Weekend Reading #16

Photo by Eli Francis on Unsplash

This is the sixteenth edition of our weekly newsletter, Weekend Reading, sent out on Saturday 11th May 2019.

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We’ve been travelling in emerging markets for many years, and in that time we've met some seriously impressive people. We rely on their deep knowledge of local markets to spot investment themes and specific opportunities before they enter the mainstream investment management discourse.

Here at Three Body Capital we do things differently. We invite our investors and partners into our process, creating a more transparent and aligned approach to fund management. With this in mind, we've decided to share some of the conversations we're having with influencers in emerging markets via our newsletter, blog and social channels. The first in this series is our conversation with Indonesian businessman, investor and close friend of Three Body Capital, David Fernando Audy. 

This is very much an experiment for us, so please do let us know if you're enjoying the new content and how we can improve.
  

David Fernando Audy on Indonesia's changing media landscape.

David Fernando Audy is an Indonesian businessman who is currently CEO of PT Media Nusantara Citra Tbk, Indonesia’s largest free-to-air TV broadcaster and content production company. David is also an active investor, starting early at the age of 19. 

Being in the media and broadcast businesses for more than 16 years, David has profound insight into the workings of the content ecosystem in film and TV, both in Hollywood and the growing Asian content scene. This means that David is uniquely positioned to share his insights on dealing with the ever-intensifying #CompetitionForTime, one of our core investment themes here at Three Body Capital. David has a different view on this topic, and it was fascinating to hear how he sees it playing out in Indonesia.

Broadly speaking, how do you see the entertainment industry playing out in Indonesia? How is traditional media competing with the streaming players and how do you, as a traditional media operator, plan to grow your business?

Indonesia is a highly competitive market and an important expansion target for most global media and tech players, especially American and Chinese companies. FAANG and BAT are here from the early days, competing with local and regional media players. The foreigners have the edge with tech and capital, but when it comes to local content capabilities, the locals are unmatched. The good news for us is that the locals are getting even more local. Ratings for American and Chinese shows are way below those of local programmes. The same is true of social media channels, such as Youtube, Facebook and Instagram. Local content from MNC (which has 100+ Youtube channels with 35 millions subscribers) generates the highest views on Youtube, with 3-4 billion minutes of monthly total views – despite the fact that only clips and highlights of its TV shows are shared, never full episodes. 

As a longtime buyer of Disney content, what are your thoughts on the prospect of Disney+ and how do you think it will affect existing market participants both in Indonesia and internationally? 

I think Disney+ will be a formidable competitor to Netflix in the US, Europe and globally. However, I don’t think Netflix subscribers will churn to Disney+, but rather add Disney+ as an additional subscription. This makes a lot of sense, especially in the USA market where subscribers have to pay US$90-100 for Linear Pay Television. However, increasing competition from Disney+, Hulu, Apple, Amazon, will limit Netflix’s ability to increase pricing for the next few years. As such, these streaming platforms will eventually diversify their offering into music subscription to increase ARPU, and this will exert significant competitive pressure on players like Spotify or Tencent Music. But that’s a whole other story. Disney+ will also be a dominant player in the global video streaming market, but while it definitely has a major content advantage in the US, Europe and in many other English speaking countries, it will need to acquire local content rights and produce local originals in order to become a local winner. 

Given the challenge in Indonesia – (1) rampant piracy for both online and offline, (2) low GDP, hence challenging Internet monetisation, and (3) lack of local content owned by foreign internet players – there has not been one video streaming subscription platform that has really cornered the market. iFlix and Hooq are maybe the largest SVOD in Indonesia right now, but traditional broadcasters with strong local content (such as MNC, Emtek, Trans, Viva) are also building up their own OTT services. Everybody is moving to AVOD, as it is a more suitable business model for countries with GDP below US$7000, and this is why Youtube thrives in a country like India (2018 GDP US$2029) and Indonesia (2018 GDP US$3871). 

Everybody knows that competition is only going to get more intense. Improving local content production in quality and quantity, while learning what kind of content works for on-demand platforms, is the right strategy right now for Indonesian broadcasters and content producers.

In the #CompetitionForTime being fought between television, film, gaming and everything else, how do you see the television industry fighting its corner? 

I don’t see competition coming from gaming, it’s a totally different segment. The time spent on online gaming nowadays is probably similar to the time spent on gaming in the old days. For example, kids used to play soccer or basketball in the playground out of home, but now they meet in Fornite or PUBG. But the nature of time spent is probably similar. Youtube is not the same content and may not be directly competing with television. Sure, it competes in terms of advertising revenue, but not when it comes to content consumption. The reason for that is Youtube is user generated content, while TV is producer generated content – in industrial parlance, it’s called “quality content”. For example, in Youtube you search for how to bake a cake, while on TV you watch Brooklyn Nine Nine or Madmen.

#CompetitionForTime in the Television industry is more due to the fact that television is linear viewing, while online is on-demand. So its linear versus on-demand. Obviously, we know that in most markets, the later will be more and more preferred. However, this doesn’t mean that linear will die. There will still be growth potential for linear broadcasting, like we see in US television industries. And this is even more profound in Indonesia, where the advertising rate card is still very low, and linear broadcasting coverage reaches 95% of Indonesia (a country with 17,000 islands and widespread population), plus it is free to enjoy too. In addition, as online on-demand viewing is creating competition for TV linear viewing, there is also a silver lining. All of the on-demand platform will need to procure content licenses produced by TV, and this can be a new source of revenue growth for traditional broadcasters, which is majority accretive to the bottom line, as the content cost has already been expensed for linear TV broadcast.

I’d say in the next 5 years, free-to-air television will still enjoy growth. However, that doesn’t mean we can sit back and relax. We have to prepare ourselves to be a dominant force in the Indonesian online content industry, while we still have muscle. 

How has the burgeoning middle class in Indonesia contributed to changing tastes? Do people prefer local language content or international? 

Middle class consumers have always been the target market for large-scale businesses in Indonesia and as national broadcasters with 4 television stations (out of 10 nationals on TV) covering 95% of the population, producing content that appeals to the middle class is at the centre of our programming strategy. 

More than 20 years ago, only the “haves” could afford TV sets in their homes, and therefore foreign content like westerns and Chinese content (with Indonesian subtitles) delivered better TV ratings. At that time, local content was way behind foreign content. But today, TV ownership is widespread and local programming quality has improved significantly, shifting audience preferences to local content.

In terms of content, is Hollywood entirely dominant or are the Chinese emerging? How has mobile contributed to these developments?

Thus far, Chinese content hasn’t appealed to the Indonesian audience nor global audiences because it’s been targeting Chinese consumers. Korean studios, on the other hand, are targeting Asian audiences.

Going forward, I think Chinese content will gain more market share versus Hollywood, in Indonesia and globally. The key reason for this is China, which can now afford to spend significant budget in content production, given the giant domestic market. In fact, China is soon to be number one in terms of global box office market share (currently US$8.87bn out of $41,8bn global box office in 2018). China also spends billions of dollars investing in backlot studios and post-production facilities, on a par with Hollywood quality. US companies know this well and China will always be one of their top priorities when commissioning big budget theatrical productions. It’s the reason that we’re seeing more Chinese actor/actresses in recent Hollywood movies. In a decade or maybe less, China should match Hollywood in terms of content quality. 

Is cinema a growth market in Indonesia? Do young people go out to movies or would they rather stay home and consume content on mobile?

Cinema is booming in Indonesia. With 21Cineplex as market leader, followed by CJ Group’s Blitz Megaplex (CGV), and Lippo Group’s Cinemaxx, there are a total of 1615 screens in 2018, growing 29% from 1251 screens in 2017. This increasing competition amongst players rolling out screens indicates significantly growth potential for the movie-goer market. The expanding middle class and millennial segment is growing the addressable market for cinema operators. The adoption of online booking via mobile also increases the occupancy level of cinemas in big cities. 

Tell us how you think augmented/virtual reality will change entertainment as we know it today. 

Augmented Reality and Virtual Reality are the next stage of online disruption.

My take is that VR will be more applicable to gaming in the next few years before it is adopted for movie productions. VR adoption will also be driven by video streaming companies and content production studios, to enhance the consumer experience. Although we still don’t know whether this will change the way movies are being consumed. 3D movies were not really well accepted by audiences. Also we are yet to see if Netflix will be successful in its interactive movie innovation, such as “Black Mirror - Bander Snatch”. I would not be surprised to see Netflix, iQiyi or any other major SVOD companies experiment with producing VR movies in the next few years. But it will be expensive and they will want to be careful with their budget spending. 

As for Augmented Reality, I think its adoption will be at a much later stage, and it will be more of a Mixed Reality or MR, rather than Augmented Reality alone.

What’s your favourite TV show of all time? 

Macgyver (1985).

What are you watching at the moment?  

Netflix’s Daredevil, Billions, Narcos Mexico. I watch them to kill time while in the gym!
 
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Quickfire questions.

Best investment ever? 

TINS (PT Timah Tbk) betting on decades low tin price, depleting LME’s supply, and Indonesian illegal tin mining crackdown. Already exited in early 2019. 

INCO (PT Vale Indonesia Tbk) betting low nickel price due to US China trade war in end 2018, Tsinghan project HPAL nickel which collapse nickel price (again), exited in early 2019.

CMG (Chipotle) betting on turnaround post food poisoning incident and new ex Taco Bell’s CEO with his new online order initiatives and strategy. Already exited in 2018. 

BKD (Brookedale Senior Living) betting on asset play, BKD turned loss making post merger, price crashed end of 2017, but property asset is real and is the largest senior living operator in US. Exited in 2018.

ADRO (PT Adaro Tbk) and PTBA (PT Tambang Batubara Bukit Asam Tbk) betting on comeback of coal price post oil price crash in 2014-2015. Just when everybody think coal is dead. Already exited in 2016-2017.

ANTM (PT Aneka Tambang Tbk) betting on nickel price collapse capitulation in 2014-2015 post China’s nickel pig innovation that destroy class-1 nickel market. Exited in 2015-2016.

ELSA (PT Elnusa Tbk) betting on low PE / PBV due to price crash in 2012-2013, few years after its IPO. Exited in 2015.

Worst investment ever? 

My worst investment was DAVNET in ASX. I liked the company because its name was like mine, and what was even more stupid was to put all of my portfolio in a single stock. Bought the shares in the year 2000, then came the dotcom crash, DAVNET was delisted in 2001. Lost all of my 3 years university tuition money (AUD 38,000). Went living ass-broke for the next 3 years of my life in Sydney, eating instant noodles almost everyday, and working full time (not part time) for the whole of university to finance my living costs. It was a lesson well learnt. 

Current favourite stock?

ANTM – betting on nickel and gold price, both which has been multi years / decades low. All expectation is low, just a bit of positive development towards US-China or HPAL delay/disruption, or real growth due to EV demands, or a bit of stainless disruption, will be big news for nickel. ANTM is also SOEs favourite, a diversified miners, backed by Inalum, less likely to go bust. If Ray Dalio is right about GLD, then ANTM should also significantly affected. 

iQiyi – early Netflix-like story, but added with Youtube-like story. 7 of 10 families in US subs to Netflix, but only 2-3 out of 10 in China subs to iQiyi + TencentVideo combined. Forget about Youku. iQiyi is the only focused SVOD company in China (Tencent has too many things), and iQiyi is the most innovative – has their own VR devices, and tested on virtual online girlfriend project, VIVI. iQiyi content is also China’s best: Yangxi Palace, White Snake Legend, are booming not only in China, but also amongst overseas Chinese ethnics. iQiyi also has a proven track record for successful national scale talent search shows which is traditionally done by linear TV. Rap of China. No other SVOD / AVOD company in the world that has successfully done talent search in the scale like Rap of China.

What would you buy for your children right now?

Landed property or land.

What would you buy for your children’s children right now?

Same again. Landed property or land.

What’s your view on crypto? 

Blockchain is a useful innovation and is being applied not only in many data and transaction records, but virtually everything of value. But cryptocurrencies have no intrinsic value nor cash generating capability. Therefore, I believe they should be avoided as an investment. However, Bitcoin, as the pioneer in crypto, it will be the first choice for any fund manager that decides to invest a small part of their portfolio in crypto for diversification purposes. 

The one piece of technology that most excites you. 

CRISPR genome editing – this could create superhumans.

The one book that shaped your outlook on the world. 

Peter Lynch – One up on Wall Street. 

The one quote or piece of wisdom that you think about every day.

"Knowing others is wisdom, knowing yourself is enlightenment." (Lao Tzu)

 
What we're doing.
 
This week we pulled the trigger on the legal work required to launch our company structure. We expect this exercise to take a little time – it can’t be rushed and we need to get it right – but work has begun and we are looking forward to the day when, not too long from now, we will be able to accept capital from professional and institutional investors. 

Development work on v1 of our private investor network app is progressing well. We have signed off the full product spec and our product manager is assembling a team of developers to build the thing. To ensure the quality of the network – both in terms of the deals we market and investors we market to – our community will be highly vetted and operate on an invite-only basis. Please get in touch if you’re interested in being part of the initial launch group of users. 

What we're reading.

This week we read a great piece in The Atlantic entitled, "The Peculiar Blindness of Experts". David Epstein points out that the track record of expert forecasters – in science, in economics and in politics – is dismal. This is self-evident from economists' abject inability to consistently forecast macro and micro trends. Epstein goes on to argue that reliable insight into the future is possible – but it requires a style of thinking that’s uncommon amongst experts. 

We previously read (and enjoyed) Epstein's book "The Sports Gene" about talent, practice and the truth behind success on the sports field, and we’re eagerly awaiting his latest effort, dedicated to exploring how generalists triumph in a specialised world.

What we're watching.

This week has to go down as THE greatest week in the history of European football. The final of the Champions League looked sewn up, with Barcelona and Ajax sitting on seemingly insurmountable leads over Liverpool and Spurs. It didn’t turn out that way, with both English clubs coming back from the dead to overcome their opponents and set up a mouth-watering final at Madrid’s Wanda Metropolitano Stadium in June. Both games were a reminder of the enduring romance of European club football and its ability to capture the collective imagination. 

In the ceaseless competition for our time, football, and sport, remains a formidable force. And the success of teams like Liverpool and Spurs demonstrates the power of teamwork and passion over the individual technician, however brilliant.