Tech Mediums

So, Guy Hands, the CEO of private equity firm, Terra Firma, which purchased EMI in 2007 for $6.4 billion is having a hard time making EMI work.   

There were two things that stood out from the NY Times piece on the deal.

1. How bad recorded music is and how profitable music catalog is
2. How difficult it can be for a private equity guy to handle highly nuanced businesses like music

 What’s more profitable, Recorded Music or Publishing?

So Hands points out that he paid about 80% of the $6.4B for publishing and the rest for recorded music – the music side he says he feels like he overpaid for. 

I’ve heard this so many times before - recorded music is horrible and the only profitable line is publishing.

But it makes me think…isn’t publishing’s value partly (or predominantly) derived from the recorded side. 

Think about it.  If you have a go-nowhere artist, the value of the publishing is nil.  But if you a multi-platinum artist like the Notorious B.I.G., then the value is exponentially more.

So the cost a company puts into recorded music will ideally be recovered by the stream of revenue from publishing.  Economically, the costs are shared, since the value is shared.

There needs to be a model that will help predict this, especially since there’s so much historical data.  Something like an algorithm that factors in popularity of the artist and number of records (or downloads) sold/acquired.

 Private Equity and Entertainment, eh?

Stereotypically, business types and creative types haven’t mixed well.  That’s what partly explains why the EMI deal isn’t going over well.  An analogy is AOL and Time Warner…young, tech folks, mingling w/ old media.  It also reminds me of how superficially ludicrous Carl Icahn’s interest in Yahoo is (superficial because he seems more suited to bothering ExxonMobil or Chrysler, not new media companies).

I can see what Hands wants to do – should be able to wring out cost, although growing top line revenue is more difficult.  Just that music isn’t a business for finance types, not yet at least.  It doesn’t run like a creative tech company (which can be very querky and moody…like me), nor a typical non-tech company.  In other words, it relies HEAVILY on intuition. 

I don’t particular like music for this reason.  I like a more predictable business model - one that uses a little intuition and a lot of hard core facts to build a sustainable business.  That’s why I wrote about the potential for using predictive models in developing a business model for entertainment companies.

 What’s Funny?

What’s funny is that if people were still buying music like they did in the 90s, I don’t think this would be a problem.  It’s just that, now, the business model has to change and no one has figured it out yet.

It makes me think of stocks.  So, in a bull market, the average stock picker looks great.  Many use intuition and it works (like in the late 90s).  After the crash, you saw the great pickers do well.  They used a methodology, a system, that works when the market is more rationale. 

Don’t know if this has been talked about a lot before, so here it goes.  There are flaws in the logic so hit me back if there’s a better way to think about this…koe@TechMediums.com.  

What if traditional media companies were able to use predictive models to lower their inherent risk profile?

 The Risk Profile

So, think of media companies (like Disney, EA, Bad Boy) as a series of formal start-up ventures, where the business model requires the constant formation of start-ups (e.g.., new artists, games, movies) to make money. 

However, unlike normal start-ups, each media start-up utilizes common administrative systems like legal, accounting, marketing, etc., and, for the most part, they are more efficient, since this is what they do day-in and day-out.

Some of these businesses already have a library of content (franchises like Madden, or Disney’s Classics) that they milk to lower the risk profile – making the business model more like software - build it once and charge “rents” and/or offer updated versions for a fee.

But unless you have people who consistently pick out winning “ventures” (Diddy, Clive Davis and DJ Drama come to mind), then you’re at a much higher risk.

 Predictive Models

So what if predictive models (PM) could be used to lower the risk profile by refining the kinds of potential audiences, venues, alternative media, (like video games for film or music), price points, additional merchandise that could be sold to fans? 

Predictive models use a series of data (like whether someone buys a product on sale, what day, what kinds of products, etc.) to anticipate future behavior, like other products they would buy or what day they’d buy in on.  It’s a way to drastically improve the click-through rates of customers.  Obviously, the most widely known models are the ones used by Netflix and Amazon.  Insurance companies have been doing this for years, though, in determining likelihood of getting into accidents or dieing.

  Application to Media?

So how can it be applied to media?

Example questions that can be answered:

·        Music -

o       What extras, if any, should be given away with the CDs?

o       Should CDs even be made?

o       Would demand increase by offering the music for free (then charge for concerts and merchandise) or charge for music, lower price for concerts or no change?

o       What kind of merchandise should be sold?

·        Movies –

o       Should advertising be 100% online? 

o       What other product tie-ins could be developed?

o       What products should be licensed?

·        TV -

o       Which shows or episodes should be broadcast on internet only?

o       What other product tie-ins could be developed?

o       What products should be licensed?

Notice that none of these deal with content.  Entertainment is such a different animal.  You can do all the right research - type of movie to produce, the actors and directors to hire, etc, - and still fall flat because the actor didn’t put in his/her best performance, etc., etc. 

Nonetheless, constant research, polling – on and offline, are critical to gaining as much detail as possible.

 While many of these questions have already been answered, to varying degrees of success, PM (like the one developed by Proclivity Systems) seeks to maximize the effectiveness of the marketing, product development, licensing, etc., and lower the risk profile of the business (not necessarily eliminate it).

Before we get into piracy, a word from McLovin (of SuperBad) on the topic.

Matt Mason, in his book “Pirate’s Dilemma: How Youth Culture is Reinventing Capitalism” discusses a fascinating look into what is very possible a mega trend…piracy in other forms – not just music but everything, how technology is making piracy easier and how, on some level, it should be embraced.

As far as the first two points, sure, there have been bootleg BMWs, watches, software, but Matt’s talking about a world where it’s becoming much easier.

An example, is the 3D printer, which has been talked about for a while (heard about this at about the same time I heard that someone built a PC accessory that could replicate smells over the internet).

As far as it being embraced, I remember an old professor of mine, Pete Fader, a marketing professor at Wharton who’s known for his patented rants, arguing that file sharing was actually good for copyright holders (primarily record labels and their artists). It created buzz. Matt also talks about this in that the demographic who would get pirated material is not the demographic who would actually buy the material. Fader argued that the labels were wrong when saying that they lost $X amount in revenues due to pirated materials. “That’s ridiculous!” Fader said. Just because you can’t get something for free, doesn’t mean you’ll buy it otherwise.

While thinking that copyright laws should be updated, Matt likes the idea of piracy (mentioning that he can’t wait for his book to be pirated).

I actually agree, in concept. I like the idea that new business models need to emerge. That’s why I like open markets. It forces companies, and thus, products, to evolve.

But if I spend a lot of money to make intellectual property, I deserve the right to protect it, regardless of borders.

That notwithstanding, I also think some forms of IP can be seen as marketing materials for a greater thing. Classic example is music. Because of the amount of music put out yearly and the lack of distinguishing characteristics of some tracks to others, music seems more like a commodity. As such, it could be effectively used to market the artist. Artists can let viral marketing take over, bootlegged or not. In fact, in this scenario, you want people to pirate it because it costs you nothing…free marketing to create demand.

The model that I favor is a controlled “open” IP.

Software companies have been doing things like this for a LONG time. Adobe let people get Reader (reads pdf documents) for free to help create demand for Acrobat (to make pdf), for which it charges.

This model might be able to be used consistently for all IP and is a direct link to revenue– that’s why I like it.

Here’s Matt’s video. Enjoy!

Thanks to ProHipHop.com for the video.

“Don’t call it a comeback, I’ve been here for years.” - LL Cool J’s “Mama Said Knock You Out”

I gotta give it to MySpace!  Looks like they are coming up with a way to unlock the value in the site.  Based on a lot of feedback from current and former MySpace users, the current model was getting stale.   The new venture is ripped (in a good way) from the page of how to unlock intrinsic value while protecting your ass from current and future lawsuits. 

The Quicks: MySpace is spinning out its music service as a separate venture with minority shareholders being 3 of the 4 major labels: Universal Music Group, Sony/BMG and Warner Music Group (there’s some speculation that EMI will likely join given that the other 3 are in).  The deal was made on Wednesday after UMG agreed to drop its lawsuit.  The ad-supported site will offer free music and video streaming, DRM-free downloads for any device including iPods, concert ticket sales and merchandise and social networking features such as sharing customized playlists with friends.  Check these sources for more info: NYTimes, Tech-Ex and Yahoo News.

So why would they do this?  Among a few, here are three:

·        creates a formidable competitor to iTunes,

·        aligns record labels interest with MySpace’s, and

·        unlocks some value within MySpace.

 The iTunes Play

It’s no secret that iTunes is enormously popular.  In 2007, iTunes became the largest music retailer overtaking the behemoth marketplace that is called Wal-Mart.  Since iTune’s primary format is digital, then it has a pretty enormous share of the digital download market – the only part that’s actually growing (increase of 21% to 29 million downloads in 2007).

So it’s not exactly rocket science that the majors want to help mitigate the impact of one company’s (Apple’s) influence over the market. 

 The Align Interest Play

“Keep your friends close and your enemies even closer.”  That pretty much sums this one up.  With the labels having a stake in the company, their interests are aligned with MySpace’s.  Thus the threat of another Label v MySpace lawsuit is significantly reduced.  Each can make money on the mega trend of streaming content, and, at the same time, creating value (enhanced by litigation reduction – see Value Reason Play below).

Thus, it makes sense for the labels to partner with MySpace in spinning off it’s music division, since it already has a large footprint (about 30 million uniques/month and 5 million artists).  It also diversifies the labels revenue stream, which I’ve argued for before.  This is smart!!!

 The Value Reason Play

Often, spinning out a division of a company unlocks the real value of that division (i.e., the sum of the parts is greater than the whole).  Think of it this way…RJR Nabisco had tobacco and food divisions.  Tobacco, because of the litigation, limited the growth of the company’s stock price.  Consequently, the value of the food division was hindered because of the tobacco.  So RJR spun off the foods division into a separate company.  Corporate raiders of the 80s did this kind of thing all the time (buy a company on the cheap and sell off the parts and make a killing).

So maybe this is what’s being done here.  Outside of this deal, MySpace’s growth prospects weren’t looking so good.  We sampled 20 non-artists who have MySpace pages and asked if they still used it.  If not, what social networks do they used?  17 of them didn’t check their MySpace pages frequently (generally going to it once every 2-3 months).  The social network that’s grabbing 15 of them…FaceBook.  Artists still use MySpace as I found out at the Urban Network Summit a few weeks ago.  It’s still a great platform to showcase their wares.  Just that the fans don’t seem to be clamoring for MySpace the way they used to…so outside of this deal, MySpace was dieing.

So the good thing is that MySpace has a stake in the new venture that will enhance it’s own valuation. 

 What about Independent Artists?

The one thing that MySpace did was help even the playing field for independent artists.  With the majors owning a stake in the new venture, what does that do for the indie artists?  This wasn’t clear in the MySpace press release.  Logically, the labels will want to have their artists featured, but it’s the indies that really made MySpace what it is.  There’s a LOT of them and their enormous fan base.  I wonder if they’ll have to fight to get exposure.  You know?

 Btw -

I presume that the labels will not exclusively distribute their content on the MySpace music site.  I can see arguments either way, but

 Facebook

FaceBook has always been rumored to be talks with the labels to establish a similar music service.  It already has music services, but nothing to the extent of a full-feature music service (the current system is more of a application). 

We’ve written about 360 deals before.  The much rumored deal between Jay-Z (aka Shawn Carter) and Live Nation is expected to finalize this week along those lines. 

The NY Times reported that the deal is valued at $150 million.  The short of it is that Jay-Z gets what amounts to an investor in Live Nation for future ventures that he creates.  These would include record distribution, merchandising, concert ticket sales and merchandising.  Live Nation will annually fund Jay-Z’s umbrella company (that will partake in the venture) and share in the profits thereof.

The deal reflects the kinds of 360 deals that we’ve talked about, where more and more mergers and acquisitions will happen along the vertical: record labels, distribution, artist management, merchandising, advertisers, promoters, etc. 

The inevitable ‘why’ comes to mind.  Because CD sales are down, more music is becoming free or low cost, but demand appears to remain strong. 

So the best business models will seek to diversify and capture different streams of revenue, presuming that core demand is still there. 

 What’s more interesting is that LiveNation is positioning itself as the ‘GE’ of music. 

Live Nation could have its hand in just about every aspect of music (rather entertainment).  Investing in Live Nation could be like investing in a mutual fund for entertainment.  Distribution, concert tix sales, merchandising, promotions, the whole nine. 

 Logical Next Step

What would be interesting is to see Live Nation partnering/acquiring a company in the web 2.0 space, like a distributive media company (e.g., widgets), a virtual world like Doppelganger’s vSide or the next FaceBook kind of social media company. 

It would make sense when looking at the mega trends of more people spending time online, TONS of dollars going in online advertising, online services, etc.

Live Nation appears to be building such a model.  It acquired Music Today, a one stop shop for merchadising, fan club building and more for artists.  Live Nation has been partnering with several companies to develop its online presence, like Last.FM.  Full acquisition might be the next step.

.

Further, it is marking its territory to become the better record label model.  It already wooed Madonna from Warner.  Now, Jay-Z is leaving Def Jam.  This is particularly interesting since Live Nation has historically focused on rock and country.  

I asked a couple of record labels about possible acquisitions as a revenue strategy, but maybe it could be basic business strategy to ward off companies like Live Nation.  Most said they really hadn’t thought it through.  But a few are realizing the game is changing and it’s not really about entertainment, but a basic business policy that creates allies everywhere to further the mission of the company.  I’ll write more on this later. 

Fascinating!!!

I was on a digital media panel at the Urban Network Summit last week.  Various subjects were broached but I kinda got fed up of MySpace being tossed around as the be all/end all social media platform for artists. 

First shot came from me: ”MySpace is dieing.  People are looking for a more intimate interaction.  People are on MySpace because they have to be.  MySpace is spammy and you can boost up your numbers with bots.  Facebook is where things are headed.”

You should have heard the ruckus!  Heads immediately shot in my direction.  One fellow panelist took it personally.  The room, almost at capacity, even got anxious as a result.

Return fire (from the fellow panelist): You’re kidding!  MySpace has millions of visitors.  In fact, how many people use MySpace? (about 70% of audience)  How many people use FaceBook? (about 30%).  See.  How can you say MySpace is dieing???

Blast back (from me): I’m not saying don’t use MySpace.  Should be on all platforms.  But still, look at the growth rates.   FaceBook is growing at lot faster pace than MySpace.  FaceBook is where MySpace was 1-2 years ago, in terms of growth rates.  But people aren’t going back 1-2 times a day on MySpace as they are for FaceBook.  MySpace is played, from a fan perspective. 

I felt good since some people came up to me afterwards and got what I was saying.  But I think the “use all social media platforms” idea was lost.

 For Fans

People aren’t going to MySpace as much to socialize.  Too much spam.  That’s why they’re going to FaceBook.  I have friends from 23-34 in age who log onto MySpace MAYBE once every 2-3 months.  They say they’re tired of MySpace.  FaceBook, because of the closed model, can only allow friends to chat and post on their page.  It’s more meaningful.  What MySpace was.

It’s about quality of friend interaction, not quantity.

But I have to admit, FaceBook was NOT intuitive when I first signed on.  The only reason why I spent time learing it was because I thought I had to.  I have yet to work my MySpace page though. 

 For Artists

Being all social networks is one of the best, low-cost ways of getting noticed…after all, that’s the main thing for young artists.  Now that FaceBook has plans for launching music and video players for artists, FaceBook becomes a lot more appealing.  Having a lot of people sharing your video/audio on FaceBook probably means more than on MySpace – fans here are more likely to be REAL fans. 

 For Record Labels

Labels want to know who’s hot.  The problem with MySpace is that you can’t really rely on MySpace for friend counts, title plays or views.  You have to gauge.  The problem with FaceBook is that it’s a closed model, so you can’t get exposed to new content as easily.  Although, the people playing the content will probably be real people.. 

An interesting play would be a technology that could aggregate all plays, views, votes from all social networks.  Imagine a dash board where you can see anyone’s total plays on FaceBook, MySpace, Veoh, FunnyorDie, or any other site that lists, most watch, most popular, newest. 

That would be hot and usable by everyone. 

But let me offer a few pros/cons.

Given that CD sales have been tanking, it was inevitable that labels were looking into getting more of the pie by structuring what are called 360 deals.  Basically, labels would give more money as an advance to an artist, but get it back in recorded music sales AND concert tix, merch, advertising, etc. 

360 deals are good for artists who can be called brands…maybe the music isn’t that good, but the artist is a character.  50 Cent is a current example.  MC Hammer comes to mind too (although, back then, I doubt if he had a 360 deal).

Historically, artists relied heavily on concert tix sales and other non-recorded music sales to put money in their pocket, since the recorded music sales were subject to recoupment of the advance.

I would expect to see more 360 deals, within limit, since not all artists can be seen as brands (multi-talented who can act, perform well, pitch a product, etc). 

What’s more interesting is that I would expect more labels to be acquiring non-label companies.  Some labels are beginning to do this.  One I know recently purchased a merchandising company to bring this function in-house.  Imagine that labels would own businesses within the verticals…advertising companies, ticketing companies, merchandising companies, etc.  As labels need to grow revenues and profits, acquiring a vertical that can be accretive to earnings immediately or shortly afterwards will be key and expected…barring any regulatory rules, that is.