Music economics in the age of abundance

Jay Frank of FutureHit.DNA notes that for music labels, a streaming music customer is “now worth nearly 15% more than the person who bought music either digitally or physically.” In this third industrial revolution, that's not surprising. Streaming music services are the logical service for this age of abundance while purchasing music made more sense in the age of scarcity, however artificial that scarcity was.

Frank recommends artists face facts about the economics of this new age.

As Ethan points out, it took an “indie pop/rock group” 34 months to make more money from streaming than they did from sales. Some artists will do it in less time, and others in more time. Either way, the artist has to take the long view. It’s certainly easier and much better to run a music business with the money coming in quickly with an up-front sale. However, if you believe in your music and have patience, the long run pays off. In this way, the recorded music business will quickly resemble its partners in publishing. In another way, with many artists being financially irresponsible, is it so bad for them to get their money slowly over a prolonged period?

A person buying $14 worth of CDs a year has the money going to 3 artists at the most (3 CDs x under $5). A person buying $14 worth of downloads a year has the money going to maybe 18 artists at the most (18 downloads x $.79). However, $16 worth of streaming revenue conceivably goes to as many as 3,200 tracks (3,200 streams x $.005). Even if you take an assumption that a person does 100 listens of one artist in a year, that’s still spread out over 32 artists in a year, or nearly double the max average for download sales. As I’ve reiterated before, the real issue facing artists with streaming is that the very access that allows them to make money means the pie gets sliced thinner. There’s more money, but it just goes to more artists.

Disposability of a song only works if you work it extra hard while it’s hot. If an artist/song takes 34 months to make more money, then the song needs to be relevant for those 34 months. No longer can you stiff a consumer who buys something and only listens to it a couple of times. Now, those listens need to reoccur and do so over a prolonged period. This also means continually marketing content to ensure it stays relevant.

The first two are just reality. The last one is curious: how does one create a song for repeat playability across the years? What are the qualities of such a song? One can ask the question another way: do some artists knowingly create music that is disposable? That would only seem to make sense if it was easier to do so, otherwise why wouldn't one want to create something longer lasting? All things being equal, you'd prefer the longer cultural relevance and a revenue stream that more closely resembles an annuity.

Despite the great consumer experience that is streaming music, I'm less bullish on the financial attractiveness of that industry. Companies like Pandora, Spotify, and Rdio will all suffer from the wholesale transfer pricing problem. The labels have a unique asset, the digital streaming rights to millions of songs, that all those companies require to survive, and the labels will continue to adjust the pricing to squeeze all the margin out of the business.

There is a path forward. Video sites like Netflix, Hulu, and Amazon all suffered through the same problem as studios licensed back seasons of shows for exorbitant fees, often to multiple buyers who ended up with undifferentiated offerings on which to charge meaningful subscription fees. Still, all of them had to license a meaningful enough library, let's call it tonnage, to serve as a base for a service. From there, all three turned to financing original content that they'd own exclusively as a means of differentiation.

The music streaming services may have to take a similar approach and compete with the labels head to head in working with artists directly to handle the jobs further up the value chain like production and marketing. I've long thought Spotify, as the leading streaming service in subscribers, should become a music label of its own.

It's a costly road, and the payoff is not immediate, but at least it offers the possibility of future profits which might never materialize given the terms the music streaming services have to work with now.

Fast Fashion

Fascinating article on the phenomenon of fast fashion, much of it tied to the an area of downtown Los Angeles known as the Jobber Market.

In the 2000s, the first major wave of second-generation Korean immigrants— kids who had grown up around their parents’ showrooms—started hitting adulthood. They headed off to American universities to study business, or to schools like Parsons to acquire skills in design, marketing, and merchandising. “They are going to fashion schools everywhere—in Paris, London, Milan, L.A., and New York, all over the world,” says Tommy Choi, a 15-year veteran of the Jobber Market.

On their return to Los Angeles, the kids revamped their family businesses: re-branding, creating company logos, building out showroom spaces to make them appealing to American wholesale buyers, and setting up sleek websites. Their Americanized cultural identities and native English skills allowed Jobber Market businesses to communicate fluently with domestic department-store and retail buyers. And their design, marketing, and merchandising skills allowed companies in the neighborhood to start making clothes on the cutting edge of fashion.


Competing against retailers that were still observing the three-month fashion cycle, Forever 21’s buyers only needed to show up daily in the Jobber Market and choose from a smorgasbord of fashion-forward designs, all ready to be shipped that day. If the company’s buyers did not agree with one vendor’s price, all they had to do was go next door, where a similar design could likely be had for cheaper.


There’s one more important part of the picture: Fast fashion did not just arise from a new intergenerational division of labor within Korean fashion businesses. It also arose from a new distribution of risk in the industry, with much of it falling on the shoulders of the Korean and Mexican families near the bottom of the production chain. For the fast-fashion suppliers in the L.A. Jobber Market, consumer demands are unpredictable and the market is highly volatile. Wholesalers live at the mercy of retailers who set prices and squeeze profit margins; families must invest cash and put thousands of styles into production before knowing what will sell. Everyone in the Jobber Market tells me about the stress, likening the business to gambling at a casino.

So much to unpack in that story, well worth reading.

I had no idea cycle times for fashion could be so short. One more advantage of “made in the USA”: the ability to rapidly reduce cycle time in an industry where trends can be fleeting.

At some point, perhaps manufacturing shops in the Jobber Market move down the apparel value chain and start selling direct to consumers? I need to wander through that neighborhood the next time I'm back in L.A.

Flexbility or stability, pick one

From a story on the rise of sharing economy jobs through services like TaskRabbit, Uber, Lyft:

Labor activists say gig enterprises may also end up disempowering workers, degrading their access to fair employment conditions.

“These are not jobs, jobs that have any future, jobs that have the possibility of upgrading; this is contingent, arbitrary work,” says Stanley Aronowitz, director of the Center for the Study of Culture, Technology and Work at the Graduate Center of the City University of New York. “It might as well be called wage slavery in which all the cards are held, mediated by technology, by the employer, whether it is the intermediary company or the customer.”

(Disclosure: For two weeks in the summer of 1988, I had a gig as the au pair for Professor Aronowitz’s daughter, then a toddler.)

That final parenthetical is, not ironic, but hilarious?

Snowpiercer, VOD, and indie film financing

Over the past few years, some indie films have been experimenting with day-and-date release in theaters and on VOD services like iTunes. It has always made a lot of sense to me: you capitalize on your theatrical marketing spend when you put movies out on multiple platforms at once, instead of having to spend multiple times to market the theatrical release and then the VOD and DVD releases.

Studios had always been hesitant to go too far with this strategy because of blowback from the theater owner cartel and because studios are just generally a bunch of conservative folks who need to be dragged kicking and screaming into the future. It didn't help that the only movies that typically received this type of treatment ended up being some of the most obscure movies out there; it led to the self-fulfilling prophecy that this was a dumping strategy for movies with little or no market.

Some forces are finally converging to make this strategy more attractive, though. For one thing, the DVD release window continues to shrink in value as the DVD purchase market fades away. As with CDs, so go DVDs. Secondly, the theatrical film business is flat, and for indies it is likely declining as more share of theatrical spend is for blockbuster movies. The competition for moviegoing as a form of entertainment is increasing, and most of it comes from a computer people carry with them all the time and that turns on with a tap of a button. Other competition comes from a larger but also more accessible screen, the giant LCD TV in people's living rooms. Desperate times call for desperate measures.

Here comes the poster child for the revolution. Snowpiercer is the widest multi-platform release ever. It wasn't quite day-and-date, but two weeks after it was released in theaters, it was available on most VOD services like iTunes and cable operators like Comcast and DirecTV.

Some interesting tidbits:

But RADiUS-TWC is taking steps to create a new language around digital platform revenues, with Snowpiercer earning an estimated $1.1 million from VOD this past weekend, nearly twice as much as the $635,000 it earned in theaters. “From a layman’s perspective these numbers are possibly not that interesting,” admits RADiUS-TWC co-president Tom Quinn. “But from an industry perspective, it’s a game changer.”
Why? For a distributor, VOD is both cheaper and more profitable. “That $1.1 million gross is actually worth almost double to me in terms of how it nets out in our bottom line,” says Quinn, who claims that the film’s real-value weekend gross is thus about $2.6 million, enough to land in the box-office top-10.
This strategy also didn’t require a traditional TV spend. “We are being promoted on TV, but we are being promoted on TV to consume,” he explains. “We have a TV campaign, but it’s in service of actually selling the movie to be purchased. That’s very different.”
Also, VOD—with access to 85 million homes—doesn’t have the same drastic theatrical drop-offs from week to week.

More from Variety:

The picture has racked up an impressive $3.8 million over its first two weeks on VOD, while pulling in a respectable $3.9 million over five weeks of in theaters.

The lowered marketing cost is huge here, it's difficult to overstate just how deep a hole a studio digs for an independent film when the studio takes out a broad ad campaign, including television ads, to promote its theatrical release. The irony is that it's not clear that an expensive TV campaign ever made sense for all but the biggest indie films, and the increased competition for the theatergoing experience makes that even less logical.

Perhaps the total potential audience for your movie is not massive, and frankly, for many indie movies it won't be. In this age of increased competition for attention, being able to keep your marketing costs at a minimum gives your movie more opportunity to make a profit at whatever percentage of your potential audience you manage to convert.

The internet does not increase the total user attention in the universe, it only makes it easier to tap into it. There are still only 24 hours a day in the lives of each of the people in the world, and that finite resource is being subdivided more and more. It's one reason Hollywood is so eager to please the Chinese market with plots that are China-safe; it's one of the few ways to grow the base of paying customers by a magnitude of order.

Liam Boluk writes about some strategies for indie filmmakers:

As a result, VOD and digital distribution should represent the indie priority – not just another non-theatrical channel. However, this means far more than pursuing a common release date across all mediums, penetrating a wide variety of different providers (Netflix, Amazon, Apple etc.) or standing up a direct-to-consumer distribution portal. Indie studios will still need to find a way to stand out among the 500+ other indie titles per year (not to mention thousands of pre-existing major and indie catalogue titles). What’s more, revenues will still be too slight to fund elaborate marketing campaigns nationally. As such, studios will need to establish and cultivate direct-to-consumer relationships through which they can inform individual consumers of any new releases that might be of interest and help guide them to the appropriate distributor (e.g. Netflix, iTunes etc.). If this is done well, indies may even be able to use consumption and interaction data to guide future film investment decisions (as the major studios, as well as OTT video providers do).


With RADiUS-TWC sharing this data on its VOD success, perhaps the stigma of having your movie released on multiple platforms simultaneously will diminish. The next generation doesn't see it as a black mark if your movie is released on multiple platforms, they see it as outdated and absurd that more movies and TV shows aren't available on all the screens all the time. While your movie opens to largely empty theaters in an exclusive theatrical window, they sit at home watching videos on YouTube.

While I personally still love and prefer to go to the theater to sit in a darkened theater with other people to see movies projected on a giant screen, I support whatever release strategies continue to finance filmmaking. The windowing strategy isn't going away anytime soon, but it makes less and less sense as we transition from the age of artificial scarcity to one of uncontrollable abundance.

Miss American Dream

Each residency is a reflection of the demographic the property is going for—the Mirage made a play for the affluent and not-quite-debaucherous late 30s/early 40s crowd with Boyz II Men, these boyz who are now patchily gray men, who remain pure in their desire to romance you, to make gauzy, romantic, sweet, consensual love to you, and quickly retreat when you give the nod, who wear sequined letter sweaters and overestimate the impact their music had on our sex lives (“I bet there are some Boyz II Men babies in here!”). The Venetian very much wants the Midwestern, soft-country audience of Tim McGraw and Faith Hill. Planet Hollywood, with its hot pink accents and movie-themed rooms, was built for the Britney fan.

It’s only late in the evenings that Vegas visibly becomes what the tourism board says it is: young and saturated with sex—and not the Boyz II Men-sanctioned lovemaking kind, either. Out on the Strip, aging women wear shirts that say “Girls! Girls! Girls!” A man working for a competing strip club has a shirt that says “Orgasim Clinic: Accepting New Patients.” (Sic on that tragic typo.) Single-named DJs pump their skinny arms as women in tight tube dresses and Lucite heels they bought online a year ago straddle mouth-breathing men on VIP couches like they just heard there was an asteroid headed toward earth or just took a handful of Ecstasy; platonic girlfriends decide to make out at no urging at all because we’re in Vegas bitchez! One does not have to go far to feel the erection of a stranger in the rear of one’s jeans. It is in these small, handsy hours of the night that Caesars’ hope for Britney was born.

Taffy Brodesser-Akner on Britney Spears residency at Planet Hollywood in Las Vegas.

I enjoyed this economic breakdown from AEG Live president John Meglen before her residency began. It's telling about the economics of Vegas.

“Even if you believe in Britney, that gives you 50 shows [per year], great, what are you going to put in there your other 200 nights a year?” Meglen told me, in his office in L.A. “If all they have in there is Britney Spears and she is sold out for 50 shows, they have failed. They need Britney Spears and the Spice Girls and Jennifer Lopez and Pink or whoever, okay?” That said, even if the theater is sold out and the seats filled, that doesn’t quite fulfill the residency’s mission, which is to say: Vegas may claim to want youth, but young people aren’t actually good for business.

“You have to ask, ‘Are those kids buying tickets yet?’” Meglen continued. “Because most of them still are seven in a carload driving out from Southern California, they all sleep in one room, they spend the day at the pool and at night they go to the clubs. They’re great at using the workout room, that comes with your ticket. They don’t get the body scrubs or the facial wraps, you know? They don’t gamble and they don’t eat at restaurants and right now, in my opinion, it’s fucking tanking the whole fucking city.”

Billy Beane and the resource curse

Benjamin Morris posted a good analysis of the value of Billy Beane over at FiveThirtyEight.

To be conservative, let’s just look at the period since Henry made Beane his offer: In the last 12 years, the Red Sox spent $1.714 billion on payroll, while the A’s spent $736 million. We can then break down what it could have looked like if Beane had worked for the Red Sox like so:

  • Let’s say it would have cost Boston the same $736 million that it cost Oakland to get the A’s performance with Beane.
  • At the hypothetical $25 million-per-year salary I suggested earlier, Beane would have cost the Red Sox another $300 million. (It’s possible that Beane would have wanted more, but it’s even more possible that they could have gotten him for less.)
  • The difference in performance between the A’s and the Red Sox over that period (where the Sox were as successful as at any point in the franchise’s history, and the A’s were supposedly stagnating after Beane’s early success) has been about 50 games for Boston. Since we don’t know exactly how good Beane would be at procuring additional wins above his Oakland performance, let’s assume that the Red Sox would have had to pay the typical amount teams have paid for wins in the period to make up the difference. According to the year-by-year price of wins from my calculations above, those 50 wins (taking when they happened into account) would have a market value of about $370 million (though this might have been lower with Beane in charge).

If we combine these — the price of the A’s performance ($736 million) plus Super-Expensive-Billy-Beane’s salary ($300 million) plus the additional 50 Red Sox wins at high market estimates ($370 million) – merely duplicating their previous level of success still would have saved the Red Sox more than $300 million relative to what they actually spent, and that’s with reasonably conservative assumptions. That’s money they could have pocketed, or spent making themselves even better.

Management and ownership are undervalued in sports (though ownership's compensation should include the equity value of the franchise which usually outweighs salary by a lot; it's just that ownership often selects management so they have a ripple effect on franchise competitiveness). It's the reason I have a Cubs jersey with “Epstein” on the back as my profile pic on Facebook. I consider the hiring of Theo Epstein as the Cubs President of Baseball Operations the single most important Cubs hire in my lifetime as a long-suffering Cubs fan, far outweighing the value of any single player. Forget all talk about curses; the Cubs have just been so badly run for so long that even random luck hasn't been enough to deliver a World Series title in over a century.

In December of 2012, Bill Barnwell did a great piece on how Jim Harbaugh was the most undervalued asset in pro football, and in his annual ranking of trade value in the NFL for the year ahead Barnwell still had Harbaugh ranked 49th, the only coach to appear in his top 50 list. Harbaugh certainly turned around the Stanford football program.

Whether it's Beane or Epstein or Harbaugh, of course it's not just their influence but the staff they bring in that matters, too. But that's one thing about bringing in someone like that: their ability to hire great people or bring past teammates with them is one of the keys to their value. Epstein brought in Jed Hoyer and Jason McLeod and countless other people whose names aren't public but who've given the Cubs, in a few short years, the best farm system in baseball. The mantra with the Cubs has always been "wait til next year" but now it feels more like “can't wait til next year.”

The longer I'm a sports fan, the more I think the most important thing if you're loyal to a sports team is quality ownership. In some sports, more football and basketball than baseball, a good manager or coach matters, too. Baseball being a series of individual confrontations, the tactical value of a good manager is less there than that of a coach in basketball or football.

The hypothetical question of how Billy Beane would have done with the Red Sox is an interesting one. On the one hand, as Morris notes, Beane has done a ton with less in Oakland. On the other hand is the well-known phenomenon called the resource curse.

The resource curse, also known as the paradox of plenty, refers to the paradox that countries and regions with an abundance of natural resources, specifically point-source non-renewable resources like minerals and fuels, tend to have less economic growth and worse development outcomes than countries with fewer natural resources. This is hypothesized to happen for many different reasons, including a decline in the competitiveness of other economic sectors (caused by appreciation of the real exchange rate as resource revenues enter an economy, a phenomenon known as Dutch disease), volatility of revenues from the natural resource sector due to exposure to global commodity market swings, government mismanagement of resources, or weak, ineffectual, unstable or corrupt institutions (possibly due to the easily diverted actual or anticipated revenue stream from extractive activities).


Sports has its own version of the resource curse, and even Epstein, who delivered the Red Sox their first World Series in ages, ran into it late in his tenure there, signing a ton of expensive free agents like Carl Crawford. Beane would have had a much larger payroll in Boston, and that might have had him chasing more big name free agents rather than searching for inefficiencies as he has had to with the A's.

Or so the theory goes. Readers here know I'm wary of extrapolating phenomenon across boundaries, of the temptation of metaphor, and taking the resource curse, which is often used to discuss countries with rich oil supplies, and applying it to wealthier teams in baseball draws my immediate suspicion.

What's happening in baseball is that teams are smarter about locking up players for their prime years. In baseball, players become eligible for arbitration after three years of MLB service, and they become free agents after 6 years of service in the major leagues. However, teams can sign players to contracts that lock the player up for their first few years of free agency, as well, and more and more teams are doing so for their star homegrown players to secure more of their highest productivity years. This means rich teams like the Yankees can swoop in and buy with a fat contract are older and further into their career. Older players are more likely to be on the downside of the careers or to suffer injuries. Thus what appears to be a resource curse in baseball, as noted in the ESPN article I linked to above, may just be a temporary phenomenon.

The biology of risk

That was the title of a fascinating opinion piece by John Coates from back in early June in the NYTimes.

Most of us tend to believe that stress is largely a psychological phenomenon, a state of being upset because something nasty has happened. But if you want to understand stress you must disabuse yourself of that view. The stress response is largely physical: It is your body priming itself for impending movement.

As such, most stress is not, well, stressful. For example, when you walk to the coffee room at work, your muscles need fuel, so the stress hormones adrenaline and cortisol recruit glucose from your liver and muscles; you need oxygen to burn this fuel, so your breathing increases ever so slightly; and you need to deliver this fuel and oxygen to cells throughout your body, so your heart gently speeds up and blood pressure increases. This suite of physical reactions forms the core of the stress response, and, as you can see, there is nothing nasty about it at all.

Far from it. Many forms of stress, like playing sports, trading the markets, even watching an action movie, are highly enjoyable. In moderate amounts, we get a rush from stress, we thrive on risk taking. In fact, the stress response is such a healthy part of our lives that we should stop calling it stress at all and call it, say, the challenge response.

Coates notes that the challenge response in humans is particularly sensitive to uncertainty and novelty, causing an elevation in cortisol which reduces our appetite for risk.

Based on that thesis, Coates argues that in reducing uncertainty about upcoming interest rate movies, Greenspan and Bernanke have actually “one of the most powerful brakes on excessive risk taking in stocks was released,” leading to much greater stock market volatility and more dramatic stock market booms and busts.

It may seem counterintuitive to use uncertainty to quell volatility. But a small amount of uncertainty surrounding short-term interest rates may act much like a vaccine immunizing the stock market against bubbles. More generally, if we view humans as embodied brains instead of disembodied minds, we can see that the risk-taking pathologies found in traders also lead chief executives, trial lawyers, oil executives and others to swing from excessive and ill-conceived risks to petrified risk aversion. It will also teach us to manage these risk takers, much as sport physiologists manage athletes, to stabilize their risk taking and to lower stress.

I watched more soccer (I'd use football but most posts tagged football in my blog will be about the American rendition, so for disambiguation I'm going to use what soccer fans would consider the profane nomenclature) than I have in my entire life up until now this summer because of the World Cup. People put on the game in the office, and everywhere I went it seemed some American TV was dialed to a game.

[This is a topic for another post, but I am curious about what drove this noticeable uptick in interest in soccer in the U.S. this summer. Was it the greater build out of social media? The success of the U.S. team? Increased coverage on ESPN? The fact that games were in the U.S. timezone this time, unlike the next World Cup or this past Winter Olympics? The rise of MLS? All or none of the above?]

While I'm far from a soccer expert, I did detect a noticeable tightening of game play in overtime. This could purely be because of fatigue, but it led to a less interesting form of play in those periods.

Coates' theory of the relationship between risk-taking and uncertainty reminded me of one of my pet peeves about many sports: the many mental traps that reduce risk-taking in athletes and coaches. From a sports design perspective, I'd argue that fans would prefer greater daring from players and teams more often. Volatility, with dramatic boom and busts, may be not be desirable when it comes to your finances, but in sports and entertainment it's the building block for more compelling drama.

It's not just soccer. The reluctance of football coaches to go for it on fourth down more often is another example where reduced risk lowers entertainment value. The irony is that mathematically, what feels like riskier behavior may be the more rational play. The math supports going for it on fourth down most if not all the time. In soccer, ending overtime deadlocked leads to the randomness of penalty kicks. I'm not conversant on the statistics around soccer, but leaving your fate to penalty kicks feels less certain than just trying to win in overtime.

If the players and coaches won't behave rationally, however, they can have their hands forced by rule changes. What if the NFL just banned punting? Everyone would go for it on fourth down, and I'm confident that would be a more exciting game. What if soccer's overtime were sudden death?

My ideal sports design guiding philosophy: maximize entropy but still reward skilled play. That is, you can let the rough at the U.S. Open grow wild so golfers have to try to stay in the fairways or risk having to hack their way out of the weeds. You can shorten the first round 7 game series in the NBA to 5 games to give the underdog a greater chance.

Don't design a game so skill-based that the outcome is never in doubt. There's a reason why people don't watch televised checkers. But also don't design a game so random that every contestant has an equal chance of winning regardless of skill. You might as well watch two teams flip a coin.

Beware destination shareholder meetings

Li and Yermack look at data on 10,000 annual shareholder meetings held between 2006 and 2010. In one set of companies that in a certain year choose to hold their shareholder meeting at least 1,000 miles from the corporate headquarters. After such meetings, the company is more likely to announce unfavorable quarterly earnings, and also experiences an stock market return 3.7% less than a benchmark for the overall stock market over the following six months.

Similarly, when a company holds its shareholder meeting at least 50 miles from a major airport, its stock underperforms the market benchmarks in the following six months. When companies hold their meeting both more than 50 miles a major airport and more than 50 miles from corporate headquarters, the company's stock underperforms the market by 6.8% in the six months after the meeting.

Just to be clear, this effect is not rooted in effects from companies that are already known to be performing poorly, or already facing controversy, before the shareholder meeting occurs.

More here.

Destination weddings are more fun, though, in my opinion.