You would think that the current problems facing mega-financial institutions (with Citigroup being the obvious poster child, but to be fair by no means the only example) that the CEO’s and Boards of large banks would think twice before thinking about pursuing large ‘industry-consolidating’ acquisitions. Don’t get me wrong, I can see how this current downturn could be seen as a seductive opportunity for anyone with a strong(er) balance sheet – not only are targets potentially cheap (at least by historical standards – setting aside concerns about visibility of future earnings) but they are possibly available which isn’t always the case (irrespective of price.) Furthermore, given the current labor market environment, the potential to actually realize efficiencies by consolidating and downsizing must indeed seem tantalizing to experienced industry leaders. And yet…
…and yet, at the risk of oversimplifying, it all just seems to underline a lack of creative strategic thinking at the top. Is the strong buying the weak, the big buying the less big, really the best or the only long term strategic choice faced by global financial services giants? Isn’t there a viable plan B? or C? At times like these, one can be forgiven for asking the question (from Here is the City news):
One upshot of the credit crunch is that some of the smaller or troubled banks look vulnerable to takeover. Only last week Bank of America CEO Ken Lewis said that he thought it will be more difficult for stand alone investment banks (like Goldman, Lehman, Merrill and Morgan Stanley) to survive, and that they may be swallowed up by commercial banking rivals with bigger balance sheets, better capital-structures and deeper pockets. Well, it didn’t take long for the rumour mill to kick into life.
The Daily Telegraph has come out Tuesday and reported that Barclays President Bob Diamond is trying to twist his board’s arm to make a bold bid for an investment bank. And, according to the newspaper, top of his wish-list is Lehman Brothers and under-fire UBS.
As the newspaper points out, Lehman would bolster investment banking arm Barclays Capital‘s presence in the US (something Diamond is keen to do), but there is significant overlaps in terms of jobs in fixed income and huge job losses are likely in the event that a deal is done. Over at UBS, of course, a large proportion of fixed income staff have been (or will be culled), so Diamond and the BarCap team won’t need to do as much axe wielding. And UBS’s equities, wealth management and private banking businesses would make a deal for the Swiss bank highly attractive.
Rumours are also swirling that Ken Lewis himself, despite his much-regretted comments last year about having about as much ‘fun’ as he could stand in investment banking, might be mulling over a run at Merrill Lynch. Although busy putting to bed the Countrywide deal at present, the smart money says that once that is sorted, Lewis might pounce (he is said to have long-coveted Merrill’s brokerage network).
I’m sure there are some good ‘consolidation’ deals out there to be had in the next 12-18 months, but I would further suggest that they will be the exceptions that prove the rule. The biggest risk in my opinion, will be when CEOs and Boards think like traders and not business leaders when considering these deals. In the majority of cases, they would be better off buying out-of-the money calls on firms they think are cheap and (if they are right) reaping the financial rewards of a good trade, rather than buying one firm lock-stock-and-barrel and having to valiantly try to manage through the (probably non-linear) increase in corporate complexity that this would engender.
I’ve been thinking about how to point you in the direction of a fantastic post by Going Private and despairing of just putting up a link saying ‘Read this’, or alternatively lamely regurgitating an executive summary, I am pleased to connect the dots in the context of the question posed above. Going Private blames the strategic ineptness of many businesses on Michael Porter and his Five Circles of Hell:
I blame Michael Eugene Porter. Not that Porter is a dipstick, (well not only that) but because the majority of his modern adherents certainly are.
The eager and almost rabid application of Porter’s “Five Forces” (Supplier Power, Customer Power, Threat of New Entrants, Threat of Substitute Products, Industry Rivalry) to technology products and services has bred an entire generation of MBAs in marketing positions dedicated to developing and maintaining closed systems and closed hardware platforms. This is particularly egregious in the case of business models that are effectively based on distribution channels. In conventional analysis there is nothing wrong with making your living on distribution channels. Remember, that in 1979, when Porter developed the Five Forces framework, distribution channels were highly expensive to create and maintain and, owing to these costs, constructing them effectively presented a significant barrier to entry. Your product didn’t even have to be particularly good, because the threat of substitutes was reduced via the difficulty and expense of the competition actually getting those substitutes (however good they might be) to your customers. Suppliers, if they wanted access to your customer base as a proxy to sell their raw materials, had to go through you. New entrants had to build an entirely new distribution channel. Customers were stuck. You owned the market. But you had to guard this distribution channel carefully. And you had to make sure you hadn’t forgotten something simple and critical. That’s not part of a conventional Porter analysis. But why would it be? Conventional distribution channels are quite physical, antique and boring.
In this post, Going Private makes the point by looking at a variety of businesses such as entertainment (videos, music), telecommunications and consumer electronics: “…particularly egregious in the case of business models that are effectively based on distribution channels.” (emphasis added) Now I would posit that this describes remarkably well much of the business of modern financial services as well. (Indeed some readers may recall my penchant for comparing the business models and the impact of technological changes thereon of the telecommunications industry and financial services…) (Mixing metaphors liberally…) bolting unreconstructed, 20th century, distribution platforms together ad infinitum, might get you a more efficient horse-and-buggy, but I sincerely doubt it will get you a car.
Admittedly this line of thinking is somewhat self-serving given that my business is predicated on helping large financial institutions develop a ‘Plan B’ and to helping them embrace new business ideas and approaches that are adapted to the new techno-economic paradigm. I am sympathetic however (see my previous post) to the institutional reality that it is often easier for a Chief Executive and his team to convince the Board to spend $10 billion on a ‘linear’ acquisition than it is to convince them to spend $10 million on an unproven ‘non-linear’ venture. We think we’ve found a way to help mitigate this behavioral paradox and plan to spend the next few years trying.
If we don’t succeed, I fear the future giants of banking will need a new mascot…
British MPs who oversee the Department for Culture, Media and Sport are a sensible bunch, with a keen eye for special pleading. But they’ve erred badly today. In a report on online ticket touting, the MPs have today given a strong recommendation for a levy on the resale of tickets for live events. (Report here.)
Resellers – and therefore punters – will be forced to pay this levy, and a levy collection agency would need to be established to distribute the tax. There’s no recommendation that the levy is returned to performers, as the MMF (Music Managers’ Forum) has proposed. As it stands, the levy will merely oil the machinery of the primary market: the promoters and their agents. This is a quite amazing stunt to pull off – and should serve as a wake-up call to everyone…
…there’s a very healthy after-market for tickets, sold through auction sites such as eBay and bulletin boards such as Gumtree and Craigslist. This is exactly what the internet is supposed to be good at: eliminating wrinkles caused by consumers having a lack of information. And it works very well.
Yet the major promoters have very nearly succeeded in banning this market outright. Instead they’ve won themselves a “right” not enjoyed by book authors, songwriters or composers – or even the RIAA! (Authors, publishers and record companies don’t get a cent from the second-hand sales of books and records.) …
The Committee said it wants the secondary market to continue, and declared itself reluctant to intervene. But it did so anyway, giving credence to a long laundry list of grievances raised by the mega-promoters, including Harvey Goldsmith. Goldsmith wants to extend his huge market power in the primary market by banning the secondary market, and does so by conflating issues such as fraud with touting. Of course, there’s already legislation in place to deal with fraud. But the ticketopolists want to fight fraud the cheap way: getting us to pay a tax, rather than using better technology or employing a few more people to check against abuse. And in this case, they’ve won an improbable victory.
I’ve only had the chance so far to read the summary or the report (but have printed out the whole c. 200 page pdf to read later) but I can’t for the life of me figure out how they managed to reach their final recommendations, which seem to contradict their own findings (!):
While the superficially obvious solution—of increasing ticket prices to whatever level the market will bear—might keep all the potential profit within the industry and effectively eliminate the secondary market, it would run counter to the industries’ pricing policies which aim to make tickets affordable by their grass roots and genuine fans upon whose continuing interest and attendance the long term wellbeing of the industries depends. [Give me a break!!! There are so many holes in this argument I don't know where to start...] We did not receive any evidence from the grass roots or fan bases complaining that they were unable to obtain or afford tickets for their chosen events…
…We also believe that the existing situation whereby large profits can be made on the secondary market with no benefit to the organisers or owners of the primary rights is unfair and must be addressed. [Why????? Change the primary market price if you think it is wrong!!!!] …
…We welcome the initiative of the Music Managers Forum to seek agreement for a voluntary scheme under which sellers of tickets in the secondary market would pay a proportion of the profit to the original organisers to be distributed in the same way as the original amount paid. In return, the organisers would recognise the legitimacy of the secondary seller and not seek to invalidate the ticket being sold. [So the secondary market participants pay the primary underwriters for their inability to correctly price and risk manage their inventory...wow. Wow! All I can say is I wish we had that kind of mechanism when I was underwriting bonds for a living!] Such a scheme would recognise the right of those in the entertainment and sports industries to a share in the profit made by others out of the events for which they are responsible in the same way that creators of artist works now benefit from sales of their works through resale royalties. We believe that a scheme of this kind offers the best chance of meeting the concerns of event organisers while still allowing the secondary market to operate unfettered and we strongly encourage all those involved to consider it seriously.
May I suggest an alternative model? A simple one. Liberalize and regulate the secondary market. Full stop. Fraud and manipulative and abusive trading is proscribed with both criminal and civil penalties depending on the situation (analogous to securities markets.) And the market decides. I guarantee you the world will not come to an end. Events will continue to be underwritten. Artists and performers will end up being fairly paid (sometimes a lot more, sometimes a bit less but closer to “fair market value” in all cases), consumers will be happier, and underwriters and distributors will make a decent living and innovation will thrive.
The crowning irony is that folks like Mr. Goldsmith would probably continue to be very successful – and the Sharpe Ratio of their business vastly improved – in such a new world. After all they still have their relationships which in an efficient electronic market paradigm generally become even more valuable insofar as they cannot be industrialized and yet can be monetized against a much more efficient infrastructure. But fear and habit are powerful ghosts…and change is well, scary. Like the recorded music industry before them, rather than clinging for dear life to the status quo, major promoters should be leveraging their position of market knowledge and leadership to participate and profit from change: partnering with and investing in innovative new participants and business models. And not leave it until it is too late.
I just wish I had know about the report. I would have liked to submit my Tickets & Markets Part 1 and Part 2 as evidence…
Regular readers will have probably noticed that I’ve been somewhat preoccupied by the music business over the last few months. Ostensibly this is because it is a high profile industry that has been much in the news as its 20th century business model is torn asunder by the digital revolution. While this is certainly a factor, this situation is not entirely unique to the music business and so I had to ask myself why I’ve been so drawn to read, think and comment on this particular industry. I think it comes down to two additional factors.
First it’s cool. I could pretend that I’m above that – blase – but let’s face it…it’s rock and roll. I could pretend otherwise of course but it wouldn’t be true.
Secondly (and more in keeping with the usual tenor of this blog) – and I’ll admit to bias – there are significant parallels with financial markets (with the key exception that while financial services have managed to sneak into the Devonian while the music industry seems by and large to be desperately clinging to it’s pre-Cambrian ways.) More specifically, it is a business whose core value springs from human genius and creativity and whose product (in a digital age) is essentially an interesting barbell of abundance and scarcity. Once one understands this, it becomes pretty obvious how a combination of existing computing, communications and markets technologies could be put together to create an entirely new paradigm for the music industry. A paradigm that would increase wealth for artists and performers, improve the service offered to their customers and provide a good return on financial/managerial capital needed to oil the machine. Furthermore, much of this could be generalized to much if not all of the entertainment industry. And – perhaps the topic of a future post – maybe even to any industry predicated on individual talent and creativity. (Investment banking? Money management?)
There is just one giant problem: it doesn’t look anything like the existing paradigm. The giant music companies of today would either have to disappear or completely transform themselves. Voluntarily. At least for it to happen quickly. While this is not entirely impossible, it certainly isn’t going to happen with the current crop of incumbent managers. They are about as likely to give up their sinecure as stick a needle in their eye. Ain’t going to happen. Hell this doesn’t happen in most ‘normal’ industries. It is damn sure not going to happen in a business where the executive perks include hanging out with the Rolling Stones and getting your picture taken with your arm around Shakira’s waist. I imagine – much like an investment bank – given the potential rewards, it takes a certain significant cunning and ruthlessness to get to the top of one of these companies and so the grip on power is not surprisingly equally tenacious. How else could you explain this proud public boasting about one’s own ignorance (apparently not just reserved for guests of Jerry Springer…):
Morris was as myopic as anyone. Today, when he complains about how digital music created a completely new way of doing business, he actually sounds angry. “This business had been the same for 25 years,” he says. “The hardest thing was to get something that somebody wanted to buy — to make a product that anybody liked.”
And that’s what Morris, and everyone else, continued to focus on. “The record labels had an opportunity to create a digital ecosystem and infrastructure to sell music online, but they kept looking at the small picture instead of the big one,” Cohen says. “They wouldn’t let go of CDs.” It was a serious blunder, considering that MP3s clearly had the potential to break the major labels’ lock on distribution channels. Instead of figuring out a way to exploit the new medium, they alternated between ignoring it and launching lawsuits against the free file-sharing networks that cropped up to fill the void.
Morris insists there wasn’t a thing he or anyone else could have done differently. “There’s no one in the record company that’s a technologist,” Morris explains. “That’s a misconception writers make all the time, that the record industry missed this. They didn’t. They just didn’t know what to do. It’s like if you were suddenly asked to operate on your dog to remove his kidney. What would you do?”
Personally, I would hire a vet. But to Morris, even that wasn’t an option. “We didn’t know who to hire,” he says, becoming more agitated. “I wouldn’t be able to recognize a good technology person — anyone with a good bullshit story would have gotten past me.” Morris’ almost willful cluelessness is telling. “He wasn’t prepared for a business that was going to be so totally disrupted by technology,” says a longtime industry insider who has worked with Morris. “He just doesn’t have that kind of mind.”
Doug Morris is the CEO of Universal Music and the quote above is from an excellent recent profile in Wired. If you are like me it will make you laugh and cry simultaneously as you begin to understand how completely unsuited Mr. Morris is to running a business – let alone a music business – in the 21st century. On the other hand, you have to give him credit for not trying to pretend otherwise. Kicking and screaming. That’s the only way he’s going to change… Ok so assume I’m right, why don’t the shareholders just get rid of him? And given that Universal is a division of a company (Vivendi), rather than a public listed company, this should be easy right? (No agency problem, no powerless Board vs. imperial CEO…) Well, curious to know the answer to that question, I decided to have a quick look at Vivendi and their management structure.
While I must admit they have a pretty friendly and modern looking corporate website, identifying and reading about their senior management did not exactly fill me with confidence that they could add anything to the discussion let alone stand up to someone like Mr. Morris who I imagine is a charismatic, wily and tough (American) operator. Basically, even if they did have the moxy to give him the boot, they would be unlikely to be any more successful in filling the strategic vacuum. Don’t get me wrong – I suspect the Vivendi executives are all very intelligent, diligent men, and of course not knowing anything about them beyond what is on their website, I could be wide of the mark. Disclaimers aside however, it strikes me that for instance, Regis Turrini – SVP Strategy and Development is unlikely to be a thought leader in terms of tuning Vivendi’s business model to embrace the opportunities of the digital age:
Mr. Turrini, 48, is an attorney admitted to the Paris bar. He is a graduate of the faculties of literature and law and the Paris Institute of Political Sciences, and an alumnus of the Ecole Nationale d’Administration (postgraduate public policy college).
He began his career as a judge in the French administration courts. He then joined law firms Cleary Gottlieb Steen & Hamilton (1989-1992), followed by Jeantet & Associés (1992-1995), as a corporate lawyer. In 1995, Mr. Turrini joined the investment bank Arjil & Associés (Lagardère group) as executive director. He was then appointed managing director and, from 2000, managing partner.
And I’m afraid the supervisory board is unlikely to be of much help either – with only one member born after 1950, they may well have a wealth of experience but somehow I doubt their ability to confidently challenge Mr. Morris on his strategy. I doubt any of them have Facebook accounts…I wonder if any of them use iTunes…
To be fair, if you read the Wired article, Universal is not entirely standing still, also see for instance there possible involvement in a Pepsi/Amazon music giveaway promotion. But there is a big difference between reacting – fighting every step of the way – and pro-actively reinventing your business model. Given the events of the past few months and the acceleration of change as artists wake up to the empowering possibilities of the emerging paradigm (after having been fed and often swallowing a load of crap by their erstwhile partners for the last few years…) the record companies really have no choice now but to try to adapt. (MTV has a great summary of some of the watershed events of 2007.) But this is happening under duress and while the left hand tries to innovate, the right hand is still waging a rearguard action to stymie anything that might threaten the ‘way things were’. Much has been written about pioneering new approaches like Madonna signing with Livenation and Radiohead managing themselves the release of their latest album. The emperor has been stripped of his clothes. Thom Yorke (of Radiohead) puts it clearly in an interview with David Byrne (of Talking Heads fame:)
Byrne: What about bands that are just getting started?
Yorke: Well, first and foremost, you don’t sign a huge record contract that strips you of all your digital rights, so that when you do sell something on iTunes you get absolutely zero. That would be the first priority. If you’re an emerging artist, it must be frightening at the moment. Then again, I don’t see a downside at all to big record companies not having access to new artists, because they have no idea what to do with them now anyway.
…(on their ‘free’ digital pre-release:)
Yorke: In terms of digital income, we’ve made more money out of this record than out of all the other Radiohead albums put together, forever — in terms of anything on the Net. And that’s nuts. It’s partly due to the fact that EMI wasn’t giving us any money for digital sales. All the contracts signed in a certain era have none of that stuff.
And like a rolling stone, this movement is gathering momentum, it seems almost daily. Just this week Robbie Williams has decided to go ‘on strike’ from EMI; although his stance seems more opportunistic given that – as a big star already – nobody forced him to sign his contract with them… (Perhaps he was poorly advised?) Even the Economist – my favorite periodical – has joined the fray.(At least this has a chance of capturing the attention of the ‘establishment’, I hope someone sends a copy to the Vivendi Board members just in case they missed it.)
It’s worth taking a closer look at EMI. I’ve never had the pleasure to meet Guy Hands, but by any estimation he is clearly a very clever man and has a good understanding of valuing mature businesses that have strong asset bases and/or generate (or have the potential to generate) strong free cash flow. I think he made a mistake with EMI. It’s easy to be an armchair manager – and hindsight is easy – but (and you’ll just have to trust me here) I thought as much when the deal was first done. And this is putting aside the fact that – almost certainly for the first time in his career – after having lost a few deals due to his disciplined approach to pricing, he finally succumbed to the private equity fever and his capital burning a hole in his pocket and over-payed. This – and the subsequent tightening of credit markets – has certainly made things worse. (On the other hand these facts can act to muddy the waters, masking the real – more fundamental – error in this investment.) The interesting mistake is more fundamental and specific to EMI and the music industry and no it has nothing to do with the fact that he “knows nothing about this special industry” – as so many insiders are claiming.
Indeed, having someone from outside is probably just what the doctor ordered. And his instincts were in my opinion spot on in a couple key respects. First (and the ‘simplest’, most basic private equity play), that the business was mismanaged – or more accurately not managed. Like many talent-based industries, succesful ‘producers’ often end up at the top; however more often than not, top ‘producers’ make poor managers. Separate production (creative) from management and run a tighter ship operationally and financially. So far so good. Secondly, that music publishing libraries have significant value, value that can be better unlocked through a more deliberate strategy and more efficient capital structure (supported by the historically strong cash flow generating ability of these assets.) So where did he go wrong? On two counts I reckon. Firstly he should have just bought the library. I suspect that this is probably all he wanted and to be fair it probably wasn’t an option given the frothy tone of the market during the deal. He probably figured there was enough wiggle room to sort out the rest and end up with the catalogue at a reasonable price. Secondly and more importantly, he underestimated the speed and scope of the gathering tide of secular change that was coming crashing over the music industry, making the economics of the deal (even at a lower price) tenuous at best.
If he is as good a trader as his track record suggests, Mr. Hands should re-mark his book lower and proceed apace with re-inventing EMI as a force in this new landscape. The fact that he is an outsider should help. Although I wonder if it wouldn’t be easier to start with a completely blank slate – cleaning up the existing mess probably doesn’t leave a lot of spare capacity to build something innovative and new. Or perhaps he waits a few quarters and buys in the innovation – waiting to see which of the myriad new ventures (like Sellaband or DeepRockDrive) currently bubbling up gains real traction. Of course this might be expensive but the only thing that is sure is that the old way of doing business is on the way to the graveyard.
Besides reading the Park Paradigm, I suggest he have a look at David Byrne’s thoughts in Wired on how things might evolve, here are a few exerpts but I encourage you to read the whole article:
What is called the music business today, however, is not the business of producing music. At some point it became the business of selling CDs in plastic cases, and that business will soon be over. But that’s not bad news for music, and it’s certainly not bad news for musicians. Indeed, with all the ways to reach an audience, there have never been more opportunities for artists.
…What do record companies do?
Or, more precisely, what did they do?
* Fund recording sessions
* Manufacture product
* Distribute product
* Market product
* Loan and advance money for expenses (tours, videos, hair and makeup)
* Advise and guide artists on their careers and recordings
* Handle the accounting
This was the system that evolved over the past century to market the product, which is to say the container — vinyl, tape, or disc — that carried the music. (Calling the product music is like selling a shopping cart and calling it groceries.) But many things have changed in the past decade that reduce the value of these services to artists.
…For existing and emerging artists — who read about the music business going down the drain — this is actually a great time, full of options and possibilities. The future of music as a career is wide open.
It comes down to intelligently managing a combination of abundant assets (digital music) and scarce assets (live performances) and optimizing the business model to provide value to both the producers (artists) and the consumers (fans.) An interesting and exciting challenge, but one that the current powers that be in the music industry seem unable and unwilling to grasp.
Sounds like a great place to invest…
And just to show that there are no hard feelings, here’s one for Mr. Morris and his friends:
Working to bridge the disconnect between the socio-institutional paradigm and the techno-economic paradigm, which as Carlota Perez so eloquently writes will lead to a golden age for the emerging digital generation:
I don’t know these gentlemen, and obviously I am not privy to the internal workings of the financial behemoths that they were charged with piloting, but I wonder if the problem isn’t so much who is at the helm but the ship they were trying to steer. As Mr. Prince said, taking personal responsibility was the “honorable thing to do” as a leader (I’m reminded of the immortal words of Hopper – “The first rule of leadership: everything is your fault”) and I would tend to agree. And there is no reason to cry for these men – they were amply rewarded for their efforts and will – I’m sure – land on their feet so to speak, so don’t misunderstand what is to follow as sentimental apologia for their failings (real or perceived.) However I wonder if these giant firms are manageable at all – at least under the current constructs of managerial science – and ask honestly if any one individual however smart, charismatic or experienced (Mr. Rubin would seem to have all these qualities in excess) can realistically succeed in steering the turn-of-the-21st-century financial megafirm through the oceans of Extremistan (Mr. Taleb‘s metaphorical “province where the total can be conceivably impacted by a single observation.”)
For some years now, I have been interested in trying to understand how the corporate ecosystem would change under the effects of the onslaught of accelerating social and economic change driven by the revolution in information and communication technologies. Applying Coase’s Theory of the Firm to a world where communication and transaction costs move unrelentingly towards zero (at least in many contexts) must in my mind lead to a fundamental – quantum – shift in the optimal organizational dynamics of companies and the economy more broadly speaking. The vision I seem to be ineluctably drawn towards is one that looks like the classic map of a network, containing millions (or billions) of nodes and interconnections, with a fractal geometry. So yes I do think that ‘super-nodes’ (read mega-corporations) will continue to exist and even grow, but I think that complexity will migrate away from any particular node to the network. So in my mind, bigger is only sustainable if ‘simpler’. Today’s financial behemoths are anything but ‘simpler’.
If we look back from a vantage point twenty years hence, I suspect that the period between 2002 and 2012 (or so, I’m not hung up on exact dates…) will be seen as a transitionary period – when the one wave (of linear giganticism) crested, and another of specialization and the migration of organizational complexity to the network (the “edge”) emerges. Will the takeover of ABN Amro be the last of the mega-mergers (although and perhaps fittingly the 3-way break-up involved added an element of deconstruction to the transaction…)? If I had to guess, probably not but it will more likely be ‘one of’ the last of its kind. Of course, I am far from alone in wondering if these giants have passed the point of diminishing returns on scale (from the BBC article on Mr. Prince’s resignation:)
“The actual structure of Citigroup is broken – it’s too big, it’s too bloated and we think it should be broken up into three of four pieces,” added Bill Smith from Smith Asset Management in New York.
Ronald Coase, the economist, famously observed that private companies are different, because they are not the only place to do business. An alternative to costly and complex banks is an atomised market, where individuals and institutions do business without a large financial intermediary. Banks may merge to survive this inevitable transition; but in the long run many of their functions will disappear…the core functions of any Wall Street Bank cannot remain inside the same complex and costly shell forever.
Given this is probably a topic worthy of a doctoral dissertation (and if done well perhaps a Nobel prize in 25 years), there is no way I can even start to do it justice in a short blog post, but I hope I have been able to give at least a taste of how I think this might play out and why it is likely to be a core consideration in any investment thesis for financial services over the coming two or three decades.
Which US presidential candidate will be the first to stake out a common-sense, commercially intelligent, free-markets-based position on intellectual property rights and privacy in the campaign for 2008?
Which Fortune 100 CEO(s) will be the first to endorse these policies and get on the right side of their customers?
And how long will the great American Joe and Jill Public sit back and let the narrow and short-sighted lobbyists, jurists and legislators entrench an (artificial) 19th century paradigm on the 21st century knowledge-based economy?
Well I don’t know the answers to these three questions but if I had to take a guess I would say:
1) Obama ? Bloomberg ?
2) Jeff Immelt? Thing is, the answer should be all of them: how many business school case studies and courses does it take to drive home the fundamental tenet of business which is treat your customers with respect??? And once, just once I’d like to see a leading US CEO come out in favour of truly free and competitive markets (not the gummed up, carved up, oligopolies that too often pass for markets these days…) Why Jeff? Well he seems like a strong leader and one that genuinely has a long term view, and as head of GE can get away with saying and doing what he thinks is right. It would be nice if he had a talk to the folks who work for him at NBC…
(3) I hope my optimism on this front isn’t just naivete…but I suspect most people are very close to the tipping point and will get increasingly angry and vocal in the fight against stupidity.
Last week I discussed the doublethink and newspeak of “the Campaign to Protect America,” an initiative launched by the Coalition Against Counterfeiting and Piracy as well as the shameful strong-arm bullying tactics of the Recording Industry Association of America.
My big concern about this coalition is that it isn’t just about Big Entertainment trying to stop “piracy”, it also includes the National Association of Manufacturers and Big Pharma on the pretext of addressing the problems of counterfeiting.
As I suggested at the end of last week’s rant, the CACP ploy could be very bad news for us all because its goal will be to extend the law into all sorts of areas where we really don’t want it and I threatened that this week I’d look at what it might be able to do.
Here’s the worst case scenario: Consumer PCs would, by law, be directly monitored by ISPs to ensure compliance, and the legal consequences for any attempt to circumvent mointoring would make the punishment for murder look like a slap on the wrist.
He goes on to tell us of how the friendly folks at NBC are thinking about things:
Remember Rick Cotton, NBC/Universal general counsel, who I mentioned last week? A couple of weeks ago he actually suggested that ISPs spend more of their time spying on users and then added that the law be changed to remove the Safe Harbor provisions that protect ISPs when their customers have pirated materials! According to several sources, Cotton would like to see ISPs forced to use “readily available means to prevent the use of their broadband capacity to transfer pirated content.”
Wow.
Clearly regular readers will know that I am not some woolly dreamer who doesn’t believe in making money or getting paid for ‘brain-based’ services. On the contrary my livelihood depends on being paid for ‘brain-created’ value. But I also realize that business models and ecosystems evolve and so what worked or more importantly still – what was appropriate – 20 years ago is unlikely to work today, and will almost certainly not work a decade from now. It seems to me self evident that the underlying ‘asset’ in the entertainment industry – talent in the jargon – remains as valuable, probably moreso than it ever was. I have no hesitation in believing that talented entertainers will continue to thrive financially and otherwise in the future including (and most likely) operating in an entirely different business paradigm to that which existed in the second half of the 20th century. I’m not an expert, but even I can see a few possible outcomes and business models that might work extremely well for the artists and their customers (the audience…) – think ‘because of’ rather than ‘with’ (to steal a great line out of Doc & JP‘s books…) I mean even the Economist has figured it out:
The shift away from recorded music is due in part to the recognition that touring and merchandise are more lucrative. But it may also be a consequence of internet piracy, as free downloads give music fans more money to spend on other things. Jwana Godinho, the director of Música no Coração, a concert promoter in Lisbon, thinks many music lovers have a “mental budget” that they are prepared to spend on music, and have switched their spending from CDs to tickets and merchandise.
The logical conclusion is for artists to give away their music as a promotional tool. Some are doing just that. This week Prince announced that his new album, “Planet Earth”, will be given away in Britain for free with the Mail on Sunday, a national newspaper, on July 15th. (For years Prince has made far more money from live performances than from album sales; he was the industry’s top earner in 2004.) Outraged British music retailers were quick to condemn the idea. As far as the record industry is concerned, it is madness. But for the music industry, it could well be the shape of things to come.
Which reminds me of this fantastic quote (the epitome of leadership in crisis don’t you think?) picked up via pmarca:
UK’s Entertainment Retailers Association co-chairman Paul Quirk, who apparently doubles as a mafia boss, defending a doomed distribution network (retail CD stores) from a doomed medium (Prince’s new CD) being bundled with another doomed medium (the Sunday print edition of the UK newspaper The Mail):
“It would be an insult to all those record stores who have supported Prince throughout his career. It would be yet another example of the damaging covermount culture which is destroying any perception of value around recorded music. The Artist Formerly Known as Prince should know that with behaviour like this he will soon be the Artist Formerly Available in Record Stores. And I say that to all the other artists who may be tempted to dally with the Mail on Sunday.”
The problem is not how the artists make a living. The problem is how do the intermediaries that have been successful in this industry over the last 50 years continue to make a living. They are the ones having an awfully hard time seeing how they can continue to be successful with the same business model (and a truckload of extra lawyers) over the next 50 years. Only problem is…they are looking for something that will NEVER HAPPEN. Ummm…let me see, how can I put it… IT’S OVER! FINITO. HASTA LA VISTA. Hmmm…probably not clear enough but…
They can’t make money from their old business paradigm going forward. It won’t work. I’m not suggesting they should be doing cartwheels or that they shouldn’t be worried, or scared or even a bit angry…even denial is a normal emotional response to loss. Yes it sucks (for them.) However…no amount of denial or anger or – yes ultimately even lawyers – is going to put this genie back in the bottle, and so rather than beating up paying customers you would have to think that there is an unbelievable opportunity for some of the smartest people and firms in this business to get a jump on all the others and become part of inventing the next business paradigm for music and visual arts. Remember my contention is that the existing business model is bankrupt, not that no useful, customer-friendly and profitable business model (needing of course lots of talented people to make it work) exists. An important distinction, at least in my book.
And why I was so sad to see last.fm absorbed into the maw of CBS (even if I can totally understand why the founders and investors might have taken this particular nickel…) and why I can only hope it turns into a sort of reverse take-over in the end. (I’m thinking of a music industry version of O’Connor into SBC into UBS…)
Markets. Talent. Intermediaries. Broking. Distribution. Customers. Disruption driven by technological and cultural change can happen in any industry where these elements exist.
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