will release mult, you know, three each year probably for each of their franchises at least. And Nintendo will do, like we mentioned, about three to 4 billion in profits for that. So you only need a few, you know, franchises each year. And then back on that flywheel thing, I would describe it more and Nintendo actually describes it themselves, which we really found interesting.

Brett: If anyone is more interested in the company, I would highly recommend their annual [00:20:00] investor presentation to show, or that kind of, they go on their longer term strategy there, cuz they’re quarterly reports as Ryan mentioned. Don’t, you know, they don’t like to give much away, but within these they, I would kind of describe it as a hub and spoke model where the middle is the video games and then there’s these spokes out, you know, movie or visual content theme parks, merchandise stores, and then, you know, IP licensing, which would be like Legos and stuff like that.

Brett: And all feeds back to the gaming business because the gaming business is much more profitable and is gonna drive so much earnings and with the integrated hardware. Incremental sales on video games as well, specifically with their first party content, are gonna have extremely high gross margins because you’ve already sold the device for a very low margin and then you’ve already produced the game.

Brett: And if you can drive a million more sales, it’s there’s really no work except getting the distribution on your own device. You’re gonna have no third party licensing fees, you’re gonna have just the [00:21:00] payment processing. So we kind of think, especially when we move into more digital sales, I mean, it’s just gonna be very strong very beneficial for their margins.

Brett: What.

Matt: Let me say, I guess my greatest fear about this company and that’s like, I think you guys gave a great case for why there might be upside here, but what scares me is like when you look at their long-term, like stock chart, like how cyclical, like the business tends to be around like console releases, right?

Matt: And they’ve had like some huge hits along the way, but they’ve also had some huge misses. And the stock price has reflected that. But even more reflecting than that is like their revenue. Like when you look at their long term revenue, like from the quarter, this is like quarterly revenue and like obviously a lot of that, like it peaks around the holidays.

Matt: So like you could smooth this out somewhat, but it is still like, like this, like terrifies me as like a long-term shareholder. Like when I see like, things like this, [00:22:00] like how is this a cyclical company? And like, how do like, you know, if you’re a long-term investor, is this something like you can invest in and hold onto for a long time?

Matt: Like how do you have faith that the switch huge hit great success, but what comes next? I don’t wanna

Ryan: underestimate the abil the possibility that this is like previous cycles, like previous consoles, but there is some like technical differences just between like the we and the switch. So what is your, you’re you’re tied to the online account now.

Ryan: So Nintendo online you can subscribe for, I think there’s a, it’s very cheap. You build a 20 bucks, you build an, yeah, there, there’s a cheap subscription, but there’s also, you build an Nintendo online account anyways once you set up your switch and the games you’re now tied to that account as opposed to a specific piece of hardware.

Ryan: There was no we online account where you were like downloading the games, digitally able to access ’em [00:23:00] on the next weu. You can do that now with the O led and the switch light and the original switch. You can kind of use them, I guess, interchangeably and still save your progress. So it’s a little more like, and I hate to make this comparison cause it’s not Apple, but it’s like an iOS account as opposed to,

Brett: I mean, it’s like a PlayStation or the other one.

Brett: Sure, yeah.

Ryan: Where you’re not tied to a specific piece of hardware, so it’s easier to upgrade and not, it’s not as big of a hurdle to upgrade to the next piece of hardware. So when the next, hopefully it’s relatively soon when the next switch hardware comes out. You can access a lot of those same old games, you don’t feel like you have to build a new character and go buy a whole bunch of the same old games over again.

Ryan: And so that’s why even in the seventh year, the Switch is selling. I think it’s sold what, 17 million units this year which is down. But there, the [00:24:00] developers, I’ll, I have a chart in front of me, but game development for the switch, all pretty much all other cycles. It’s peaked in year four, year five, basically between year three and year five, it’s peaked and then people stop developing for the games.

Ryan: It’s year seven and the amount of software titles that are released continues to trend upwards because I think people are on the development side, both Nintendo and third parties are realizing that this is more, this is a stickier user base that they can consistently sell into. So, there’s always the chance that.

Ryan: People move on to the next thing, whatever it is. But I would say that this is technically a little different and they’re starting to, even though it was slow they’ve shifted to kind of the cloud model as opposed to or an online account model as opposed to a p

Brett: specific piece of hardware.

Brett: Yeah. The one thing I’d add is the we, it was very popular and it makes Nintendo’s financials look very lumpy in [00:25:00] that one point. And people got extremely excited with that. You know, the stock in, when it came out, I believe, what was it? Oh six or something, oh seven. And they got extremely excited, but it was a gimmick and software sales were not nearly as strong.

Brett: And if we look here on the shared screen, Nintendo Switch is already outselling on a software side, which software is just, you know, game units. And the we is a little bit inflated because they gave away We Sports with every title. I believe there’s like a hundred million we Sports sales. None of like, I, I just don’t, I just think it’s entirely different because the, we had the motion controls that, again, it wasn’t like standardized games.

Brett: And with the connections that they’ve talked about from driving, you know, the Nintendo account, bringing all the old legacy games onto the Nintendo Switch Library and what they’ve just indicated, again, they can change their mind in a heartbeat and maybe do something funky again. But they’ve repeatedly talked about learning [00:26:00] the lesson from the we you, which again is in the lower right corner there.

Brett: The follow up to the, we was very strange. People didn’t really understand it only sold 13 million copies and they kind of cut it off right away and then started developing the switch. They said they’ve learned their lesson from that, and again, maybe they’ve learned their lesson, but that doesn’t mean they’re gonna execute on the next one.

Brett: But our hope is that the next Nintendo switch is gonna be a more powerful one, maybe with some other cork in there. And then over the long term, I think any investor has to be comfortable with a little bit of cyclicality with this business, but understand that they have, if not the best, you know, the second best compared to Disney family friend of the IP in the world.

Brett: And that is very durable.

Ryan: Something else that I think is a good indicator if you buy a switch today, you’re probably gonna buy a couple games once you get the switch. So game sales are still somewhat tied to the hardware initially, where if you have a [00:27:00] bunch of sales of the switch hardware, you’ll probably see an inflation in game sales.

Ryan: Also, if you look at the chart of switch hardware units sold, it kind of looks like a mountain in a way where it peaked in 2020 cuz a lot of demand got pulled forward. I would

Brett: say Covid makes it look worse, to be honest. Covid. Yeah.

Ryan: Yeah. And there’s still holding out to kind of release the next piece of hardware, but if you look at the.

Ryan: Switch platform game sales, it gets up to 2020 and then it’s basically flat, it kind of plateaus as opposed to that mountain like shape. So, and I’m trying to describe it for the listeners, but that tells me that the installed base or the households that have had a switch for a couple years are still buying games.

Ryan: It’s not as tied to it’s not just people that bought the hardware, purchased some games and then stopped using it. Game sales and software sales are still high, despite declining hardware despite declining switch

Brett: purchases. Yeah. And then the last thing there is their active users have only gone, you [00:28:00] know, up into the right each quarter that they’ve disclosed that.

Brett: I think they disclosed twice a year maybe every quarter. They’re a little, you know, they don’t disclose stuff unless active. They want to active, yeah, the active users. But I mean, it’s it’s only slightly lower than their total hardware sales. And even though, you know, the way they define, it’s just someone that’s opened the device.

Brett: The definition is, has been the same for the last, you know, it’s not like they’re changing the definition. So it went from a tiny amount when they started and it’s gone up to, I think 114 million as of the last quarter. And that shows to us that people are still very engaged with the, this device. I don’t have the we numbers, but I know almost certainly six years after it’s launched, it would’ve looked like a mountain, which is not a good thing where if there was barely any active players left.

Brett: Because when we looked at the we, none of their mainline IP really succeeded that. Well, the only thing that people remember from the We is We Sports, right? And yeah. That, yeah. Yep. And Mario Cart, excuse me. And Mario. Mario, [00:29:00] yeah. Mario Cart did well and smash Bros and that stuff, but a lot of the other stuff didn’t do well.

Brett: Right. But on the switch, we’re seeing Pokemon do extremely well as they’ve combined the handheld stuff into there. They have the new title platoon that does extremely well. Zelda’s obviously doing extremely well. All the Mario games are doing well, switched sports. They actually did that and it sold like 10 million copies this year.

Brett: So the software sales event diversified and the subscription revenue, we ran some numbers when we did a show on them a few weeks back that could be earning upwards of a billion dollars in revenue a year for them. And again, that’s not earnings, but that’s subscription revenue. It’s recurring. And we kind of think like, okay, flip this around.

Brett: Why would they build a subscription base of 40 million people just to, you know, cut it off and say, actually no, we’re gonna start over again. Maybe they would do that. But that doesn’t make much sense to us. It

Matt: doesn’t make much sense but they’ve done it in the past, right? Like where like,

Brett: I mean, sort of, [00:30:00] sort of, yeah.

Brett: Not the subscription, but Yeah. Like the player base. Yeah. Right, right.

Matt: So let’s talk about valuation. I know you guys don’t ignore valuation by any stretch. So like, I just pulled a few, a couple metrics, but enterprise value are over ebitda. It’s under eight now. That’s steadily gone down the last several years.

Matt: You know, it’s PE ratio has also steadily gone down during this time. You know, reaching like the low teens there. Like, is this how does this guy’s how do you guys look at this valuation

Brett: wise? I think, yeah, and I think Evie to e it does pretty good number there. The PE is gonna be a little inflated, actually.

Brett: All the numbers are gonna be a little bit. Inflated for the trailing one because the movie and the new Zelda game didn’t get released until calendar year, q2, which is their fiscal year, q1. So movie was in April. Zelda actually got released the day we’re recording this. And those have a lot of development costs and those had a lot of marketing costs behind it that they’re not gonna realize until q2.

Brett: But [00:31:00] besides the point we kind of see it as, okay, the stock is cheap enough, do we think the earning stream is durable? And the question is, the earning stream will be durable if the software sales are durable and the software sales will be durable if the active users are durable and if they can get an updated upgraded device.

Brett: So the key is an upgraded device, and that’s the key question. And we think it’s likely maybe more than others that this is gonna be success from all the indications. And then we think there’s some upside from the optionality in the i p. With the movies and the theme parks that we’ve already talked about and the expansion to digital sales that could drive maybe a few billion, that could, you know, in an optimistic scenario, double their earnings power.

Brett: Maybe a conservative scenario grow up by maybe 50% if we add on all those other things to their current earnings power. So we think the margin of safety is there because it’s at such a low earnings multiple, that even if their earnings just stay flat, we’re [00:32:00] gonna earn a lot of money. And second, there is a lot of upside potential when we look at their, you know, their EV to ebitda.

Brett: The current price could fall to five or four in five years time. Anything else to add there, Ryan? Because seems like it’s, that’s kinda how we look at it.

Ryan: Yeah. I mean, it’s a little tough to forecast, to be honest, because

Brett: I mean, this year will be down. Yeah. Yeah.

Ryan: So it’s a little basically, We think that if we are right about the qualitative characteristics of the business, that the switch is here to stay and they are going to do a better job monetizing their IP outside of gaming Earnings will grow considerably from here.

Ryan: So if we’re right on that, which we think, obviously we’re shareholders, so we think we are then add an EV to EBITDA or ev to earnings of 10 times I think it’s pretty easy to see how you’d make money. Assuming we’re right,[00:33:00]

Matt: when can we, when can when can people expect a new console or new switch? Well, when’s this upgrade gonna happen?

Brett: That billion dollar question

Ryan: that, yeah. $50 billion

Brett: question. They keep that under wraps and I honestly think, given all the rumors that flood out there, I feel like they throw some. Some some fake throw airings out there.

Brett: Yeah, they throw. Yeah, exactly. The, I believe the actual, so they do a interview every quarter with the biggest Japanese news newspaper. And in that interview, the executive didn’t mention this, but someone that said, source is close to the matter. So I’m assuming someone within the company said that it’s gonna come out not within the next 12 months, but really right after that.

Brett: And from our seat we kind of see they have this, their number one game is Mario car sold over 50 million copies. That’s kind of their main line one. And they’re doing this add-on contact with that for the switch that ends in the spring of 2024. So we think that probably spring [00:34:00] 2024 would be when it comes out.

Brett: They said that their forecast of 15 million units this year does not include any new hardware. So, and again, their fiscal year ends in March. So we think spring 2024 could make sense, but. What’s weird is that if they delay it more, that’s somewhat of a good thing because that means that the original switch is still selling well.

Brett: But from an investor perspective, we will get an earnings boost potentially if this new one arrives. So it’s T B D, but it could be tomorrow. They’re very secretive. And sometimes historically they’ve said things like, we have nothing planned, and then two weeks later they’ll release it. So they like to throw or keep everyone on their toes, I guess is a good way to put it.

Brett: Sure.

Matt: So, is Nintendo a gaming company? Is that the best way to think about them? And if they are, How come they don’t do more with mobile games? Like the Pokemon Go game that came out a few years ago. It just seemingly took the [00:35:00] world by storm. You know, like when you were driving around, you just see people like all over the place and you’re like, what are the, like, there’s like 20 people over there.

Matt: What are they doing? Oh, they’re playing Pokemon Go or whatever. Like, like that. Why have they not leaned into this

Brett: more? Right. Ryan, do you wanna hit this one? Yeah.

Ryan: I think there is some benefits to controlling the experience on your own hardware. I guess the, there is a Mario Kart version that you can download on the app store right now.

Ryan: I think there’s a game called Mario Run that you can download and I’ve played it and they keep, it’s like a free version where it’s just like random. It’s not, it’s a very limited in its capabilities but it’s not the same experience as pulling out a switch piece of hardware and. Like being more immersed in your console.

Ryan: And so I think they’ve always liked to keep things exclusive. They don’t license their game to Xbox. They don’t license their games to PlayStation. They like to control the [00:36:00] whole experience. I’m not sure whether, I’m sure they benefit financially if they just released something that was like a really popular mobile game, but I don’t know, maybe they’re worried about erosion of the brand.

Brett: Yeah, they wanna protect the ip. They don’t, they hate licensing stuff, especially for mainline games, however they are. Okay. So Pokemon Go, it’s a bit confusing, was produced by Niantic. And Niantic is the augmented reality gaming company spun out at Google and when they spun out at Google, there was three investors, Google, Nintendo, and the Pokemon company.

Brett: But there’s also an interesting twist is that Nintendo owns part of the Pokemon company. So you know, the biggest takeaway is that Netten owns a steak. In Niantic. Niantic made the Pokemon Go game, and they’ve recently, well, what was this maybe two years ago now, announced a partnership when Niantic, where they basically said, they didn’t say this explicitly, but they said, all right, all further apps that we’re gonna make [00:37:00] for smartphones.

Brett: We’re not gonna be making any mainline games for smartphones, but we’re gonna let Niantic license all of the Nintendo IP and make some sort of games. They made one for Pickman, which is a smaller franchise. That’s like a walking game, so TBD on that front. But Niantic has, I don’t know, they’re gonna be developing this stuff and I don’t think they’re gonna be making much money from a Nintendo perspective, but it’s more of, again, that spoke on the hub and spoke model.

Brett: I don’t know if that’s exactly the right way to say it, where the Nintendo’s video game hardware is at the center and that will hopefully drive more people to that. Sure. Why don’t you,

Matt: If you guys can, why don’t you explain Nintendo’s relationship with Pokemon, because that’s obviously, you know, look, Pokemon was kind of after my time, sadly.

Matt: But like my kids I have a kid who’s into it. He trades cards with his friends, or I guess plays cards. Like I, it’s a card game, you know, but they also collect ’em. And there’s a, there was a cartoon of course, and there’s some [00:38:00] games out there with Pokemon. I know Nintendo owns a stake, but explain how those financials work.

Ryan: So they just, they value on their, in terms of their financial statements, they basically just place some sort of a equity value. I don’t know how they get to it on their assets side. I can’t remember what line item it’s under, but it’s basically like a long-term investment. But the Pokemon company, from what I understand, and this is like everything with Nintendo, somewhat secretive.

Ryan: I think it’s owned by. It’s owned in thirds. One third is Nintendo. I can’t remember the other two, but one of the other two is also owned like 50% by Nintendo. So they maybe own half, it’s kinda hard to say. So they have this exclusive licensing deal where the Pokemon content is only produced on the switch or maybe on mobile gaming as well.

Ryan: And then I guess one other thing that’s kind of interesting is there’s some Pokemon animated content on Netflix. So that tells me [00:39:00] that maybe there’s a streaming deal in the cards for the other Nintendo animated stuff like the Mario movies, maybe they signed some sort of deal with Netflix, since they have some existing

Brett: relationship there.

Brett: Yeah, and I believe the first, this Mario movie is gonna have a Netflix window, and then since Universal is the producer, it’s gonna stay on Peacock after that. So it’s gonna be Netflix for maybe a couple months and then. On Peacock. But yeah the way, like they have the stake in the Pokemon company, you get value that at a pretty high amount.

Brett: But the way they’re not one, they’re not gonna monetize that stake. They’re not gonna sell it anytime soon. And second, the way they kind of monetize that, or the way as an investor you monetize that is they get the exclusive rights for the Pokemon games, or at least the mainline ones on the Nintendo devices.

Brett: And those things will sell like hot cakes. The fir, whenever they get released, the last one I believe sold 10 million units within the first week, and that’s [00:40:00] 600 million in revenue. If they’re all selling at the average price of $60, they have these add-on content that goes with it. So the way I would think about it is an Nintendo doesn’t really make money from its investment in the Pokemon company, but from its relationship where they get the games on the Nintendo devices and not on Xbox, not on a smartphone, not on a PlayStation.

Brett: Gotcha.

Matt: All right guys, last question about Nintendo. Nintendo owns a lot of ip, right? We’ve talked about Mario. I mean, they could almost come out with their own M C U like a Mario Cinematic universe, but they also own a lot of other characters. You, we mentioned Donkey Kong and Zelda and Metro, and there’s Pokemon.

Matt: Like if you guys could, like, what is the piece of content you would most want to see Nintendo produce? Like movie wise? Yeah, movie wise, show wise, whatever

Ryan: I am, I’m a big fan, probably of the Mario franchise over all the others. Maybe a Wario spinoff. Wario is probably my favorite character. [00:41:00] So some sort of a Wario and Waluigi

Brett: spinoff.

Brett: He does make a great point. There are a lot of Mario characters that, yeah, I mean, you could just make dozens and dozens of movies over the years. I think I, I’m not really a personal fan of any of these characters, but from an investor perspective, I think the Zelda or a Zelda visual content would do quite well.

Brett: They have a, not a giant fan base, but they have some die hard fans that I think, yeah, I think it would do great and it would probably expand again, when people see this kind of unique storyline that they do where it’s more, you know, this is less of the family friendly content, but still, you know, kids can play it.

Brett: If something like that was produced on HBO o and it’s sort of like a game of throne style no, not exactly the same, obviously storyline, but of, you know, high quality content that would expand the fan base and again, drive more people to say the next mainline Zelda game that gets released. Sure.

Matt: So I’ve never told anyone this.

Matt: I don’t think, but like, when I was stationed on Guam, like I’m not really a [00:42:00] gamer. I’ll get into Madden or like, like there was a time in my life I would play a lot of shooter games like Halo or, you know, stuff like that. But I never played any other, like more intense game or more involved game when I first got stationed to Guam.

Matt: Like, I, like I had a roommate who I started getting along with, I didn’t know anyone there. And then he got shipped off to the Philippines for like a four month special deployment or whatever. So it’s kind of like alone in my room at night. I didn’t know anyone and, but he left behind his Nintendo 64 and I played like the, it was like a Zelda Arina of time or the legend of the Arina.

Matt: I’m not real sure, but like, I got into that game and that game, like, like completely like, swallowed up like the next four months of my life. So I would love to see like a Zelda series or or series of movies like a La Lord of the Rings or something like that.

Brett: Yeah, exactly.

Brett: Yeah.

Matt: But but yeah that’s really my that’s really my only experience in that kind of

Brett: gaming all I think I think, yeah, I think, yeah, I’m looking at right now that game is the number one rated critically game ever. [00:43:00] So you got a good start the ACA arena of time. So it was awesome. It was awesome.

Brett: I love that you got a Yeah, he picked a good first first game there, Matt. First and only, but

Matt: yeah. But yeah, and it took me like, like I said, I didn’t never really play these games again and so like, it took me like a long time to figure out like really simple things. Like I thought I like totally found a glitch in the game cause I was stuck in a room but didn’t realize you shoot your slingshot at these things on the wall, you know, things like that.

Matt: It took me forever to figure out. But yeah, it was a fun game. It was a fun game. All right guys, so let’s talk about a few other things. We have ea just reported earnings. I. Think you guys have a position in that their net bookings for Q4 was 1.9 billion. That was up 11% year over year.

Matt: Their live services was 1.6 billion of that that was up 9% year over year and represented 83% of total net booking. You know, in the six months since launch FIFA 23 has surpassed lifetime sales of EA sports FIFA 22 becoming the most [00:44:00] successful launch in franchise history. Apex Legends delivered a net bookings growth in Q4 year over year at constituent currency driven by successful season 16 with peak weekly active users up over 20% from the previous season.

Matt: And Sims four, they now have 70 million players on their network. Guys, what do you guys think of the latest quarter from ea? Go for it, Brett.

Brett: I think it was very like the act actual, the quarter was. Decently good. You know, the results they had in q4, which again is the same as Nintendos. It’s the first, their last quarter, it’s the first year of the calendar.

Brett: I’m thinking

Ryan: about starting a petition to get all the video game companies on the proper

Brett: fiscal year or just all the companies, although that’d make your earnings season a bit crazy, but well, let’s just get all the count everything on the same calendar year. It’s too confusing. But yeah, I mean, they generate the cash that they said they were gonna generate.

Brett: FIFA looks great. Apex looks great. Sims looks great. FIFA Mobile looks good. They just hit a billion, or excuse me, a hundred million [00:45:00] in quarterly bookings which is equivalent to revenue for the first time. So that game looks to be finally growing. And mobile actually looks strong if you exclude the cancellation of Apex Legends Mobile, which I guess they’re gonna revamp in the next few years.

Brett: So again, there looks good, but the guidance felt a little underwhelming on our front. I think in both Ryan and I agree with that, at least from a cash flow perspective. They talked about over the last few years that they were in a major development period. And that after that, you know, cash flow would bump up and they only got it for, I don’t know, it’s not nowhere near, they’re all time high.

Brett: So we were a little bit perplexed. I think analysts on the call were also perplexed. Besides that everything looks good. So yeah, I, it’s a bit of a mixed bag where, you know, they’re not high growth. The valuations you know, it’s right around the market, average or above on a cash flow basis.

Brett: And if they’re not gonna grow their cash flow, that’s why it’s kind of lower on our list of holdings where if [00:46:00] we found something that we think can grow their cash flow it’s it might replace it, but I don’t know. I saw no huge red flags on the court. Or Ryan, anything else you saw?

Brett: No, I think

Ryan: the positive is that most their hit franchises are very durable. So it’s one where, I think they’re going to consistently generate cash, but it doesn’t seem like cash flow is growing at the pace we would’ve wanted when we first bought it. Maybe that’s just a higher cost of development.

Ryan: Maybe it’s costs associated with mobile development that aren’t really bearing fruit. I mean, you look at the most popular mobile franchises, they’re not adaptations of console games, they’re Candy Crush. They’re these very casual style games. And I don’t know, it just I guess there’s some frustrations there, but I thought the quarter, especially with the core brands, FIFA in particular was really strong.

Ryan: I will say they benefited from the World Cup, I’m sure with, you know, just higher engagement, more people engaged in soccer and not to mention the World Cup. [00:47:00] Well, it only happens once every four years, but it typically happens in the summer too, so it’s usually on a different quarter. So to couple it with Christmas and the winter and just overall game sales, I think there was just this huge tailwind that really helped EA something I did see.

Ryan: They are transitioning to the FC name. I think some people are, were maybe concerned about that, them losing the FIFA rights. I don’t think that will have any bearings on like the amount of gamers that interact with the brand. It will hopefully help margins as well though, since they’re not gonna be paying fifa.

Ryan: Right. 250 million or whatever it was a year

Brett: for the name. Yeah. And that’s also a little bit disappointing. We thought there would be a slight earnings month from that. I guess they did say it, but I don’t know what the other headwinds are. They are developing the N C A football game and the upfront costs on that are gonna be quite high.

Brett: But yes the EA sports FC transition. Like, it seems like it’s going smooth. There actually aren’t any other games out there, so you [00:48:00] know, no one’s announced anything, so I guess they’re still gonna have the market to themselves. But that margin boost, I guess. I think, yeah.

Ryan: I thought that was a little funny when they first announced fifa, the federation, like the organization.

Ryan: Announced that it was no longer going to be exclusive with e electronic guards. And they’re like, we’re opening this up for other game companies to build.

Brett: And everyone’s said, spent it. Yeah, it’s been a year. No one’s done anything. We’re not gonna do that. Like, yeah. Yeah, exactly. It’s been a full year and nothing’s happened.

Brett: It’s something that used to

Matt: worry me just because I don’t really follow soccer and I, you know, I didn’t understand like, the makeup of it. I thought like FIFA was more like the N F NFL and you would lose like NFL licensing rights, but it was just really like the lack of a better term, but like a league of leagues and you still, they still have all the league rights and the team rights for all the major leagues and teams out there.

Matt: So yeah, it’s not nearly as big of a deal as if they lost in the NFL rights for Madden

Ryan: or, yeah, it is [00:49:00] like, it is straight up a name change. FIFA has. Rights to world Cup content, but since that only happens once every four years, it’s a really small part of the game. The other thing is, I mean, I’m very kind of immersed in the world of EA sports fifa and a lot of the popular, I mean, if you’re gonna advertise a place to buy a game where it’s something that gets updated every year, the best place to do that is on the existing game because people will just say, oh we’re, you know, FIFA will pop up a message that says, or pre-download our, or pre-order our EA sports FC for next year.

Ryan: And most of the player base is just existing players that upgrade to the next game. So they, they really kind of control, I think, the competitive dynamics that way. And it’s such a network effect business now where you wanna play where everyone else is. So it’s a winner take all, I think, and losing the name will just give them less cost that they didn’t need.

Matt: Why do you think [00:50:00] Covid hurt game developers? It just seems that like, you know, I own a share, you know, I own shares on ea and it just seems like a lot of games lately have been released where that just to very disappointing reviews and they do iterate them and they do seem like they get better as time goes on.

Matt: But like the New Jedi game just came out to really bad reviews. Lots of people complaining about glitches and like, you can’t play it even on like the latest and greatest equipment. You know, same thing with the last battlefield game, like, I think it was like over a year ago now, but when that came out, like I, I had high hopes for that one that would drive sales and it also came out to disappointing reviews.

Matt: Do you think that’s like an offset or like, a consequence, I guess, of covid and remote work where people don’t collaborate in an office or, and if not, like, I guess like, w what, you know, what’s going on is that just EA can’t get their act

Brett: together? It’s widespread throughout the industry.

Brett: So I think, yeah, work from home. Hopefully it’s work from home. If not, the other excuse would be, or the other reason [00:51:00] would be that these new consoles and then the expansion into all these PC games, which have risen in popularity for a lot of these AAA games has made it much more difficult to develop.

Brett: And what’s interesting is that some of these large publishers, like ea, like Activision Blizzard, have been making their own internal game engines, which basically kind of does the without going into the details, the bear, like the bear roots of the game. And you can kind of, you know, it’s easier or bear roots of say, a video games development and you can kind of transfer a lot of the, you know, development costs across much more titles and then build up from a faster or a, you know, you’re later in the development stage earlier if you kinda get what I mean.

Brett: So I wonder why that hasn’t helped, but I think part of it, yeah, hopefully it’s more from home, but I think part of it just might be these new generations Of consoles and the PCs just make it much more complicated. But hopefully they all talk about AI helping them with the development cost.

Brett: I know a lot of people have been hyping up ai. I think in this case, maybe they, the development [00:52:00] cost could actually really be helped out by these new AI tools.

Ryan: Yeah, I don’t, maybe it is the word from home. I remember one of the CEOs either was take it’s either Bobby Kodak or I’m blanking on Take two CEOs, Strauss Zelnik.

Ryan: He, one of them called it out and said like, I think it was a year ago, we’re gonna have delays. A lot of this is due to the work from home. I would think that they’re kind of past that now. But I also wonder if gamers are just fickle. Like, it feels like there’s very few games these days that get a great rating that everyone loves.

Ryan: It seems like maybe the voices are just amplified now a little more, but I don’t know. Ultimately I think there’s a lot of games that get bad reviews initially and then end up selling well also. So I think a lot of people were complaining about FIFA earlier this year and stuff like that.

Ryan: So maybe it’s, maybe some of it’s overblown.

Matt: All right, we, we’ve mentioned Activision, Microsoft, Activision. Let’s talk about like [00:53:00] Microsoft the latest with Microsoft. Plans to acquire Activision Blizzard. The deal was blocked by the UK’s competition and markets authority. After months. This is from the verge after months of analyzing 3 million Microsoft and Activision documents and more than 2100 emails from the public.

Matt: The C m A has concluded that the deal could quote, alter the future of the fast growing cloud gaming market leading to reduced innovation and less choice for UK gamers over the years to come end. Quote Microsoft says it will appeal the decision, but a lot of people are pessimistic. Like that appeals gonna work.

Matt: There was more. UK regulators have been cracking down on merger and acquisition activity and recent years coinciding from the UK’s exit from the European Union to fight its latest decision. Microsoft will have to file a notice. But the competition appealed tribunal a process that can take months. It will have to convince a panel of judges that the C m A acted irrationally illegally or with procedural [00:54:00] impropriety or unfairness and the chances of winning our slim.

Matt: Since 2010, the C M A has won 67% of all merger appeals. Gentlemen, what do you think of the Microsoft, Activision Blizzard acquisition?

Ryan: Disappointed as a

Brett: gamer and an investor? Yeah, it didn’t make much sense cuz Cloud gaming is less than a billion dollars a year. It’s a tiny market. It’s a fraction.

Brett: Yeah, it’s a fraction. Yeah. So the reason it didn’t make sense, I think from an investment perspective, you kind of had to ex, you know, This is the downside. And as full disclosure, we owned a little bit of Activision Blizzard right now. We did own it mainly for the merger because we thought it was a wide you know, merger ARB spread.

Brett: And we don’t have to go through the whole pitch, but we thought, you know, since Microsoft put their Xbox division was basically fourth place, if you count steam and way behind all the other platforms, that this is a way for them to, even the playing field against PlayStation, who does the same thing.

Brett: Nintendo, which we just talked about, does a ton of first party development, but, you know, this is the [00:55:00] risk that was at the regulators are gonna act against a big tech company, and it didn’t, doesn’t really make sense to us. You know, they would actually help with launching a mobile store as well to compete with Google and Apple potentially.

Brett: Although that stuff gets really sticky from a legal perspective. Th this wouldn’t be really anti-competitive at all because it’s not like co any of the Activision Blizzard games. It’s not like they’re a dominant content provider, say. There’s just not that in video games because the market is so big and there’s such a diverse player base.

Brett: So I don’t really know why they blocked it. The cloud gaming market might not even be legitimate. The stuff doesn’t work, except if you have an extremely strong ga you know, internet connection that doesn’t lag at all and is strong and extremely consistent because you have to, you know, if your game legs even a little bit, it’s not gonna be, you just don’t have the same experience.

Brett: So I don’t know, it doesn’t make sense. I wonder if they want to get, create, like, I’m just thinking if I wanted to get this deal done [00:56:00] and be Xbox combined with Activision, do they say, what if we spin off Xbox and combine it with Activision? Because it seems like there’s just a stain on the big tech company when in reality Xbox is probably losing Microsoft money each year.

Brett: And if we look at PlayStation because they say they’re losing money right now with, or Sony says PlayStation is losing money right now. I don’t know. I wonder if they would, it would work if they said, we’re gonna spin it off. But again, the deal didn’t make sense, Ryan a anything else there, but it’s just a strange, perplexing announcement from

Matt: our view.

Matt: Yeah. Ryan, why don’t you share why you’re disappointed as a gamer? Well,

Ryan: I guess they called it out. They’re they’re concerned that Microsoft could build a really good cloud gaming solution and attract customers. Like that would be great if there was a cloud gaming solution and I didn’t have to buy a console in order to access some of these top tier games.

Ryan: Even if from third party publishers, if I could like just log on to my Xbox [00:57:00] subscription and have a controller and be connected to an internet connected TV and play fifa, that’d be awesome. So the, you know, that’s not the reality right now. And they were concerned that one day that could. That they could have a really good service for customers.

Ryan: And ultimately, I guess somehow Activision Pro, somehow Activision would build that forum. ’em and they had all those exclusive they granted the licenses to all the other companies. They offered it to ’em, they said they, you can have Call of Duty for 10 years. So the exclusivity stuff is void.

Ryan: I mean, that wasn’t a concern. I don’t know. It’s just, I guess, disappointing. They said that one day maybe the cloud, cloud gaming market could be worth 11,000,000,001 day. Maybe it could be worth four or 5% of the gaming market. I think that’s a weird reason to block a deal. PlayStations and Monopoli. I mean, they are the leading console supplier in Europe by a long shot.

Ryan: So, I don’t know.

Brett: I think, yeah, it’s just an example of the, you know, these regulators, I think [00:58:00] you just gotta, they gotta. You know, bias against big tech and maybe rightfully so, but that’s just kind of what investors I think have to expect. And that was the big risk here. And it did materialize.

Brett: Yeah.

Ryan: I don’t think they got the decision right. But the UK apparently has been known for this too. They blocked Meta’s acquisition of GFI because somehow owning gifts was gonna destroy the world. And that

Brett: was so much smaller even than this. Yeah.

Matt: Yeah. That one was ridiculous. You know, but it feels like big tech’s definitely been under the microscope lately.

Matt: Not just in the uk, but like, even here at home, I feel like Lena Kahn has been very aggressive with that. Like they blocked metaverse from meta platforms, from like buying a meditation app for, you know, the Oculus. Right, right. Yeah. A year or two ago. And just things like that. It just seems like a little, I’m not sure where the monopoly is for meditation apps, but Seems

Brett: a little Yeah it’s coming.

Brett: It’s coming. Yeah. It’s like, The, yeah. And then speaking of like Xboxs, you know, of struggling, I mean, it’s not, you [00:59:00] know, failing, but as a, the fourth place in the console wars, I mean, Oculus is a distant fifth and blocking anything with that just seems very preemptive, very similar to this excuse about the cloud gaming market.

Brett: Sure.

Matt: Yep. Well, gentlemen, thanks for coming on, but like, where can where can listeners find you guys if they’re interested in finding out more

Ryan: Chit Chat Money podcast and arch capital fund.com are probably the two. And we the chitchat money has a, as well, if you’re more of a visual person just like a chitchat money, you’ll certainly find it.

Ryan: So those are the two places.

Brett: Yeah. The podcast will be on Spotify, apple, YouTube, or any of the smaller ones as well. So wherever you’re listening right now if you want our show, which would cover basically individual stocks each week, something like Nintendo maybe, but a variety of companies to search it.

Brett: Whatever one you’re in right now, give it a follow and you’ll be able to listen to all our shows. And I can attest

Matt: like you guy you know, guys, I’m a regular [01:00:00] listener. I enjoy your content. You do a very good job at making your podcast not dry and entertaining, which is like, when you’re a working stiff, like me driving into work on Monday morning, like, you know, it’s a, it’s hard to listen to a deep dive, maybe on a obscure company you’ve never heard of, but it’s easy to listen to you guys.

Brett: Thank you. Hey,

Ryan: nice.

Matt: That’s the goal. All right, everyone, thank you for joining us. I’m Matthew Cochran. We’re seven investing and we’re here to empower you to invest in your future. Have a great day.