Pod Insights Invest Like the Best with Patrick O'Shaughnessy Mario Cibelli - Cornerstone Investing Insights - [Invest Like the Best, EP.205] About this episode My guest today is Mario Cibelli. Mario is the managing partner of Marathon Partners Equity Management, a long-biased, concentrated investment firm that he's run for over 20 years. In our conversation, we discuss how his firm figured out Blockbuster's DVD volume and told Reed Hastings and Netflix about their numbers, why visiting a company's distribution center can be an edge for investors, Mario's interesting foray into the world of tequila, and how a few "cornerstone" investing insights have led to many of Marathon's long positions. I hope you enjoy my conversation with Mario.
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Show Notes
(2:34) – (First question) – Doing a deep dive into the early days of Netflix
(2:43) – Netflixed: The Epic Battle for America's Eyeballs
(6:50) – What was impressive about Reed
(7:34) – Visiting Netflix’s distribution centers early on and the lessons of those visits
(10:44) – Lessons learned from other distribution centers
(17:52) – What helps create good luck for a company
(19:17) – Why tequila was fun to investigate
(25:09) – Why tequila is different from other hard liquors
(27:40) – Finding the cornerstone insight in a company
(29:20) – What he’s learned about media-driven personalities and WWE
(34:30) – Lessons in starting a media company and developing IP
(39:00) – Having to battle activist shareholders in business
(42:43) – How the rate of return in deep investigations has changed over his time
(45:08) – Kindest thing anyone has done for him
Learn More
For more episodes go to InvestorFieldGuide.com/podcast.
Sign up for the book club and new email newsletter called “Inside the Episode” at InvestorFieldGuide.com/bookclub.
Follow Patrick on Twitter at @patrick_oshag
Transcript Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
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1:49 Patrick O'Shaughnessy? Hello and welcome, everyone. I'm Patrick O'Neal, and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.
2:09 Speaker 01 Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.
2:32 Patrick O'Shaughnessy? My guest today is Mario Chabelli. Mario is the managing partner of Marathon Partners Equity Management, a long-biased concentrated investment firm that he's run for over 20 years. In our conversation, we discussed how his firm figured out Blockbuster's DVD volume and told Reed Hastings and Netflix about their numbers, why visiting a company's distribution center can be an edge for investors, Mario's interesting foray into the world of tequila, and how a few cornerstone investing insights have led to many of Marathon's long positions. I hope you enjoy my great conversation with Mario.
3:06 Patrick O'Shaughnessy? So Mario, you and I discussed a place to begin this conversation a couple of days ago, and I think it's hard to pick something better than an amazing story that you were a part of that's been written about publicly in the book Netflixed. And I think you've never told the full story from your perspective in a setting like this. So I just think it's an amazing wedge into a conversation about doing extremely deep dives on companies. And I'll just leave it there. I'll let you begin with the Netflix DC story. You tell us how this started and walk us through it.
3:33 Speaker 02 I haven't fully told it. I haven't told it at all.
3:38 Patrick O'Shaughnessy? Good. I love being first.
3:39 Speaker 02 For a while, I kind of considered it proprietary. This is a good time for a great reveal. We had an investment in Netflix. We've been fortunate enough to have a number of really good companies in the portfolio over the years, and Netflix was one of them. We got in there at a time where the company wasn't particularly in favor on Wall Street. So we've got a fair amount of access. I tweeted at one point about a visit to a distribution center on Long Island. It was one of the most interesting DC visits I've ever had in my career. We do a lot of thinking, a lot of deep work. Details, concentrated portfolio like we run are very, very important. So one of the things I came up with, let's track how these services run in comparison.
4:20 Speaker 02 Netflix had its service, subscription DVD by the mail, red envelope, everyone knows that stuff. Blockbuster had something called Total Access that they were competing with against Netflix. And even Walmart jumped into the fray at one point. We subscribed to every service and we said, let's start putting them through their paces. One of the things we looked at is what percentage of the time did you get what was at the top of your queue? How many days did it take to turn around? So you selected them, when did they come? When you sent them back? When did the next one come? When did they receive it? All that stuff. Unsurprisingly, Netflix outperformed everyone. That was interesting. One of the ways that we kept track of everything, we had all these envelopes. We'd keep envelopes and write data on them, when it was shipped, when it came back.
5:04 Speaker 02 And we had eventually entered into a spreadsheet. We had DVD envelopes all over the place in the office from all three services. If you stare at something for long enough, sometimes certain patterns reveal themselves. And a guy in our office who works with me to this day, Eric Heide, noticed that on the envelope, the Blockbuster envelope, there were certain sets of numbers that kind of would repeat and in other sets that wouldn't. And we started looking into this more closely. And what we discovered was is that on the Blockbuster envelope that you received your DVD in, Blockbuster was telling you how many customers there were and how many DVDs they were sending out. And we started tracking that. On the quarterly conference call, Blockbuster would say, this is how many subscribers that we have.
5:48 Speaker 02 And then you could kind of triangulate what was the beginning subscribers? What was the ending subscribers? And then how many subscribers they kind of had throughout the quarter? Essentially, we could see that their churn was astronomically high, absurdly high, maybe three to five X the churn that Netflix had. We saw that, we spotted that. We were tracking it, but it was pretty labor intensive. Maybe you might argue it's somewhat limited benefit. It told us what we wanted to know, that the Blockbuster service was. To us was unsustainable and didn't perform nearly as well as the Netflix service. So what we decided to do was let Netflix know about what we had discovered.
6:29 Speaker 02 We had a couple of calls with them. I think they initially didn't even believe us that we were able to do this. And then we showed it to them. They took it over. The reason I was in the book Netflix was because we were the ones that kind of cracked the code on Envelope Gate. And it was very helpful to Netflix for a period of time when it wasn't also clear that they were going to emerge victorious. I kept in touch with Reed for a number of years. I still consider him one of the very best leaders, CEOs that I've ever had the pleasure of investing in my career. He would absolutely no doubt remember us and remember that whole incident.
7:03 Patrick O'Shaughnessy? So literally on the envelopes, the serial number was like counting up or something. Is that what you found?
7:11 Speaker 02 That's right.
7:14 Speaker 02 Not getting too specific, yes.
7:16 Patrick O'Shaughnessy? It's incredible. I mean, talk about a good example of doing insane detail oriented work on a business. What about Reed was so impressive or is so impressive?
7:25 Speaker 02 His ability to just see things as they're going to be was just absolutely incredible. You know, and he can boil down kind of a very big problem into super simple language. Well, you know, a little bit like, I mean, how Warren Buffett does, like you can distill a very complicated thing into a handful of sentences. That kind of would make sense. Absolute tremendous vision. He would believe the direction that he needed to go and he would get there before anyone else and have a strong belief in it. Pulling a lot of people along for the ride, including in that is motivation as well, how to organize a lot of individuals, a lot of smart individuals to get behind you. He would push you in the same direction. I'd say first and foremost, just tremendous, tremendous visionary.
8:06 Patrick O'Shaughnessy? We're going to talk at some length about why it's valuable and interesting to visit distribution centers of companies, which is certainly a topic I've never talked about on the show before. It seems sort of like almost mundane, but my guess is that they're a treasure trove of information. What was interesting about the visit to Netflix's distribution center early on?
8:23 Speaker 02 This is a part of the business I've always loved. Lots of people analyze companies without visiting them. Some people have a bias. Management teams are marketing to you. Of course, they're going to tell you what you want to hear. I've always had the belief that I can potentially learn more and get an edge by visiting companies. And I may see something, I may spot a detail or something that either changes my mind or reaffirms kind of what my existing belief is. I'd say if I zoomed out a little bit on Netflix, we visited three DCs. We visited Long Island DC, which was the first one. We visited DC and San Jose, which a lot of people visited. Then we also visited one in Atlanta. So we started mixing and matching and seeing certain patterns repeat about with the DCs.
9:05 Speaker 02 But the one in New York was the most epic one. They sent us there without any representatives from the company. So it was just us and the manager of the office. I think what we saw essentially was an operation that was very, very hard to replicate, that had years and years of finding and bumping into bottlenecks and eliminating them and getting more and more and more efficient. That would range from how labor was used, the lack of storage of DVDs. They actually didn't store them anywhere. They always remained on the desk. Manager explained to us how the DVDs were always looking for a home. They weren't trying to find the DVD that the home wanted. They were had the DVD in hand and say, hey, which home would this wants this?
9:49 Speaker 02 To a bunch of machines that they bought that sorted the material that didn't work, that destroyed a number of DVDs and that they had to customize just tremendous amount of things. And you get the sense that this is not going to be easy to do. Blockbuster can't go from running stores to running a DVD by the mail subscription service without a tremendous amount of work, with a lot of brilliant people running around and trying to fix it. I think that's ultimately what we figured out there, that it's not going to be easy to replicate. And that's a continuing theme. The market gets validated. Competitors are coming. Some of them are going to be bigger and more well capitalized. Is that business defensible? And I do believe that you can get insights into that in a distribution center, of course, talking to management team and whatnot.
10:34 Speaker 02 But it's great to get out in the field and see what really makes an operation tick. Not all investments obviously lend themselves to that. There's no factory to visit for Facebook or PayPal, but on a lot of other services there are.
10:49 Patrick O'Shaughnessy? How many distribution center visits do you think you've done across your entire career?
10:55 Speaker 02 A lot less since COVID happened. I've done one since then. I did one trip. I got in the airplane two months ago to visit a distribution center in Dallas for Stitch Fix. Across my career, I mean, gosh, I mean, eight to 12 times 23 and a half years.
11:15 Patrick O'Shaughnessy? Using Stitch Fix or another example, just give some more examples of things that you have learned. What are some of the most interesting lessons you've learned spending that many days and trips to visit these places? My guess is you're in the top percentile or something by that that end of experience, walking through these places that are sort of the unseen force behind a lot of physical businesses. What are some other examples of things that you've seen? You said, huh, that's funny, or that's interesting, or that's impressive?
11:41 Speaker 02 The Stitch Fix DC visit that we did recently, I'll say this, I was like a kid in the candy shop down in Dallas. That was the most interesting DC that I've seen since my early days on Netflix. It was super, super interesting, some of the different dynamics that were going on there. So we got two hours there, which was super nice of them to allocate that much time. We spent time with their head of US operations, absolutely brilliant, dynamic guy that explained the flow of product throughout the facility there. And I walked out with so many questions. I mean, I could have just spent 12 hours there, really could have. I walked out saying, this is not an e-commerce business that we just saw. This is a whole different kind of service. And I don't
12:26 Speaker 02 think anyone, anyone in the world potentially is trying to do what they do at scale. And it's going to be a very complicated thing to get right. But if they get it right, and I think they've gotten a lot right so far, it could really be something special. There's a number of different things that we saw there that I think very dramatically versus traditional e-commerce.
12:49 Patrick O'Shaughnessy? I've spent exactly zero time in a distribution center. When you say they're not a traditional e-commerce company, like, what is that gap?
12:55 Speaker 02 The way I would think of traditional e-commerce and potentially even Amazon is that they're sending out finished goods and generally speaking, they're hoping that they don't come back, that their customer is satisfied. I think there's been a tremendous amount of volume of that type of e-commerce. For starters, Stitch Fix has built a tremendous expectation of returns that most e-commerce operations don't kind of have to think about. And returns are margin killers for that model. There were some really interesting labor bottlenecks present at Stitch Fix that I don't think other companies in traditional e-commerce think about. You might say the labor bottleneck is negative and I would say, yeah, it potentially is.
13:38 Speaker 02 It's a level of complication there and difficulty that makes it harder to get right. So the way Stitch Fix presents its units, generally speaking, all the collar stays are out, the plastic's gone, everything is taken apart. They're picked, they're folded, they're stacked, they're wrapped, they're put in a box and they're sent out and the quality control, quality checks go on. And at this point, that was a tremendous part of the human labor that was present in the DC was in that area. When the box is opened, you could try everything on inside of six or seven minutes because it's all ready to be tried on. That's an interesting way to present units versus another e-commerce operation that will send you some shirts.
14:23 Speaker 02 The collar stays are in, there's pins in them, they're folded nicely, there's plastic on top of them. If you had four or five things sent to you from a traditional e-commerce company, want to try them all on, it might take you seven or eight minutes just to get everything set so you actually could try them on. They put great effort into ensuring that when the box is opened, that it's very presentable. That's an expensive, labor-intensive thing to do for a very small win. So that labor bottleneck is, I think, very different than traditional e-commerce. Another thing that's just absolutely fascinating.
14:58 Speaker 02 Is that if you go into onto their site now and you want to get a fix sent to you, they show here's the first available date. That first available date could be seven days in the future, 14 days in the future when they're busy. There's some range of things. Let's just think about from an operator's point of view, what it means to know that shipments, what they're going to be like in two weeks. It's very different to traditional e-commerce. There's no seasonality in the business, really. It has grown over time, but they have a very, very predictable production schedule. So if they're sending out a thousand fixes today, they might send 1,010 tomorrow and 1,010 plus another five the next day. Like, it's very kind of predictable. So when you introduce that level of predictability into a facility,
15:43 Speaker 02 what allows a tremendous amount of efficiency in planning and whatnot that would reverberate throughout the whole distribution center, that's just simply unavailable to a traditional e-commerce operation that might have a peak to trough delta of, I don't know, 3X to 8X. It just is a whole different way of planning your business. I mean, how nice. It's an apparel retailer. They have a set schedule of production where like next week sold out, the week after that sold out. It's absolutely fascinating to me. You start getting into the whole personalization of inventory and how they use data and all that. So their keep rates on what they're sending out should be better than someone that would would hope to compete with them. We actually need to do more work on the data side and everything we've heard about that.
16:28 Speaker 02 It makes sense to me. But what we saw in that distribution center to me is that is not traditional e-commerce by any stretch. It was hard to do. They have years of mistakes and bottlenecks kind of being solved. And the copycat companies, they'll come, they're going to have to make all those mistakes. And Stitch Fix will be continue to innovate and keep that delta between them and the would be competitors. And that could be mine for years and years and years. So, look, if they're doing a good job, they're going to continue to innovate very rapidly, put more and more distance between them and would be competitors. They kind of want to make it look hopeless for those that are coming in after them. And I think a store operator like J. Crew or Urban Outfitters,
17:10 Speaker 02 I think is attempting a service like this that operates stores. Good luck. It's going to be tough. It's going to be tough to do subscription apparel. It's not going to be easy. My interest, by the way, I would say it's not entirely clear that Stitch Fix is going to succeed. I think they will. The level of success. How far they take it, I don't know, but I'm not saying this is easy. I'm actually saying it's really, really hard. That's the whole point. That's going to allow them to potentially escape Earth's gravitational pull in a big way. I think there's a chance that they could really be big and successful. And 10 years from now, I'll be talking about that DC visit in Dallas that I did, just like I am about the Netflix visit we did in the early 2000s.
17:54 Patrick O'Shaughnessy? You said something there, which is fascinating to me. Good luck, which it's kind of an interesting way to think about competitive advantage that you want the businesses you're investing in to have some version of that where to would be competitors. You would be saying good luck for some reason or another. That strikes me as a good example of the kind of seven powers or some of these traditional methods for thinking about edge as sort of process power. There's no way to learn how to do it, but by doing it, and they've made so many mistakes that there's just this compounding separation between the best and the second best that's trying to catch up. What are other things that you've seen, perhaps like you said, Facebook doesn't have factories. What are other things that you've seen that feel like that good luck concept? And is that basically what you're always looking for when doing one of these deep dives on a company?
18:39 Speaker 02 On the challenger company side, disruptive business model side, absolutely, we'd be looking for that. We had a great investment, a company we really loved called Zoom, that I think right now would be valued in the billions and billions. It happened to be taken over by PayPal a couple of years and they were looking to disrupt traditional international remittances. So the Western unions of the world, we did a tremendous amount of work in that company. Not unlike Stitch Fix, not unlike some other ones, you know, there weren't a lot of profits necessarily in the near term to kind of justify the interest, say, from an outside investor.
19:13 Speaker 02 The way they did remittances was so difficult to get right and was fraught with risk and fraud and know your KYC rules and all these rules that required for financial intermediaries. It was so terribly difficult to get right. We came to the conclusion that if this company's growth rate kind of falls off a cliff, the platform is extremely valuable. And we were right PayPal recognized that they had a multi-year head start. So I guess that's a yes to your question. That was a small example. Another example of a company that just puts so much distance between it and its competition.
19:50 Patrick O'Shaughnessy? Can we talk about tequila and everything you've learned about why it's an interesting beverage? And perhaps a specific company that's interesting in that arena?
19:59 Speaker 02 I'll tell you, it's been a lot of fun to do research on this. When I wasn't a fan of tequila, I'm not even a big drinker. But I now have an appreciation for tequila and I have a small little tequila collection. But it was on the basis of an investment opportunity. They're the biggest tequila producer in the world. No surprise, it's headquartered in Mexico. The name of the company is Beccle and a couple of years ago went through an IPO. The story of Beccle is really the story of tequila. Story of tequila is really about a plant that grows primarily in central Mexico called Blue Weber Agave. Blue Weber Agave takes anywhere from five to nine years to mature. Different than a lot of other spirit companies, the input is not an annual crop.
20:42 Speaker 02 So there have been in the past, we found three of them. More recently, we're in one of the price spikes. Now there have been three epic price spikes of Blue Weber Agave. Blue Weber Agave, a couple of years ago, traded hands for five pesos a kilo. The current price is in the high twenties per kilo. That is the main input in tequila. Tequila producers have had to absorb a massive price spike in their main input. That caused the Beccle shares to trade down to levels that we thought were absolutely absurd. For about coming up on two years now, we've been buying shares of Beccle from its absolute lows until the current price. And we think that that that company is a very unique opportunity.
21:28 Speaker 02 One of the other certain sectors that we can talk about that later that we tend to find a lot of our investments in. But I consider us generalists, but going back to my old days of selling research to hedge funds, we're always turned on by inefficient sectors in the marketplace. And Beccle was a super interesting company. We essentially had a really old company with absolutely tremendous brands that was driving most of its profitability as a US company, but decided to list. Equity on the Mexican bores and sold a relatively small sliver to the public, fifteen percent. There's questions of why they do that. What was the motivation behind that? The company was practically debt free. It didn't really need to raise any capital.
22:10 Speaker 02 To us, that was a perfect recipe for potentially mispriced security. Essentially, what we saw, I actually called this one the the second best risk reward trade I've ever seen in my career ever. I don't think I can lose money here. And I got really good upside. I got free calls all over the place. That's a super interesting equity. Beckley was trading at a discount to peers in the spirits business, but its margins had been compressed in fairly dramatic fashion because the price of blue Weber agave had spiked. So here they were trading at a cyclically lower than peer multiple with cyclically depressed margins, growing faster than peers because their tequila exposure is way higher than peers
22:53 Speaker 02 with very little debt. And I was like, this just doesn't make sense outside of malfeasance or something, or the numbers weren't real, that there was no way that we really could lose money. And that was the initial appeal. Now, as we've gotten to know the company better, become more familiar with the story of tequila, it's gotten really interesting. And I do think it's one of these kinds of things, you know, ten years from now, it's just going to be a bigger, more valuable company. I guess I think what we've really done is we figured out a backdoor cheap way to buy into the spirits business. Spirits business is hard to justify for value type investors because they're always well bid for. Why are they always well bid for? Because they survive inflation, deflation, feast,
23:34 Speaker 02 famine, war. They're always around. They don't go away, not going to get disrupted. In a zero interest rate world, you have an opportunity for real earnings growth. That's infinitely valuable. I think what we've done is we found kind of an interesting way to buy into a spirits company that hasn't been fully recognized that it belongs with its peer set, yet valuation wise, what we believe we're at the beginning stages of a very likely collapse in agave pricing. Agave, blue Weber agave, farmers in Mexico have been planting multiples of the harvest for the past three years. And we think there's a windfall event, margin event in the future of Beckley. We kind of believe Beckley is trading at twelve
24:17 Speaker 02 to thirteen times EBITDA on twenty twenty-two numbers versus peers today like Brown Foreman.
24:24 Speaker 02 And Diageo that are trading kind of in the high teens multiples of 2022 numbers. And we think when we get to that period of time, there'd be no reason for Beckley to trade at a discount to the group based on the earnings that we think that they'll have. Agave pricing does not have to collapse for us to make a positive return on Beckway. But if it does, we're really going to have a charged return and we think it's very likely that it will. But that's the downside protection. That's the interesting part. It doesn't have to happen for us to get pretty positive returns for our investors. Oh, by the way, what's also interesting is that Beckley has been insourcing more and more of its production of agave. And that takes time to build up your agave fields because they take multiple years to mature.
25:09 Speaker 02 More and more of their production will come from in-house. We think the agave price decline will be the catalyst that people would identify and see to ultimately bid up shares of Beckway to probably where they a more appropriate valuation over time. But because they're insourcing more and more of their production where their costs probably five to seven pesos per kilo. It almost doesn't matter if agave prices don't correct because they're producing more and more in-house. And at their scale, at their size, not everyone will be able to produce internally like they do.
25:42 Patrick O'Shaughnessy? What else have you learned that's interesting about the spirits business in general? And maybe tequila just as a thing relative to other spirits. It seems like there's been a surge in its popularity. I love the features you kicked off about sort of the cockroach qualities of the industry in general, which is why they trade at large multiples. Anything else interesting from the story of tequila that you uncovered?
26:04 Speaker 02 It's hard sometimes in the spirits and beverage businesses to create a trend. But once that trend starts, it's also hard to turn it off. I think there is a wonderful trend going on in tequila right now in the U.S. and Canada that we can't see how it turns off, at least for an extended period of time. And that trend is, I presented the idea to a group of people not too long ago, brought a bottle with me. And a lot of people that didn't want to try it because it's like, oh, I had shots when I was in college and got sick, whatever. They had a negative experience for it. And I said, try it anyway, try it anyway. And I brought a nice expensive bottle. They ended up loving it. I think a lot of people. Have figured out that it's a great drink.
26:47 Speaker 02 Latin heritage in the internationalization of our country, I think it's kind of played a role into that. And essentially, there's a lot of different variations of it. So it can range from pretty crappy to absolutely amazing. That range would exceed, say, something for a vodka. I do think vodka and a couple of other spirits will be sharegivers to tequila for an extended period of time. Look, there's no parties right now, but the party five years ago, there was one tequila drinker, a party three years ago, there were four. Next year, we're going to get past the coronavirus, there'll be eight. It's kind of playing out like that. So it's absolutely growing share domestically. And of course, we border Mexico, so that a lot of people travel to Mexico.
27:30 Speaker 02 And you know, that heritage translates into the US and Canada more easily. Absolute home run will be is that it catches on internationally. The market share for tequila is something in the nine, 10% range in the US, but internationally, it's much lower than that, maybe on the order of three or 4%, which would include, of course, a big contribution from the US, which is the biggest spirits market in the world. If tequila starts catching on internationally, look out, it could be an absolutely epic run for Beckley. It has the potential to be the fastest organically growing spirits company outside of China globally over the next 10 years. Absolutely may happen for them.
28:13 Patrick O'Shaughnessy? In each of the companies we've discussed so far, there's an example of what I would call cornerstone insight, the serial numbers, the bidirectional nature of Stitch Fix's shipping, expecting lots of returns and the sort of optimization and intelligent labor use around making the presentation of that and the experience of that great. The five to nine year cycle of Blue Eber Agave, that's just kind of a unique feature versus other spirits business. Do you find that those cornerstone insights that you have, and I'm sure we'll talk about a few more, tend to come first in your diligence of something and that kind of opened the door? Or rather, is it just that you do lots of deep dives on a lot of businesses and with some of them you arrive at the cornerstone invites? Like, what's the chicken and what's the egg here?
28:56 Speaker 02 I would say they happen in a variety of ways. How do you find these interesting companies? You pay attention, you read a lot of S1s, try new things, try new apps, you're just trying to suck up information everywhere that you can. I think sometimes I would say that, well, gee, like with Uber, I had an instant reaction. This is maybe 10 plus years ago when I heard about it. I think Rich Barton mentioned it to me on the beach once. And I was like, well, that just sounds like an awesome idea. I had an instant reaction to that, you know, and how many years later, we had the opportunity to buy it all this summer and during the coronavirus pandemic at prices that we thought were pretty attractive. And so I guess on that one, we had the observation first, this is pretty good. Can it come down to the price where it's attractive?
29:40 Speaker 02 On other ones, I would say that we dig in, we keep thinking, we ask questions, we ask detailed questions. We do a lot of work and then the nuggets of gold may reveal themselves after a lot of digging. So probably both ways.
29:53 Patrick O'Shaughnessy? I'm really interested right now in the topic of media and character creation and media personalities and all this sort of thing, which makes me think of WWE. Business, I have no idea how it works, especially because it seems like maybe there's pay-per-view and there's in-person events. I'm not a wrestling fan myself, never really have been, but it strikes me as probably a really interesting business to understand the mechanics of. Can you walk us through how business like that works and what you've learned about this sort of personality-driven media phenomenon? Cause that seems like something that's going to be important in the next several decades with social media and beyond.
30:28 Speaker 02 I've been following WWE for two decades. I know it quite well. I think it's a really unique US media asset. I have to say, actually, first and foremost, I forwarded one of your podcasts to some of the people I know there. When I think you had this guy, Matt Ball, on and you were talking about the metaverse and all that kind of stuff. And it just struck me that WWE, the difficulty in developing such a good IP and having three generations of people in the household were fans at one point. It's terribly hard to develop some of these things. Some of these personalities are larger than life. And it just struck me, I was like, boy, WWE is going to have license to Facebook on their Oculus or some VR platform. Why shouldn't you be able to put the Oculus headset on and be right on the stage, all around you, the match going on?
31:13 Speaker 02 And, but I think it doesn't get taken as seriously as it potentially should. It's generally speaking, it's men and women clad in bikinis and tights, kind of throwing each other around and scripted. But the engagement they get is just phenomenal. Now, if you measure engagement only by ratings. Their engagement over time has fluctuated and I'd say opportunities that we see in the shares. This is, I think, the third major opportunity since nineteen ninety-nine to buy the shares at the prices that we consider to be very attractive. Those have been good times to consider buying the equity when Wall Street investors were worried about engagement. And there's certainly some things to be worried about. It gets a bad rap, it's misunderstood. They hold events in New York City, but I wouldn't say like New York City is their core market.
31:57 Speaker 02 It used to be that National Tennessee would get the highest ratings share, I think, for wrestling, if I recall. Or you might say it's kind of a NASCAR crew. But I do think that they're exceptionally good in what they do. They've been around forever. To me, I'd say there's no chance that the fans disengage with the company over time. And there's a lot of really interesting upsides that are built into the model. Now, I haven't talked about the model so, so much. You can think about it like a circus. They traveled around and they put their show on, they charge for events, they'd sell you stuff at the events. They would televise it and be on TV and people would pay for those rights.
32:38 Speaker 02 But a couple of years ago, the company went through a massive transformation and all that really happened was Fox woke up one day and said, "We want to own SmackDown." So two main shows are Raw and SmackDown. Raw is broadcast Monday night. SmackDown is broadcast Friday night. Comcast previously had had those rights. Fox decided that it wanted to play in those rights. And so now those rights are split between Fox and Comcast. And the value of the US media rights went up by a factor of, I think, almost four times on the last go around. So that really transformed the company into a different beast and different animal, where the touring side of the business absolutely shrunk relative to the overall profit pool.
33:23 Speaker 02 I think the debate on Wall Street is, well, what happens to those media rights in twenty twenty-four? When they come up for renewal? And when you're in a COVID crisis, you don't have an audience. And their audience participation is way more important than football and baseball and everything like that. The performers feed off the audience. So the loss of the audience here has been. Way more difficult than kind of any other event. They will come back from that, but I do think that has created a perception that the next renewal for the US media rights will not go well. I don't think that's going to be the case. I think that they have plenty of time to reengage the audience. I'm assuming sometime between now and 2024, we're doing live events again,
34:08 Speaker 02 and that will reengage the audience and help the storyline and get them back on their feet. In the meantime, we're Wall Street investors. We're not just talking about the business in the vacuum. You've got to like, well, what's priced in? My belief is that with reasonable assumptions that the market is pricing in a down round on their media rights, and I think that's wrong. You just saw Major League Baseball kind of re-up their rights. I think it was a 60% premium to the last round, and there were some additional games that were added and additional things thrown in. So you might not say 60% is the new market. And each of these properties has a unique renewal negotiation. But I don't think the market is down on US media rights for an important property that does a very specific thing well.
34:51 Speaker 02 And the specific thing that WWE does well is it delivers a highly engaged, relatively large audience on Monday night and Friday night, and it's been doing it for 25 years.
35:03 Patrick O'Shaughnessy? Anything you've learned about how the revenue shakes out? I wouldn't be able to guess, first of all, what the revenue is, how much comes from events traditionally, how much comes from contracts, how much comes from merchandise? Is there anything interesting that you think, if I wanted to start a media company today, that involved the creation of IP, playing a 25-year game? What are the lessons could I learn from the way that WE does it? The mixing and matching of the different business lines?
35:28 Speaker 02 It's a unique thing that happened to among the last renewal rights. The media rights, which I think are fast approaching a billion dollars in revenue, now dominate the P and L, so. The trinkets they sell online and the T-shirts they sell when the events come back, those are smaller items. So those are all now kind of optimizing. But it's really going to be about the US media rights and the rest of the world media rights going forwards. But that dominates the P and L now. So it kind of makes everything else not matter. The last time that we bought shares of WWE and bought them in size was when the company went through a very interesting transition. It was profitable business that was paying a nice dividend. Vince McMahon had a vision that he wanted to have a direct path to his fans.
36:12 Speaker 02 And that was a WWE network and the internet and the explosion of infrastructure designed to create all the services that we now love and enjoy like Netflix, whatnot, allowed him to do that. And that's the WWE network. Now, to do that, they had to put at risk their pay-per-view model where they were getting 10 or 12 pay-per-views a year. They had to risk pissing off their partners in distribution. And so they went from a money-making business to a money-losing business, cut the dividend to make that transition, and Wall Street absolutely hated that because it created a high level of uncertainty and it wasn't certain that they would emerge victorious from that. That goes back to some of the sectors that we like.
36:54 Speaker 02 Essentially, WWE, when it launched its network, was investing to create its network, became a completely different company. That tends to make Wall Street very uncomfortable. And they were. And that also created an absolutely amazing $6 and $7 price to people that kind of had the vision or shared vision that the network would actually be valuable. Interestingly enough, and this is a great opportunity right now relative to the share price, is that the company announced that it's looking at alternatives, quote-unquote, "alternatives" for the network. And what that really means is that they are now looking at their direct path pipe to their fans. It's just another licensing opportunity. The product is the product. It's the performers. It's the onstage athletics.
37:39 Speaker 02 It's the story that they create. It's years and years of IP. And I think they're going to be looking at their network as just another potential thing to license out. Now, who steps up for that? This is where it gets really interesting. It all makes sense, too, by the way. The streaming wars are in full swing. My opinion is that the bundle is in the process of being reassembled in OTT environment and digital environment, and that's likely to happen again. It makes sense that one of the big players could do more with the WWE network as part of a portfolio of properties than they could do alone. Would Disney potentially be interested in the WWE network to help drive
38:21 Speaker 02 more subscribers to ESPN? This is what they did a deal like this with the UFC. That's very interesting. Would other big tech companies be interested in the audience and the engagement that WWE has? Absolutely. One of the knocks is, I told you, people are worried about how the US media rights renew for the pay TV, the traditional pay TV ecosystem, linear TV. Again, I don't think the market for that is going to be down. It's not going to be a down round for WWE. But even if it is, that means their streaming rights are more valuable. There's another transition going on. The main thing is, is that they just get highly, highly engaged fans, and they've done it forever. And yes, there's ebbs and
39:00 Speaker 02 flows and how the performers relate to the fans, but they always find another one. When The Rock retires, gets out of wrestling, and he still wrestles, by the way, it has an effect on engagement and ratings, but they've time and time again been able to find the next one. That's the brilliance of the company and Vince McMahon. I mean, I consider him a visionary, nothing but respect for what he's built and for the family. It's wildly impressive, actually.
39:26 Patrick O'Shaughnessy? What have you learned through your history in having to fight around businesses? I think especially early on, you were involved maybe in a little bit more of like activist style investing and probably against some formidable opponents. It's a unique feature of public markets that this sort of thing can happen where you don't get to choose your shareholders as much as you might as a private company or do as a private company. So interesting things tend to happen in the activist world. Talk me through your experience there and what you've learned.
39:55 Speaker 02 Ah, it's kind of funny. Look, I came into the business pretty naively. I'm like, well, I expect to be treated fairly. If someone didn't treat me fairly, I got pretty upset. And then a couple of times I said, well, I'm actually going to do something about it. I learned, we got into a spat with Ron Perlman many, many years ago in a company called M and F Worldwide. And I learned an awful lot about how to fight and an awful lot about boards and dynamics and all that kind of stuff. How to justify transactions that are not justifiable. That was a very, very interesting experience. I don't want to go over the whole story, but if you Google my name and a company called M and F Worldwide, some stories would pop up. We helped reverse a decision, a blatant kind of play to create wealth for Ron Perlman at the expense of shareholders.
40:40 Speaker 02 And I learned a lot doing that. I was kind of a corporate gadfly complainer with a company in Chicago called John Naveen. That was paying its executives very, very generously early on. And I remember I went to the annual meeting and started asking questions, again, super naively, just like, this is unfair. Why are we doing this? I kind of learned a lot from some early interactions trying to stand up for shareholders. John Naveen was another one. And I remember got down to, I went there, I flew there, I had a meeting with him and the co-CEOs, the CFO and the investor relations person. They brought me into this board room and they're like, how can I help you? I must have been 25 or 26 years old. And that room got real hot suddenly.
41:23 Speaker 02 But I said, you know, I think your compensation plan is unfair. I would just kind of say these things to people. So that, I guess that naive assumption that I should be treated fairly by a management team, combined with another naive assumption, you know, maybe there's something I can do about this. We've always been active shareholders. We're active. I don't consider us activists necessarily, that we have played the activist role from time to time. It's labor intensive. It's not necessarily fun. It's a tool in our toolbox. Generally speaking, we try to find company-like stitch fix, something else where we could help wind up the management team and watch them go for the next decade and not have to do a lot of work. We love working with management teams. I still remember that story, go back to Netflix a little bit. I don't know exactly what happened because I wasn't in the room.
42:08 Speaker 02 But people at one point thought that Carl Icahn was going to make a run at Netflix. And I think I read some story, something. Ree just invited him in and said, let me tell you about our business. A really talented management team. That's working hard for the shareholders. They have nothing to fear from an activist. A lot of times, it's the management teams that have a situation that's too attractive. The compensation's been too good. The board's overpaid for underperformance, that kind of thing. Or there's a very big delta between a company's intrinsic value, strategic value and market value, and it's persisted for a long time. And maybe the company has been unwilling to, say, repurchase shares or do something that might make the situation better for shareholders. Those are the kinds of situations where a good activist could add a lot of value.
42:53 Speaker 02 And not all activists are good. Some of them do kind of hit and run activism. That's not us. People that are thoughtful, take a long-term point of view and are really trying to help the company. They should be welcomed by management teams and boards. Sometimes they are, but oftentimes they're not.
43:10 Patrick O'Shaughnessy? If you think about the sort of rate of return, I don't know how else to frame this, on deep work, the type of which you've described on something like Blockbuster Serial Numbers or something like this, that I'm sure is still quite rare because deep work is just always rare everywhere. How do you think that's changed across the last 25 or 30 years from when you first started doing it to today? Do you think that that's more valuable work to do today, less? How would you describe the change in the opportunity set for that kind of work?
43:39 Speaker 02 I think it's just as valuable now. When I first started the fund in 1997, kind of go back to 90s. Things have changed, things haven't changed. You know, I'd say it's probably tougher and more competitive to get differentiated information today. Access to information has been democratized. Information moved more slowly when the 90s, when I first started in the investment business. I remember, and this will sound funny. I like telling little stories every now and then. I do that on Twitter and remind people of what the business has changed and how it hasn't. But I remember in the 90s, you could short spinoffs in the when-issued market. And then everyone get their shares and then they would trade down. Then you could cover them and even go long, you know, if they're a reasonable business.
44:24 Speaker 02 It was like 80% of them you could do. I remember if there was a high short interest ratio in a company, it was a red flag in of itself. Companies weren't highly shorted. What it meant much of the time is that a sophisticated short seller had found out that something aggressive was going on in the accounting. It's like, oh, you look at that, that's interesting. Oh, it's a high short interest ratio. I'll look at something else. So the information moved more slowly. All that being said, I don't think the game has changed that much. It wasn't a piece of cake to figure things out back then. It was labor intensive to get information. You had to call up the companies and ask them to send the quarterly reports and annual reports and all that kind of stuff. It was a slow, painful process. If you really wanted
45:05 Speaker 02 something fast, you'd go fish it out on microfiche or pay for a service and they'd deliver the papers to you the next day or something like that. I think the participants were also different. You know, there weren't as many hedge funds and certainly what's in Twitter or the internet or anything like that, kind of talking about deep things on very specific kind of companies. But the job was the same. It was challenging then. It's challenging now. It hasn't changed as much as maybe others might say, at least in my mind.
45:34 Patrick O'Shaughnessy? Have to turn now to my traditional closing question that I ask everybody. This has been such a cool, different episode diving into random different companies, not a lot of rhyme or reason, other than something really interesting going on. My traditional question for everybody is to ask what the kindest thing that anyone's ever done for you is?
45:50 Speaker 02 There's a lot of things that I could say or anyone could say. One that comes to mind goes back to when I graduated college. A good friend of mine, guy by the name of Rich Jaffe, his parents were Stan and Myra Jaffe. And they lived in Pleasantville, New York. My parents were like up in Canada. After I graduated, I went to Binghamton's and I had a job. My first job was Mario Gabelli, still around today picking stocks. And I had this gap where I was like, I didn't have any money. I had a job. I was two weeks, you know, after I graduated, I had to show up for work. I was like, where am I going to live? I didn't have any money. I couldn't afford rent. Now, my friend was doing an internship. He wasn't even in town, but he was like, Can live with my parents, said Pleasant Fields in Westchester.
46:35 Speaker 02 So Stan and Myra Jaffe opened their house to me with their son not even there. I moved in and lived in the basement with my parents and my friends. And I don't want to get choked up here that I'll never forget that. That was super nice for them to have done that for me. They passed on, so it's a worthy thing to mention is the nicest thing that someone's ever done for me.
46:59 Patrick O'Shaughnessy? Wow, fantastic. What a great, wonderful story. Always my favorite question. There's always something remarkable in there and it's cool to hear that one. I love it. Mario, thanks so much for the time today. I learned a lot as I do always when talking to you. Appreciate your time.
47:11 Speaker 02 Yeah, thanks so much.
47:14 Patrick O'Shaughnessy? If you enjoyed this episode, you can sign up for a new email newsletter sent out each week called Inside the Episode. Each week I condense that week's episode to my favorite big ideas, quotations and more. I've been recommending books to members of this email list for years and will keep doing so in this weekly email. You can sign up at investorfieldguide.com/bookclub.
Previous Bob Pittman - Lessons from Building Media Empires – [Founder’s Field Guide, EP.12] Next Zach Perret – The Future of Financial Services – [Founder’s Field Guide, EP.13] Page updated October 26, 2026 · transcript and summary are machine-generated
