Monthly Archives: February 2013

The Modern Record Bins

The resurgence of the music business is tied to the industry’s embrace, finally, of new digital distributors.

Case in point: adding to YouTube, which is more MTV now than MTV as a distribution platform for music videos, Google is in talks to launch a Spotify competitor that would be distributed, among other places, through the Nexus handsets and tabloids, as well as through the Android OS more generally.  As the FT notes:

Advertising executives also speculated that by scrutinising consumers’ listening habits, Google could build a valuable database for advertisers.

“It will be another piece of the puzzle for understanding consumers,” said Christophe Cauvy, European head of digital at advertising agency JWT. “This will be very interesting for brands where purchases are emotionally or status driven.”

 

The Mack is Back

For a decade and a half, recorded music has been the poster child for an industry that resisted and, consequently, was decimated by the Internet.

Now, finally, according to Doug Morris, current CEO of Sony Music and the past CEO of other mega-labels such as Warner and Atlantic, the recorded music business is back, having finally made the transition to digital.  Profits are up, and there is still a place in it for the suits at the labels:

Now Morris says the profits are returning and the thrill is back. “The industry is transitioning itself into something that will be very valuable, unless we screw it up,” he says. “There’s big money coming in from videos. Huge money. There’s a transition from ownership to access personified by something like Spotify. We’re making a lot of money from this explosion in Internet radio, the Pandoras of the world. You can see Apple getting ready to get into it.”

What’s more, the cost of distributing digital music is lower than CDs or vinyl albums. “It’s a better business,” Morris says. “The margins are higher.”

The numbers support him. Industry analyst Alice Enders expects annual music sales in the U.S. to hover at around $5.5 billion over the next three years as declining physical sales are replaced by the digital variety. That’s a relief for an industry that was in free fall for the past decade. Moreover, Enders argues that guys like Morris are more relevant than ever. “I think the suits win out in this transition,” she says. “This is a much more complex business than people often realize. You have to find artists and keep the right ones. But you can’t waste money like you could 10 years ago. You have to control costs with an iron fist.”

The Big Apple Trades Down

With some hiccups, a New York City resident over the last 15 years opens his renewal lease annually to find a rent increase.

Now the WSJ reports that the process has started to reverse itself, correlating with the drop in finance jobs:

Back in 2006, nearly 60% of new renters worked in the financial sector; now about 40% do. Workers in creative fields and technology have nearly doubled, now making up nearly three out of 10 renters, the report found.

As a result:

An influx of artists, designers, young people in the city’s burgeoning technology sector and other industries is helping to drive rent prices down because they typically make less money than those in financial services, which has seen weaker job growth, according to the report by real-estate marketing consultant Nancy Packes, released with SteetEasy.com and On-Site.com, a national leasing and tenant screening company.

“Lower wages are contributing to lower rental growth,” Ms. Packes wrote. “The highly compensated finance sector is losing market share to the technology and creative industries.”

The Geometry of Design

From a too short essay in the New York Times this weekend, an underlying understanding of geometry and mathematics in nature and history is linked to good design:

Simple geometry is leading to similar revelations. For more than 2,000 years, philosophers, mathematicians and artists have marveled at the unique properties of the “golden rectangle”: subtract a square from a golden rectangle, and what remains is another golden rectangle, and so on and so on — an infinite spiral. These so-called magical proportions (about 5 by 8) are common in the shapes of books, television sets and credit cards, and they provide the underlying structure for some of the most beloved designs in history: the facades of the Parthenon and Notre Dame, the face of the “Mona Lisa,” the Stradivarius violin and theoriginal iPod.

Experiments going back to the 19th century repeatedly show that people invariably prefer images in these proportions, but no one has known why.

Then, in 2009, a Duke University professor demonstrated that our eyes can scan an image fastest when its shape is a golden rectangle. For instance, it’s the ideal layout of a paragraph of text, the one most conducive to reading and retention. This simple shape speeds up our ability to perceive the world, and without realizing it, we employ it wherever we can.

Certain patterns also have universal appeal. Natural fractals — irregular, self-similar geometry — occur virtually everywhere in nature: in coastlines and riverways, in snowflakes and leaf veins, even in our own lungs. In recent years, physicists have found that people invariably prefer a certain mathematical density of fractals — not too thick, not too sparse. The theory is that this particular pattern echoes the shapes of trees, specifically the acacia, on the African savanna, the place stored in our genetic memory from the cradle of the human race. To paraphrase one biologist, beauty is in the genes of the beholder — home is where the genome is.

LIFE magazine named Jackson Pollock “the greatest living painter in the United States” in 1949, when he was creating canvases now known to conform to the optimal fractal density (about 1.3 on a scale of 1 to 2 from void to solid). Could Pollock’s late paintings result from his lifelong effort to excavate an image buried in all of our brains?

10% or 10X

From the intro to a Wired Opinion piece by Astro Teller:

Here is the surprising truth: It’s often easier to make something 10 times better than it is to make it 10 percent better.

Yes … really.

Because when you’re working to make things 10 percent better, you inevitably focus on the existing tools and assumptions, and on building on top of an existing solution that many people have already spent a lot of time thinking about. Such incremental progress is driven by extra effort, extra money, and extra resources. It’s tempting to feel improving things this way means we’re being good soldiers, with the grit and perseverance to continue where others may have failed — but most of the time we find ourselves stuck in the same old slog.

But when you aim for a 10x gain, you lean instead on bravery and creativity — the kind that, literally and metaphorically, can put a man on the moon. You’ve all heard the story before: Without a clear path to success when we started, we accomplished in less than a decade a dream several generations in the making. We chose to go to the moon, John F. Kennedy said, not because it was easy … but because it was hard. Suddenly everyone from schoolchildren to the largest institutions were rallying behind the mission. Kennedy understood that the size of the challenge actually motivates people: that bigger challenges create passion.

And that, counter-intuitively, makes the hardest things much easier to accomplish than you might think.

That’s what 10x does that 10 percent could never do. 10x can light a fire in hearts, and it’s hard not to get excited and think that other, seemingly impossible things might also be possible.

Anatomy of a Firm

George Bernard Shaw said “Imitation is not just the sincerest form of flattery – it’s the sincerest form of learning.”

To that end, Marc and Ben of Andeessen Horowitz — the most successful of the most recent venture capital entrants — this week explained their thinking of the important functions of an investment firm that actually gets in there kneading the dough along with the entrepreneurs.

On the functions that are important:

Those 45 folks are across five teams of professionals that work with our entrepreneurs. And those are across five disciplines: executive recruiting; engineering recruiting, so two different what we call talent functions; a function we call market development, which helps companies meet the big companies that matter in their industry. We’ll do on the order of 1200 briefings in our executive briefing center downstairs with Fortune 500 management teams, connecting them to the best and brightest new startups. And then fourth, marketing and PR, which is fundamental: How do you get your message out, how do you break through all the noise. And then fifth is corporate development: How do you raise money, how do you go public, how do you — you know, if it comes to it, how do you sell yourself, and how do you deal with all the issues around corporate finance.

On compensation and incentives:

Yeah. Well, exactly. You know, it’s funny, and we took this model off of CAA, but it’s actually more applicable to us in a lot of ways. So in CAA, the way they were able to build a platform is the talent agents didn’t take any salary for the first several years, and they used the commissions that they got from the actors and actresses and screenwriters to kind of build the platform.

In our case, venture capitalists get paid two ways, not just one way. That was the only way the CAA guys got paid. One is what’s called the fee stream, which is the kind of money to pay salaries and operate the business. And the other is the investment, like the carrier, the return on investments. We thought like if you’re an investor, you ought to get paid on investments, not just for being there. So Marc and I, when we started the firm we didn’t take any salary. We copied the CAA model. We used the fees to build out the platform. And even now, we like to pay the investing partners far below market on their salary and pay them over market in carry, or their money on investments, because that’s just a much better alignment of incentives.

 

 

Malone

Two models of dealmaking on center stage in the last two days with Dell and Virgin Media.

Dell features the regular LBO model of the big PE shops, here with substantial founder participation.  Other than Michael Dell’s participation, this one is familiar.

Virgin Media, in contrast, is the poker playing of one man, and his mastery of sectors of the telecom world as well as the tax code.  From a description of John Malone in the FT:

This year marks the 50th anniversary of John Malone beginning his career as a trainee in Bell Telephone Labs. In the intervening half century he has done more multibillion-dollar deals than most businessmen would manage in a dozen lifetimes.

Described by one media analyst as “the most cerebral man in our industry”, the bearlike 71-year-old joined TCI’s founder Bob Magness to construct the US’s largest cable company by revenues before selling it for $54bn to AT&T in 1999.

With an undiminished appetite for deals, a powerful mind, a contrarian view on life and a deep reluctance to delegate important decisions, Colorado-based Mr Malone tempts comparison with that other media titan: Rupert Murdoch.

 

Amazon’s Prime Time

I wrote earlier this week of Netflix’s realization that it has to be HBO not Blockbuster as I had predicted a couple of years ago.

Amazon, as we know has bundled streaming into its Prime shipping fee.  As I wrote a couple of years ago, when discussing Netflix’s issues with just straight streaming of existing content:

Perhaps most importantly, on the streaming side, Google, Amazon, Apple, Dish/Blockbuster among others, are in the market.  They have other ways to make market from streaming.  For example, Amazon can bundle the price into its Amazon prime delivery fee. Google will find a way to monetize its content through its core business of ads.  Apple obviously makes huge profits by selling high-margin hardware like iPads. These other companies also have other carrots and sticks to play with the studios because of their other businesses than Netflix has.

On its website now, Amazon announces it has signed an exclusive to stream Downton Abbey.

Jeff Bezos writes a note about how streaming plays into the other businesses, including in driving digital sales and making Prime a better value.

Dear Customers,

Good news for Prime members. We’ve just completed a deal with PBS to make Prime Instant Video the exclusive subscription home for streaming Downton Abbey‘s Season 3 starting in June, and all new seasons for years to come. Prior Seasons 1 and 2, already the most popular TV seasons on Prime Instant Video, are available now for catch up viewing—and will also become exclusive to Prime Instant Video later this year.

If you can’t wait until June for Season 3, you can also buy each episode at Amazon Instant Video the day after it airs. And starting now, we’re also making the last three weeks of this season’s episodes available to purchase before they air on TV in the US. When you buy a TV Pass to Downton Abbey‘s Season 3, or if you already have one, you will receive all remaining episodes instantly.

Amazon Prime continues to be an unusual value at just $79/year, and includes unlimited streaming of over 35,000 movies and TV episodes, Free Two-Day Shipping, and a free Kindle book to borrow every month from the Kindle Owners’ Lending Library. Learn more about Amazon Prime and get to know the Crawleys of Downton today.

Thanks for being a customer,

 

 

Purchasing Intent and History Coming Together

I previously noted that 30% of shoppers start their searches for products on Amazon.

Now Amazon is jumping into that business in an even bigger way by offering targeted ads on its websites, Kindle e readers, and its own advertising network.  Amazon’s competitive advantage is the browsing and purchasing data it has on its nearly 200 million active shoppers, i.e., most everyone.

As the FT reports:

Marketers note that Amazon is now charging prices that rival its competitors and that its ad business stands out from the pack because of its massive reach, rich data-set based on actual customer data and personalisation techniques. The more that consumers and advertisers go directly to Amazon to search for products, the bigger the threat the company poses to others – especially Google – experts and analysts said.

Colin Gillis, technology analyst at BGC Partners, said: “What’s the difference between a user and a customer? The difference is a customer has given you their credit card data. Google has millions of users, but far fewer customers.”

The combination of purchasing intent (as demonstrated by the 30% figure above) with verified purchase history (as demonstrated by nearly 200 million active customers) is worth watching.

The Tinkerers, the Hobbyists, and the Risk-Takers

This is from an interview with Nassim Talib on his anti-fragility thesis:

How would you make something antifragile?

If antifragility is the property of all these natural complex systems that have survived, then depriving them of volatility,randomness and stressors will harm them. Just as spending a month in bed leads to muscle atrophy, complex systems are weakened or even killed when  deprived of stressors.

If you want to move away from fragility, you must avoid centralisation and debt and foster aggressive risk-takers who are willing to fail seven times in a lifetime. The economy of the west was initiated through trial and error. We still have a pocket of that in California, where there are small costs of failure and big gains once in a while. The top-down approach blocks antifragility and growth, whereas everything bottom-up thrives under the right amount of stress and disorder.

Are you saying that capitalism is good, but that 21st-century capitalism has gone too far?

What we do today has nothing to do with capitalism or socialism. It is a crony type of system that transfers money to the coffers of bureaucrats. The largest “fragiliser” of society is a lack of skin in the game. If you are mayor of a small town, you are penalised for your mistakes because you are made accountable when you go to church. But we are witnessing the rise of a new class of inverse heroes – bureaucrats, bankers, and academics with too much power.

They game the system while citizens pay the price. I want the entrepreneur to be respected, not the CEO of a company who has all the upsides and none of the downsides.

There are plenty of open-minded individuals who weren’t upset by what I said. This coming book will upset bureaucrats and academics – academics because I suggest trial and error is superior to knowledge. The process of discovery, innovation, or technological progress depends on antifragile tinkering and aggressive risk-bearing, rather than education. A country’s assets reside in the tinkerers, the hobbyists and the risk-takers.

It is important to think of the consequences of a society where the rewards go those without skin in the game in some way.