Just a quick post to welcome Mike Chadney to the conversation. For those of you who have not yet had the good fortune of meeting Mike, he is the founder/CEO of CityOdds, an expert (and expert commentator) on all things derivatives, and a kindred spirit in terms of having identified something “rotten in the state of Denmark” and better yet, via his new venture, seeking to do something about it.
He starts his blog with a comment on venture finance for musicians (and kindly highlights some of my thinking over the years on the topic…)
In any event, for anyone interested in the future of (financial) markets, one to add to the feed reader I think.
On yesterday’s announcements from Apple. Many hundreds and thousands of professional and amateur commentators I’m sure have already insightfully and accurately dissected Steve’s keynote and written complete and intelligent reviews of Apple’s new products. So I’m not going to bore you by trying to compete. Just two observations – admittedly first impressions, one which is somewhat tangential but still germane to some of the ideas I’ve been throwing around with respect to the entertainment industry (although I’ve been mainly focused on music and live events.)
The new Apple TV might just be as transformative for the movie business, as the iPod was for the music business. Very impressed. The rental model also – while not ideal – is probably a good compromise (at least in the short term): a good transition model to clear the way for future business models that are completely digitally native. I would have liked to have seen slightly longer time windows, in particular for the once started viewing – say 48 or 72 hours (instead of 24) but not a bad start. And being able to buy DVD’s with digital copies is also a good idea. (What would be fantastic would be a DVD exchange facility whereby you could exchange your old DVDs for new (HD if available) DVDs that include a digital copy, for say half-price. I think the studios would make lots of money as people would then be motivated to renew their entire DVD libraries at once, and as an added benefit, the old DVDs (collected in bulk) could be disposed of in an environmentally friendly way.
Apple needs just one more piece of hardware – one more appliance – in order to kit out a 21st century digital home: something that combines the Apple TV, with a touchscreen (and iPod Touch GUI) and an amplifier. For anyone that has their home wired with speakers in each room, this appliance would allow you to access your iTunes music and play it through the speakers in each room.
Apple (AAPL) was down heavily yesterday with the rest of the market, but if my first gut feeling about Apple TV is right, it goes from being a very expensive stock to something worth considering once more (especially if this market sell-off knocks it even lower.) Thoughts appreciated. (Disclosure: I own a small number of Apple shares in my pension plan.)
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:
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I suggest he have a look at ![Reblog this post [with Zemanta]](http://img.zemanta.com/reblog_c.png?x-id=101ec67b-968d-45fc-86b6-965e06ecbd1a)
