The Update Issue: Everyone Wants to Be in the Video Games Business, Unintentional Humor at WarnerMedia

By Berna Barshay

Wednesday, July 21, 2021

► A new offering from home fitness company Peloton (PTON) made a splash, probably because it sounds a little weird...

Journalists love writing about products that sound weird – it's clickbait that gets your attention. This explains why a bunch of ink got spilled on a new offering from Peloton that will probably have very niche appeal...

Peloton is getting into the video games business! Well, no... not really. But the company is introducing a new video game-inspired way to distract you while working out. It's an in-app video game called Lanebreak and serves as an alternative to looking at a pedaling instructor on your screen. As tech site The Verge explains...

The game, which will only be available for Peloton bike owners and subscribers, involves riders changing their cadence and resistance to meet various goals and control an on-screen rolling wheel. Players can choose a difficulty level, the type of music they want to hear, and the duration of the track before starting. The game isn't available yet, but a members-only beta will open later this year.

The article goes on to say that the "game's vibe and interface" is reminiscent of the Rainbow Road level in popular video game Mario Kart – something that means nothing to me, but might strike a chord with any gamers reading this.

Riders can earn points a few ways, including steering into the lane or matching the cadence the game asks for. Overall energy output will also score points.

Mimicking a video game is a new way for Peloton to distract users from the fact that they are working out...

Most people are lazy and/or don't truly enjoy working out for the sake of working out, but in-person boutique fitness companies and Peloton have figured out that the way to keep people coming back is to entertain them. If they succeed at amusing users, these folks will stick around... which is a total win-win. Customer churn will lessen... the company will make more money... and the customer will stick longer to a good habit.

Traditionally, Peloton – and its studio peers – have reeled people in with engaging instructors whose personalities, quirks, and musical niches have turned them into cult heroes with many devoted followers. With this video game, Peloton is offering something different to users who don't buy into the pull of these fitness celebrities.

The new Peloton feature is an example of the gamification trend we're seeing in lots of places. A great example of gamification is the mobile app from coffee giant Starbucks (SBUX), which is constantly prodding users to order more to gain more points and, ultimately, free stuff.

But Peloton is no stranger to gamification... The whole platform is rooted in it. From leaderboards that literally pit riders against each other in live and recorded classes to the monthly challenges that let users rack up badges and establish streaks... it has always been one big game, so a video game mode seems like a natural evolution.

There was a bigger piece of news from Peloton this week...

Health insurance giant UnitedHealth (UNH) announced yesterday that beginning September 1, it will provide millions of its members free access to the Peloton app. For members who own a Peloton bike or treadmill, the insurer will cover four months of costs for a subscription that enables streaming on connected Peloton equipment in addition to phones, tablets, and TVs.

Financial details weren't disclosed, but my guess is that UnitedHealth is paying a very meaningfully discounted subscription rate to Peloton.

In early May, Peloton reported it had approximately 2.1 million connected subscribers (those who own equipment) and another 891,000 digital-only subscribers. UnitedHealth's total membership was just under 50 million when the company reported first-quarter results in April. It's not clear how many of them will be getting a free Peloton app... but compared to the 3 million folks currently subscribing to Peloton, it's going to be a big number.

This is a great recruitment tool for Peloton, as free access to the app will introduce the brand to a ton of potential users they aren't reaching now.

This is a one-year deal, and at the end of the 12-month period, UnitedHealth members will have to sign up – and pay for – a subscription if they want to continue using the app. So whatever UnitedHealth is paying isn't a recurring revenue bump for Peloton. That could of course change if the program is popular... Many health insurers offer some form of partial gym reimbursement in their plans. Even if it costs them something, it's a win for them if members are working out, as more fit members should hopefully lead to reduced medical expenses down the line.

PTON shares jumped 7% yesterday to $126.35 on the UnitedHealth news.

I had a good call on PTON shares in June 2020 when they traded for less than $50 but told readers to move on in January when they changed hands at just under $160. I was afraid that investors would move on from "pandemic winners" at that point, which they largely have, and this is the primary reason that PTON shares are down 21% since that January essay.

Right now, Peloton's stock is in no man's land for me... a little too rich for me to buy, but not a screaming sell either. I'm a believer in Peloton's long-term prospects – the company has said recently that it can get to 100 million members. I think this is aggressive, but even if Peloton only brings in one-quarter of that and gets to 25 million, that's a lot more than the current 3 million. I'm watching and waiting on this one.

Peloton isn't the only one talking about getting into video games...

Streaming giant Netflix (NFLX) is eyeing the space as well. Last week, the company announced that it's planning to offer video games on its streaming platform soon and that it has hired an alum of video games powerhouse Electronic Arts (EA) and Facebook's (FB) Oculus virtual reality division to run the effort.

It makes sense for Netflix to explore mobile games. The company has always said that its competition comes as much from other forms of recreation as it does from other streaming apps. It even called out the popular game Fortnite as a competitor on an earnings call a couple of years ago.

And mobile games are huge... They now account for nearly half the revenue in the video games market, which is itself tremendous. Research company Newzoo estimates the global games market at $176 billion this year, and it's growing at a healthy high single-digit pace to boot.

Also supporting this foray by Netflix is its treasure trove of original content, some of which may prove ripe as source material for launching new mobile games.

Shares of video games retailer and king of the "meme stocks" GameStop (GME) fell 7% on the day of the announcement, but I really don't think that the traditional video games companies have too much to worry about regarding Netflix's latest move.

Traditional media companies paved the way for Netflix to cannibalize their core business of owning and making content for broadcast and cable television channels. They did this by taking the easy money offered by Netflix in return for licenses on the film and TV content in their libraries. It was a revenue windfall with virtually no cost associated with it, but it's also what allowed Netflix to build into the company it is today, with 209 million subscribers and a $225 billion market cap.

Long before Netflix started making original content, it gained its first-mover advantage in streaming by luring in subscribers with reruns of TV shows like Friends (licensed from Warner Bros.) and The Office (licensed from Universal Television) and old movies from Disney (DIS) and Sony (SONY).

Leading video games companies like Electronic Arts, Activision Blizzard (ATVI), and Epic Games are highly unlikely to repeat the strategic mistakes made by the legacy entertainment studios... They've seen this movie before.

Netflix will likely be relegated to second- or third-tier content in terms of licensing games... And when it comes to making originals, keep in mind that making games is hard. Additionally, competition is already fierce for talented engineers and designers in this field, who have a lot of options, including at companies where the commitment to and heritage in games is stronger or at earlier-stage companies where equity grants are more of a lottery ticket.

In summary, it will likely be impossible to secure great gaming content without buying whole companies... and building great gaming content internally will be even harder.

Netflix is so big now that top-line growth is getting more challenging...

It explains why the company has so many new initiatives – from video games, to building out children's programming, to the merch store. International markets offer big potential still for subscriber growth, but many of those subscribers come with lower subscription prices.

I warned last week that Netflix's second-quarter results could add to the wall of worry about a subscriber growth slowdown. While Netflix did manage to beat the low bar of analyst expectations, posting subscriber growth of 1.54 million versus estimates of 1.19 million, guidance for third-quarter sub adds was low at 3.5 million versus expectations of 5.5 million. The company also lost 400,000 subscribers in North America, where prices are highest.

NFLX shares are down 4% today following the earnings release and are down 6% since last Tuesday when I said to avoid them for the print. Netflix's stock is still a pass for me.

A couple of really funny things happened to WarnerMedia on the Internet...

Not to kick a dog when it's down... between AT&T (T) punting the business to Discovery (DISCA) just a few years after buying it and the box office disappointment of In the Heights... but these things are too funny to ignore...

First, there's the case of the new company logo, which was unveiled last month along with a new corporate name: Warner Bros. Discovery. It didn't go as expected. I'll leave it to Twitter to explain...

Source: Twitter/@WardrobeDoor

As if that wasn't bad enough, the folks at HBO Max suffered further embarrassment a couple of weeks later when they sent this e-mail to a few million subscribers (myself included)...

My old business school friend and WarnerMedia boss Jason Kilar addressed the screw up on Twitter with a characteristic dose of good humor...

Source: Twitter/@jasonkilar

HBO Max took to Twitter to apologize – and, comically, blame it on an intern...

Source: Twitter/@HBOMaxHelp

Twitter can be a rough place... but not for this intern, who received comfort and support from the masses. I encourage you to explore the delight that is searching "Dear Intern" on Twitter, but will offer you this sample of what you will find there...

Source: Twitter/@AerinChevyFord

And this one...

Source: Twitter/@postcards4USA

And this self-deprecating one, which may be my favorite...

Source: Twitter/@MonicaLewinsky

Three cheers for when the Internet can be a kinder, gentler, funnier place!

And congratulations to WarnerMedia for having a better day last week as HBO/HBO Max led all network/platforms with 130 Emmy nominations and Warner Bros. Television led all studios with 79 nominations. These guys were due a win.

In the mailbag, Empire Financial Daily readers are back in movie theaters and a question from a reader about investing in cryptocurrencies...

Any Peloton users out there who would use this game mode or want to weigh in on what they like about the product? Any predictions about how Netflix will do in mobile games or interest in using this service? And in solidarity with the sad HBO Max intern, share your worst e-mail misfire story, anonymously if you would like! Send your stories and thoughts to [email protected].

"My girlfriend and I went to see In the Heights in a theater, after a year + hiatus. For us, sitting in total darkness, eating excessive amounts of popcorn, and being absorbed by the screen action, IS the theater experience. Being from New York I could relate (I live in Mississippi now). There were six people in the entire house including us. We loved it, but it was obvious, we were clearly in the minority." – Robert B.

"I am a Canadian senior, waiting for Covid numbers to improve. I have gone to the movies twice in the last three weeks, and we have a large home theatre. To me, there's nothing like the BIG screen." – Galena A.

"So happy to get back to the theater again. Here in Florida, our state has been open for some time but now our theaters are back too. Was fantastic to see the long-awaited release of Black Widow in IMAX at the theater, especially since our local theater has large comfy leather recliners with tray and drink holders. Enjoyed my caramel popcorn and a great flick." – Aimee B.

"Hi Eric, If you bought your crypto through an account with Robinhood, how do you put it in a wallet? Thanks." – Chidinma I.

Eric Wade comment: I don't think you can (but I've heard that maybe in the future this will change).

The point is, if you buy cryptos through Robinhood, you are exposed to cryptos... but Robinhood is holding them and you may or may not be able to move them out.


Berna Barshay
July 21, 2021

Whitney Tilson
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About Whitney Tilson

Prior to creating Empire Financial Research, Whitney Tilson founded and ran Kase Capital Management, which managed three value-oriented hedge funds and two mutual funds. Starting out of his bedroom with only $1 million, Tilson grew assets under management to more than $200 million.

Tilson graduated magna cum laude from Harvard College with a bachelor’s degree in government in 1989. After college, he helped Wendy Kopp launch Teach for America and then spent two years as a consultant at the Boston Consulting Group. He earned his MBA from Harvard Business School in 1994, where he graduated in the top 5% of his class and was named a Baker Scholar.

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