Author: Rocco Huang
Covestor model: Tortoise and the Hare
Disclosure: Long ATVI, NWSA, DTV
The other day I had a serious discussion with some friends about the future of unskilled workers. The income inequality in our society is partly caused by skill inequality. Some skills and jobs are more scalable and therefore naturally command a salary premium. For example, an NFL player can collect a huge paycheck because even if each of the millions of TV viewers is chipping in only one penny per game, that adds up to a large sum. By contrast, even the best plumber in the world can fix only so many houses in a day. His service is not scalable, so his income is going to be limited.
No government policies can change the inherent differences between jobs in terms of scalability, and therefore income inequality is not going away any time soon. An NFL player can gather income from millions of plumbers, but he can create demand for only a few plumber jobs.
If the income level of the lowest 99% is unlikely to rise, desperation may build up among this majority and civil unrest can certainly be a distinct possibility. The future is not bright and it seems that there is not much we can do to change it.
It suddenly hit me that what happens in the sci-fi movie “The Matrix” is actually relevant to our situation. The world in which the main character Neo grew up is called The Matrix, which is a simulated reality developed by the machines (the new ruler class of the world) to keep the human captives living in addictive dreams and as a result docile, similar to what opium would do.
I don’t think that’s where our world is heading – not in my lifetime. However, I suddenly realized that the mass entertainment industry (TV, movies, video games, etc.) actually serves a similar purpose as the Matrix: to help the 99% have-nots fantasize about the life of the 1%, in their minds only.
Now the future looks a little bit brighter: we see a potential short-term cosmetic fix to our society’s problem, and, ironically, an attractive investment opportunity.
After a busy working day, people watch TV, movies, play video games, in order to forget their mundane life. For most of us, the virtual reality is usually an upgrade from the real one.
In reality, we don’t dance with stars, we are terrible singers, we don’t kill monsters and dragons for a living, and we don’t spend half a million dollars on our children’s birthday parties. In both Mexican soap operas and Bollywood movies, the good guys always manage to take a revenge on the bad guys, and romantic couples of disparate backgrounds eventually have happy endings.
In a nutshell: “Television is not real life. In real life people actually have to leave the coffee shop and go to jobs. Your friends will not be as perky or pliable as Jennifer Aniston.” (This quote has frequently been attributed to Bill Gates, but actually came from Charles Sykes)
It is not surprising that one’s income level is usually negatively correlated with the amount of time one spends on watching TV. Higher income people have less free time, and perhaps their real life leaves less to be desired. They already have what they want.
In poor countries or in the poor spectrum of the society in developed countries, the have-nots need more than food, shelter and education. Brazil was in deep recession and civil unrest in 1991. However, the achievements of Formula One racing driver Ayrton Senna in the international arena provided the nation with a little joy and dignity every weekend – probably the only joy and dignity that the poor there had. Senna became a national hero and a great pacifying force in a country with one of the highest income inequalities in the world. (That only joy was taken away from them in 1994, when Senna died in a racing accident.)
Businesses that can help people kill time, escape from reality, and fantasize about a parallel life can prosper in a stagnating economy and an unequal society.
I believe one can capitalize on this trend by investing in DirecTV, Activision Blizzard, News Corp and Viacom. Their business models all can be described with the same words that Buffett used to describe the cigarette business: “It costs a penny to make. Sell it for a dollar. It’s addictive. And there’s fantastic brand loyalty.”
DirecTV (DTV) is a satellite broadcast service provider operating in the U.S. and Latin America. For several dollars a day, one can escape from reality and indulge in unlimited fantasies, be it soap operas, reality TV, or sports events. In many Latin American countries, satellite signal is probably the only infrastructure that can be considered reliable and literally “out of this world”, and therefore DirecTV truly provides an escape from reality.
Where can you find a cheaper entertainment solution than watching TV? Not even smoking can beat it on price. No wonder DirecTV is doing well in the US and abroad even in a challenging economic environment. One would rather skip breakfast than cut the cords (and the satellite dishes). For the 99%, the pain of hunger is easier to bear than the pain of reality.
Activision Blizzard (ATVI) is a video game maker known for the World of Warcraft and the Call of Duty franchises. Violence in virtual reality is more fun and less physically demanding. Once you are killed, you get reborn in 30 seconds. What a great escape from reality. Even better, like other media businesses, the variable cost of serving one more gamer is insignificant. In fact, the company’s networked games become more valuable with more participants.
News Corp (NWSA) is known for the Fox TV Network, cable channels Fox News and Fox Sports, 20th Century Fox movie studio, and the Wall Street Journal.
Deep inside, many of us feel that we are so important that the world will stop running if we are not aware of an exotic three-eye kitten born in a remote village somewhere – typical “breaking news” updates gladly provided by Fox News to satisfy your curiosity. Yes, when you are not the richest, it feels good to be at least the most informed person among your friends and colleagues, and Fox News gladly collect $1/month from you for that service. You may not notice this because your cable companies usually include Fox News in the basic package.
Not interested in politics or national/world affairs? Fine. Get the Sports Package or rent a 20th Century Fox movie DVD, and fall asleep on the couch. Finally, don’t forget that News Corp also owns significant stakes in many satellite broadcasters, including BSkyB with 10 million subscribers in Britain.
Viacom (VIAB)’s video contents remain one of the most cost-effective sources of entertainment. The Nickelodeon channel can stop crying children, the Comedy Central can make you laugh (and release pain-killing endorphins from your brain), and the MTV channel can help teenagers fantasize about the life of rich kids in Orange County or poor kids on the Jersey shore.
No doubt the Real World doesn’t live in the real world, and My Super Sweet 16 is the 1%’s sweet sixteenth birthday party. Certainly these are not NPR or National Geographic type programming, but why should we care? As Lowry Mays (founder of Clear Channel Communications) used to say: “We’re not in the business of providing news and information. We’re not in the business of providing well-researched music. We’re simply in the business of selling our customers products.”
Customers get what they want and what they deserve. People are looking for an escape from reality. Good businesses serve their customers’ needs. Too bad more people read tabloids with topless Page Three Girls than do the New York Times. But who are we to judge them? The economy is bad enough. Give them a break and may everyone have a nice dream!
The entertainment business is about selling dreams to the have-nots and getting them plugged into the Matrix.
Now you can also understand why FMyLife.com, a site where people post their everyday unfortunate happenings in 2-3 sentences starting with “Today…” and ending with “FML”, has become more popular as the economy turns south. Other people’s miseries can be very entertaining and reading them can make us forget our own, temporarily. What a great business model! I would invest in FMyLife.com if its stock were traded on stock exchanges.
Here is one submission found on the site:
Today, my mother was watching me play Pokemon. She walked over to the TV and pulled the plug before ranting about how shameful it is that her 17 year old daughter plays Pokemon. She then sat down at the computer and started playing Farmville. FML
I agree, your life sucks, living with your parents and playing Pokemon. And that’s an investable trend.
