Invest like the Best Ep 185 - Matthew Ball
The future of media - movies, the metaverse, and more
Primer: In this episode of Invest like the Best, Patrick O'Shaughnessy interviews Matthew Ball, who is the Managing Partner of EpyllionCo and Venture Partner with Makers Fund. Matthew has a compulsive interest in knowing how people spend their leisure time and in this interview, he shares about the future of media. Learn why Netflix and Disney are so resilient and how Epic Games are building the infrastructure to actualize their vision of the Metaverse.
Who is Matthew Ball?
Managing Partner of EpyllionCo
Venture Partner with Makers Fund
The former head of strategy at Amazon Studios
Investor and business essayist
Has a compulsive interest in knowing how people spend their leisure time and how they entertain themselves
Supremacy of Intellectual Property (IP)
The pinnacle of IP tends to be massive immersive fantasy worlds
As technology advances to make these fantasy worlds more immersive, that IP gets bigger
E.g. The Witcher first came out in the 1990s but it only became New York Times Bestseller list in 2015, which coincides with the release of The Witcher 3 video game.
The second time it hit the Bestseller list was in 2019, which is when The Witcher TV series on Netflix came out
The release of the TV series led the game to triple its concurrent active users, its Twitch broadcast audience to more than double and the price of the stock for the company behind this, CD Projekt Red, to go up 50%.
The growth of IP ultimately comes from what the audience wants to do with it
The biggest IP is fast pervading every medium - we will see the same IP used everywhere like in games, in books and in films.
IP has a disproportionate impact on customer attention
Netflix
Netflix understands the impact of IP
They bought a company called Millarworld which came from Mark Millar - one of the most successful comic book writers of the past decade
They intend to produce more comics and to grow the ancillary elements of Millarworld
The goal is to use the Netflix platform as a launch for these new titles but use Millarworld as a source of IP creation
Why are other media companies hard to compete with Netflix?
Understanding consumer behaviour in leisure
Consumers are not rational
There is a general perspective that Netflix's content is not good enough and there are competitors out there who are coming up with better content, leading to erosion in Netflix subscribers
But consumers are not rigorous price or leisure optimizers - they will not invest an extra 20 minutes to find the perfect thing to watch
They just watch whatever is good enough at that point in time
So there is stickiness in the subscribers base
Netflix have a huge subscriber base and that affects their success rate in launching content
Netflix can launch worse content with greater success than other companies with better content but a lower subscriber base
Due to the economics of scale and also because consumers just watch whatever they had subscribed that is good enough
Tiger King will never be such a big hit if it had been on another network other than Netflix because they do not have enough subscriber base to begin with
Hence other companies with laggard subscribers cannot catch up with Netflix by releasing better content
"If you are a laggard in subscribers, how are you going to catch up to Netflix? Most of them plan to do it on a content basis, but if Netflix can launch worse content to greater success than you can, and because of its greater scale it can economically do that, that's a huge advantage."
- Matthew Ball
The challenges that Netflix will face
In 1930 to 1940s, a lot of people goes to the theatre but that is slowly taken over by television
Now, we see that television giving way to other formats, like TikTok or something more experiential like the game Fortnite
"Reed Hastings [CEO of Netflix] has been clear that he considers the greatest competition to be Fortnite as opposed to Disney, and even still, he sees YouTube as more competitive than HBO."
- Matthew Ball
In the future, people will just spend less time on television and more on interactive gaming
Disney
Why is it hard to compete with Disney?
There are 36 or 38 films in the past 15 years to cross the billion-dollar mark and Disney has 65% of them
Most of that happened in the past 3 years
Reasons:
Disney have a lot of good IPs
They are exceptionally skilled at using the IPs to tell good stories
They are best at monetizing their IP with their strong distribution agreements with theatres, consumer products and theme parks
All these create a feedback loop that makes it hard for anyone to come close to beating them
Spotify
On-the-go medium
Just like Netflix, Spotify is a giant in its medium in terms of penetration and significance
Consumers are sticking to platforms they are already engaged in, so Spotify has many opportunities to transition that audience to new things
Spotify is an on-the-go medium and there is intimacy in the spoken word or music, being right in your ears as you go about doing your daily things
However in the video gaming space now, there is a progressive expansion into what is considered Spotify's space
There are many games going cross-platform into mobile devices, which means that users can play on the go
Fortnite launched a mode called Just Chatting, where a user can listen to the game and still participate in it without playing because he could be driving or not in front of his gaming station
In the future, listeners might also be able to help out in the gameplay to really immerse themselves in the experience
Gaming
Monetization gap in gaming
There is a huge monetization gap between gaming and say cable television
Makes little sense because the degree of immersion and focus of the audience is way higher than that of watching television
So there are a lot more things that can be done to close up the gap in terms of more monetisation for gaming
There is a generational gap in that the older you are, the fewer games you play but the more media (films and television) you watch
Gaming industry reliance on technology
Interestingly, a movie 10 years ago and a movie now are not much different. There is a slight improvement in the graphics but it is very similar.
However, a 10-year gap in gaming will have huge gaps in every element, from how it looks, what you can do and how you can monetize to why people play in the first place
This is the reason why Hollywood misunderstands games today and had missed the opportunity for years because games evolved way faster than any other media
Gaming relies on technology to change content and business model more than other media category
Every time a technology platform changes in the gaming industry, a new segment is unlocked - there is no cannibalism in the older sectors
This is unlike the music industry, where streaming music replaces download-to-own, which replaces CD, which replaces cassettes, which replaces vinyl
"This reflects how unique and different the gaming category is, not just in the sense that you don't need to replace existing leaders to grow, but that when you see new platforms emerge, that value allows new companies, no matter how late they are to the sector, to build multi-billion dollar businesses."
- Matthew Ball
Gaming IP - the major disruptor in the future
Marvel Cinematic Universe (MCU) is hugely successfully and no one has come close to replicating it
As the franchise becomes more expansive and more immersive, it will squeeze more air out of the competitive landscape
Imagine MCU increasing their output volume of films while simultaneously increasing revenue and decreasing cost
"A fan might actually like Batman more than Tony Stark, but they just spent 13 years and 15 films and dozens of hours bonding to Robert Downey Junior's performance. 15 years is the amount of time in which a child goes from pre-puberty, through puberty, into adulthood. And actually trying to compete just with the volume, with the quality, with the reach, with the potency of the Disney flywheel, and then needing to somehow accelerate that emotional attachment, is profoundly challenging."
- Matthew Ball
To compete with them, you need to outproduce them with quality and with the reach and potency of the Disney flywheel, yet somehow still accelerate the emotional attachment that a viewer has from watching their IP products from childhood to adulthood
Hence gaming IP is the only way to compete since it is the only content category that can actually scale
Allows you to immerse deeply into the lore and characters of the game
Epic games
Gunning for Total Addressable Market growth
Tim Sweeney is determined to create the underlying infrastructure to allow for huge growth in the total addressable market (TAM)
He builds up the infrastructure and essentially gives it all away for free
His philosophy is not to undercut margins but to zero them out altogether because the Metaverse is worth trillions
In order to bring the Metaverse to fruition, content creators and the consumers of content are the most important element.
Anything in between, which includes the core infrastructure, the technology, Unreal engine etc, should have its margin reduced to zero so that those who are building for the future will have the profits to reinvest in the business
This is so that the future envisioned in 2050 can arrive earlier
The flywheel of Epic Games
The core of Epic Games is Unreal Engine - it is the most realistic simulation software toolkit and was developed in the 90s
The US military now uses Unreal engine to do its simulation because of its realism
Then Epic Games launched Fortnite
It is not just a game but more like a platform because it is extensible and flexible - like an early version of the Metaverse
They essentially built a flywheel at Epic Games
In order to make Fortnite work, Epic Games uses different technologies to make it the largest persistent world with the capability to operate on different hardware with interoperability
Then they give it away to anyone to build and integrate their games so that the games can be deployed on every device
E.g. DC, Starwars, Marvel are all in Fortnite
Epic Games take 60 to 80% lower commissions than market leaders like iOS, Playstation and Valve so that developers will have more money to produce more content to reinvest in the business
The cash generated from Fortnite launched Epic Games Store and Epic Games Publishing, adding more parts to the flywheel and bringing their vision of the Metaverse closer
Tencent
Tencent is one of the most astonishing companies he had seen
This is an outcome of their aggression in acquiring stakes in every company and the regulatory environment in China where they operate
Most of the major publishers in the world cannot operate in China
Hence Tencent has the means and the reach to be the closest to building an actual Metaverse
This is as long as China is okay with increasing the amount of time spent online
Cloud gaming
Not quite there yet
Still far away from the ideal vision of cloud gaming as a platform
It is going to be the next shift, from arcade to consoles, to PC, to mobile, to live
Some observations can be seen
The cost of the hardware relative to playtime keeps falling from arcade all the way to mobile
Mobile phones can do a lot of other things besides gaming, but an arcade machine can only play that single game per machine
The evolution of the business models used to be pay-per-use in the arcade, to pay-per-title, to pay-per-subscription and moving on to free-to-play for mobile
Cloud gaming breaks that trend because the cost of the hardware relative to playtime goes up a lot
However, there is a physical limit to how fast signals can travel if the servers are far apart
This causes lag especially when playing first-person shooter games
Hence cloud gaming should be used for other experiences instead of gaming, like going to live online and interactive concerts
Interactivity
Interactivity in gaming
Unlike other media, gaming is more outcome-driven focusing on optimizing engagement, monetization and certain gameplay behaviour
It is more consistent with what YouTube or Facebook does than what Disney or Warner Media might do
Other media tends to be based on the creative vision of a few people, rather than based on what the audience wants
The next innovative step is to use the interactive feedback loop that gaming has and apply it to drive all content design
E.g. using audience interactivity to change the content of live reality TV shows
"Like there's a reason why people laugh more when they're watching a comedy at a movie theatre than if they're watching it at home. And there's a reason why they laugh more when there are people beside them at home than when they're watching it alone. And so, interactivity has seemed to be the key certainly to those categories."
- Matthew Ball
Better to bet on companies with innovation in their business model or on new technology, than to focus on companies that produce good content
Innovative technology and business model disrupts, not good content
Business model disruptor
Marvel releasing a sequel every 6 months or every year while other studios do it after 3 years
Technology disruptor
Jurassic Park has outstanding CGI effects that beat all the other competition at that time
Interactivity is the next big thing
"When we take a look at some of the investments Epic and others are making, we're getting into live performance, virtual production, it's actually quite possible that you can imagine paying Robert Downey Jr for his likeness, for his audio. And then you have a performer that is doing motion cap that is remapped to Tony Stark, such that we could log into this game tonight, actually interact, one-to-one with Robert Downey Jr, or Tony stark, to go on a live adventure to save the world."
- Matthew Ball
Imagine logging in on a Marvel game, where you can meet up with friends and join Tony Stark to go on an adventure together
To disrupt the existing franchises, something fundamentally different has to be done
This is similar to how Marvel Cinematic Universe (MCU) disrupts the entire movie industry
Metaverse
Covid has accelerated the actualization of the Metaverse
The Metaverse is hard to define exactly because it is like predicting what the internet of 2020 is like in 1990
Some elements of the Metaverse is known but nobody knows how they are going to be integrated
A lot of people see Metaverse as virtual worlds, but it is more like a user-generated content platform like Minecraft
Essentially an interactive and immersive version of YouTube where you have an avatar that you can control
A Metaverse has the following elements:
To have interoperability, everyone has to integrate and build in a collaborative manner
Epic Games is clear that Unity, their primary competitor for the game engine business, will form the foundation of the Metaverse
These are the challenges to bring about the Metaverse
Need to have mass concurrency, which is the number of people who can participate in a shared experience online
Difficult because of technological issues
Having unified standards, protocols and agreements
Difficult because any company of significance will start their own processes with their own prioritization and roadmaps, so finding commonalities is going to be hard
Having forward-compatible code evolution
A persistent and continuous metaverse has to be flexible to evolve and grow without breaking
Difficult because if the Metaverse breaks due to updates, there will be distrust in the system
As the Metaverse becomes more valuable, the consequence of breakage will be exponentially larger
The kindest thing anyone has done for him
His parents grew from low income to middle income
Gave him and his sister an upper-middle class upbringing, which brings with it all kinds of opportunities
This is done often at their own disadvantages, like giving up on luxury trips
The success that follows from that one opportunity given is incalculable and is a gift that endures
All information presented above is for educational purposes only and should not be taken as investment advice. Summaries are prepared by The Reading Ape. While reasonable efforts are made to provide accurate content, any errors in interpreting and summarizing the source material are ours alone. We disclaim any liability associated with the use of our content.