Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) is shutting down Google+, its failed social media platform, after the private data of 500,000 users was exposed. Meanwhile, video-streaming juggernaut Netflix (NASDAQ: NFLX) is buying ABQ Studios in New Mexico.
On this MarketFoolery episode, host Chris Hill and senior analyst Jim Mueller analyze those stories, and Jim shares why he's watching the ripple effect of tariffs this earnings season.
A full transcript follows the video.
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This video was recorded on Oct. 9, 2018.
Chris Hill: It's Tuesday, October 9th. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio today, Jim Mueller. How are you?
Jim Mueller: Hey, Chris! It's good to be here!
Hill: Thanks for being here! We've got Netflix cutting yet another big check. We'll get to that. We'll get to an earnings preview. We have to start with the story that broke yesterday afternoon after we had taped yesterday's Market Foolery, and that is Alphabet shutting down Google+. Honestly, I wasn't even aware that was still a thing. For those unfamiliar, and I'm assuming that most people, Google+ was Google's attempt at a social network. By the way, there have been multiple reports on this story from mainstream media outlets that are just out and out referring to this using some version of the word "failed." "Google+, the failed social network," you know?
Now, joking aside, they're shutting it down because there was a breach of some sort, a security breach.
Mueller: Yeah, they messed up.
Hill: It happened six months ago.
Mueller: Well, no, it started as early as 2015. They just discovered it six months ago.
Hill: Oh, this is getting better all the time. I think there are a couple of threads I want to pull here. We'll get to the security one in a second. All joking aside, I'm a little surprised that Google+ was still around because of Ruth Porat, who's been the Chief Financial Officer at Alphabet for a couple of years now. She's done a phenomenal job. I just assume, anything that is running at Alphabet has gotten Ruth Porat's sign off. When I saw the news that Google+ was being shut down, before I knew anything about the security issue, I just thought, "Wow, I would have assumed that that thing was killed years ago."
Mueller: Yeah. Because Facebook (NASDAQ: FB), right?
Hill: Their attempt to compete with Facebook.
Mueller: And they were already behind when they started. The Wall Street Journal, had a great quote by Youssef Squali. "Google was trying to be more powerful than the Pope when they launched it." The Pope in this case being Facebook. But it shouldn't have taken several years for them to figure out that they're not going to catch up. So why keep it open?
Hill: My assumption is, they kept it open because, at least on some level, there was a business case somewhere. Maybe in and of itself, it was not a profitable entity, but it tied into other things that they were doing. Because they kept it going. I mean, it's been failing for a long time. They've kept it going. And now they're shutting it down because of the discovery of this breach, which they didn't reveal six months ago because they thought it would make them look bad.
Mueller: Well, you have to remember, that's when the Cambridge Analytica and Facebook story was still very much in the news and everyone was being ruled by Congress. Alphabet apparently didn't want to play in the same fields there. Even though now the story has come out, as it does, and it's not so much that there was a breach. It was that they didn't report it at the time. It's not the sin, it's the cover up that makes people even more upset. And I think people have a right. And even the reporting on this, they say they didn't have a lot of activity logs on the activity that these app designers were doing. They haven't talked to any of the app designers. They just looked at some and noticed their profiles, and they hadn't had any complaints, so they figured nothing probably happened, so we're good.
Hill: And in fact, maybe nothing nefarious was going on. But as you said, it's the cover up. On top of which, part of my reaction to this story is, you're supposed to be good at this, aren't you? Isn't Alphabet supposed to be good at security? Rightly or wrongly, I expect more from Alphabet when it comes to data security and being able to prevent any kind of a breach. I expect more from them than I do from Home Depot.
Mueller: I don't know why.
Hill: [laughs] I was going to say, just to pick one random retailer that in the last few years has --
Mueller: Or Target or somebody like that. But no, Google has this whole history of security problems. When Gmail was first launched, don't you remember the big hoopla? They were scanning people's emails to serve them ads better. People pushed back, and they said, "OK, students and businesses and government users of this, we won't do that." But they only just recently stopped doing that on everyone else on Gmail. Then, on the street view cars, with the cameras, for their Google Maps, the street view, you can go down and see what the business looks like, or your home. They were "inadvertently" picking up data from unsecured Wi-Fis, such as URLs or passwords, from people's homes. So, having high expectations of Google is nice, but hasn't been really born out.
I think it speaks more to the whole issue about big data. Facebook's Cambridge analytical story, Target's and Home Depot's and everyone else's breaches. Defense is hard because the offense always has the advantage. They're going to find those loopholes. They're going to find those holes. It's hard to imagine what all can be done with this stuff.
Hill: When Facebook recently had the departure of the executives from Instagram and the folks from WhatsApp, and that sort of thing, one of the things we were kicking around in the office was, "Boy, if you're doing acquisitions for another big tech company, that's probably a nice talking point. Hey, you should let us buy you instead of Facebook, because look at what happens with those people." In that same vein, I think if you're whoever is in charge of the burgeoning advertising business at Amazon, you have to like this news. It's one more talking point for potential advertisers, like, "Well, maybe cut down a little bit of your spend with Google and come on over to Amazon."
Mueller: Well, just like Facebook was dominant in social media back at the time, Google is the dominant player and dominant source. I mean, Google's a verb now. It's not just the name of the company.
Hill: Let's move on to the entertainment industry. Shares of Netflix up a little bit this morning on the news that Netflix is buying ABQ Studios, ABQ short for Albuquerque, based in New Mexico. ABQ Studios is home to several television shows, most notably Better Call Saul. I didn't see a price tag associated with this. I'm assuming they didn't have to reveal that.
Mueller: Nothing's been announced. And it's not even a done deal yet. The people from Albuquerque and the state of New Mexico are talking as if it is a done deal.
Hill: I was going to say, wasn't there an event with the governor of New Mexico, the mayor, that sort of thing?
Mueller: For one thing, since the city of Albuquerque is contributing some funds, the City Council has to approve the deal. That hasn't quite happened yet. But, yeah, it looks like a nice deal for Netflix. They have Albuquerque Studios, which has been for sale for a few years now. It has nine sound stages, production offices, a backlot. Has been the site for some filmings, such as Godless, and Longmire, The Ballad of Buster Scruggs, which I actually want to see.
Hill: That's the new Coen Brothers movie, right?
Mueller: That's the new Coen Brothers. Even the Avengers 2012 was filmed at ABQ.
Hill: So, this seems to be right in line with the move that Netflix had a little while ago, moving their headquarters to Los Angeles. I think if you're anyone else in the movie business, you have to be viewing this news with a little bit of trepidation.
Mueller: Well, if you're in the Hollywood movie business. But television and film are becoming businesses all over the place. New Mexico had $500 million spent there last year. Georgia has had over $2 billion dollars spent in filming in Georgia. It's big business elsewhere. States are seeing this opportunity and offering incentives, so people are going all over the place. The U.K., for instance, is a big place internationally.
What I think this plays into, not just the headquarters move with Netflix, but some of the announcements they've had out of Europe. They have two offices already in Amsterdam and London. They recently announced a new office in Paris, and then a studio outside of Madrid. Now, they just recently announced a new office in Madrid, as well. I think Netflix is making a serious play to secure places to do its original programming and filming around the world and be able to save on costs in the long run by doing so.
Hill: It saves on costs and it's also one more carrot that they can offer to show runners. We are starting to see, certainly, the other major studios and the other television networks maybe not push back so much, but basically, their selling points to a show runner is, "Hey, look, we've only got a few shows on our network, and we want yours to be one of them. We're going to promote it in a way." Netflix, they're doing a fine job, but Netflix is basically going to give you a day's worth of promotion.
Are you surprised at all at the growth? Not so much in the business and the stock, but in the growth of the production side of things? This Albuquerque, this will get finalized. But the European operations?
Mueller: In one way, yes, because, at least here in America, we've been trained that the big film locations are Los Angeles and New York. But Netflix is showing that people know how to tell stories, write good stories, and a good number of them are not here in the U.S. So I think they're taking advantage of that and, as part of their global expansion, finding a lot of those international producers and storytellers.
Hill: Kudos to New Mexico! When I was at SXSW earlier this year, in the trade show, there were a number of states and municipalities that had set up booths. A bunch of them were making the pitch of, "Hey, here's why it's good to do business in Tulsa, Oklahoma." "Here's why you should come to the greater Richmond, Virginia area." That sort of thing. And for a bunch of them, part of their pitch was to the entertainment industry. I talked to the guy from, I'm going to get the name wrong, but it was from Florida and it was an entertainment wing of the state. And basically, that guy was just sad. I was like, "Are movies not being filmed in Florida?" And he basically said, "Georgia is just crushing the rest of us. Georgia has rolled out so many incentives that all these big studios are just going to Georgia."
Mueller: They went from $60 million spent in Georgia in 2007, I think, was the stat, to $2.7 billion in last year, fiscal '17. That's quite a bit of growth. Yeah, this guy had it right.
Hill: We've got earnings season kicking off at the end of this week. Really starting to heat up next week. What is something you're going to be watching this earnings season?
Mueller: I'm really curious as to how the tariffs and the trade war with China are going to play into earnings of various companies. Even broader than that, basic economic things. For instance, Ford management has already come out and said, "We're going to lose a billion dollars because of this." That was a couple of weeks ago, I think, they said that. I'm interested to see how different types of companies and management might speak to it, how it affects their margins, how it affects their costs of inputs. Companies like Facebook, or Alphabet, or Netflix, probably not too much, because they don't really deal in physical goods. But companies like Apple, for instance. Their phones, a lot of their parts are made over in China. How's that going to affect their margins? And what might happen there?
This quarter might be a little too early to really start looking at this, except for maybe what management has to say about going forward. That $200 billion of goods being taxed now just only recently rolled out.
Hill: In terms of the tariffs, do you expect you could hear something on a conference call, or it comes out in an earnings announcement, that makes you go, "Whoa, I didn't know it was going to affect you that much. I'm now out on this stock." Or, does it make you go, "Alright, now I just need to adjust my expectations."
Mueller: More the latter. The economy and the businesses are so tied together. Take just in time inventory, which so many retailers now use, pioneered by Dell and, I just recently learned, came about because the trucking industry was deregulated, so they could ship things more easily. But now, almost everybody does just in time inventory. How is that going to be affected by the tariffs? How are the ports on the West Coast going to be affected by the tariffs? How are the truckers and the rail companies that move those goods inland going to be affected by the tariffs? It plays into so many different parts of business and the economy that you could be listening to a conference call from somebody and think nothing's going to hurt this company, and then they say, "Our costs are going up 2% this next year because of the tariffs." That would surprise me, because I might not have realized that.
But, because we're long-term investors here, I don't think that's going to make me think I need to get out of the stock, I need to get out of the investment. Companies will adjust. It's going to be painful, but companies have to adjust for all kinds of things all the time. This is just one more headache that they have to adjust to.
Hill: Jim Miller, thanks for being here!
Mueller: Thank you!
Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Chris Hill owns shares of AMZN. Jim Mueller, CFA owns shares of Alphabet (A shares), Alphabet (C shares), AMZN, and Netflix and has the following options: long January 2020 $1370 calls on AMZN, short January 2020 $1380 calls on AMZN, and long January 2019 $110 calls on Netflix. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), AMZN, AAPL, Facebook, and Netflix. The Motley Fool has the following options: long January 2020 $150 calls on AAPL, short January 2020 $155 calls on AAPL, short February 2019 $185 calls on HD, and long January 2020 $110 calls on HD. The Motley Fool recommends F and HD. The Motley Fool has a disclosure policy.