"They don't make money as a business because their operating expenses are so high," Shapiro said. "Even when they do well, they have to pay more in licensing fees to the artists and the labels where they rent all of their content and music. It's not necessarily the tech costs or the overhead that costs them money. It's the basic business of distributing the audio everybody uses on their platform. Also, on a 3.4 billion Euro business, 32 million in net profit is a rounding error. Also, to a certain extent, it feels like a bit of cosmetics, so they could say they had a quarterly profit for the first time in a year and a half to show Wall Street they did. I'm not saying it was a cosmetic manipulation, I'm just saying it feels like it to me."
"Their productivity business, which had slowed pretty badly for them, was up 13%," he said. "Their cloud business was up 24%, and Wall Street celebrated that that was happening. Their total revenue was up 13%, and their operating income was up 25%. Conversely, areas of maybe just warnings to look at: their gaming and other sectors grew only by 2%. Part of that is that they're due for a new Xbox. They're in the middle of a major reorganization with the ingest of Activision, which they just finished acquiring.
"LinkedIn ad sales growth is slowing dramatically. They laid off a bunch of people there in the last quarter. That business, which had been growing at a double-digit clip for several quarters in a row, to only grown by 8% while the rest of digital media ad selling is growing at double digits or better, this feels like a warning symbol for their ad business."
“Sony is one of my favorite companies to track on my big media universe map because their valuation basically never changes,” Shapiro said.
"And this chart speaks to why they had a really great quarter in film television sales. This is one of the big media companies that decided to be an arms dealer versus a platform player. They have Crunchyroll, a great platform, but predominantly, their entertainment business is an arms dealership business instead of a platform-running business. They had a great quarter in gaming. PlayStation remains a massive, one of the most popular consoles out there. Their music division, in a quarter where a lot of music businesses had tough quarters, did really well, and that helped drive up total revenue by 8%.
“But for those of us who were old enough to remember the Walkman, their electronics division continues to disappoint, and it feels a bit like an anchor around this enterprise's valuation. Yes, they have a pretty good chip business, and they have a pretty good B2B electronics business, but their consumer electronic business is basically in an inspiration spiral, whereas their services business is kind of best in class, which is weird because, in gaming, their device is one of the most celebrated consumer electronic entertainment devices in the world.
“Meanwhile, the rest of their electronics are celebrated by consumers but not doing well from a revenue standpoint. And that dragged down their operating income as well. And this is why I think their stock never really drops below a certain level – a hundred billion dollars pretty much consistently, and it never really goes above a certain level – $112, $115 billion. So, it consistently operates in this gray area of valuation almost since I started charting them on the map. It's got a floor, but it's also got a ceiling.”
Shapiro said that Nintendo had a massive quarter, though this was rather unexpected. “They put out their last new version of the Switch a while ago, and there's a great consensus that sales of the Switch and their games and software had plateaued and then the Super Mario Brothers movie came out, and it was the greatest commercial for their products ever. Not only did the movie do billion-plus in revenue, which benefited them directly in large part, but it also sparked sales of their games and the Switch dramatically to the point where they had record sales this far out for a console that's that old.
He noted that this has shifted Nintendo’s focus to more film franchises based on their gaming IPs. “They announced on their earnings call that they're going to do a new film franchise around Legend of Zelda,” he said. “So, my issue with Nintendo is the lack of diversification here. Yes, they sell consoles and games, and they're one of the three most important gaming companies in the world. However, that's all they do, and I think they're going to really need to investigate other revenue sources, most notably advertising, which is a massively growing sector of the gaming economy that they basically take no part in. If they want to continue having quarters like this, this company needs to start investigating the ad business in gaming, specifically mobile gaming.”
Shapiro's key takeaways
Shapiro wrapped up his presentation with a detailed breakdown of trends and key trends.
“When you look at where the money is going…digital video ads: look at the growth there, 61%. In-game ads – it's important to note that mobile gaming is 50% or greater of all game revenues. 50% of mobile gamers are women between 25 and 65. And greater than 50% of all revenues in mobile gaming comes from ads. And that's why you see 102% growth projected for in-game ads over the next four or five years.
“Meanwhile, linear television, yes, AVOD and FAST are growing at 84% clip, but relative to the whole as standalone businesses, compared to things like YouTube and Facebook and TikTok and Snap and other online video outlets, it's not necessarily materially as important as the rest of the ecosystem. We're at $2.5 trillion in total media revenues worldwide, growing to $3 trillion by 2027. Look at other online ads compared to FAST and AVOD at $35 billion, or subscription OTT. Other online ads are over three times the subscription OTT revenues. Other online ads are bigger than subscription OTT and pay TV combined.
“Look at how big gaming is. And remember, more than half of that is mobile gaming, and a decent chunk of that is mobile gaming advertising. Look how big other online video ads are compared to subscription OTT and pay TV revenues.
“So when you look at these earnings reports, and you look at these numbers and these results, it's crucial not to just look at the year-on-year context of each company individually. It's also crucial to look at the trajectory of where they're getting their revenues and where revenues are going to come from writ large around the ecosystem.”
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All infographics courtesy of ESHAP.