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.

IT TAKES LONGER TO MAKE MORE MONEY
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?

THE MONEY GOES TO MORE ARTISTS THAN EVER BEFORE
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.

THE SONG HAS TO LAST A LONG TIME
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.

Should the U.S. government pay ransoms for journalists?

And then, earlier this year, some disappeared journalists began to emerge. Two Spanish journalists were released in March. The following month, four French journalists emerged from captivity. It was widely assumed that ISIS had demanded ransom, and that the European governments had agreed to pay. European governments generally agree to make, or facilitate, ransom payments, which are believed to have run as high as $10 million.

Neither the United States nor Britain makes payments of this sort, and sharply criticize European governments for doing so. But perhaps that's why no American or British journalists have been freed during this period. In August, of course, the United States began bombing IS positions in Iraq, further complicating any official attempts -- if they were made at all -- to free Foley and Sotloff. They were thus available to serve as punishment, and as blackmail.

This raises an agonizing question: Should states pay ransom to kidnappers? If you are a friend or loved one of the victim, the answer is obviously yes. But even a more remote observer could cite the moral argument that the obligation to treat people as ends rather than means -- what Kant calls the "categorical imperative" -- forbids one to place the life of the abductee in a balance with abstract goods, like "sending a message" that kidnapping doesn't pay. In any case, the consequences of capitulation are remote and hypothetical; the life is terribly real. Israel, the most hard-nosed of democracies, has been prepared to pay a terrible price to retrieve its captured soldiers; in 2011, the state handed over 1027 prisoners, a quarter of them serving life terms, in exchange for Gilad Shalit. Israelis understand that by doing so they may encourage further kidnapping, and thus further endanger their own security; it is a price they are prepared to pay.
 

More over at Foreign Policy. Not an easy decision to make, even if, as the article notes, "the consequences of capitulating to terrorist kidnappers are ruinous” (incentives matter, and the article points a NYTimes investigation that showed how Al Qaeda was financing its operations by kidnapping and then ransoming citizens to European countries).

This piece opened my eyes. American TV and movies have given me cultural blinders; in TV shows and movies, the standard operating procedure of the U.S. government was to never negotiate with terrorists, and I assumed that was the same everywhere.

More detail from the NYTimes piece:

While European governments deny paying ransoms, an investigation by The New York Times found that Al Qaeda and its direct affiliates have taken in at least $125 million in revenue from kidnappings since 2008, of which $66 million was paid just last year.

In news releases and statements, the United States Treasury Department has cited ransom amounts that, taken together, put the total at around $165 million over the same period.

These payments were made almost exclusively by European governments, who funneled the money through a network of proxies, sometimes masking it as development aid, according to interviews conducted for this article with former hostages, negotiators, diplomats and government officials in 10 countries in Europe, Africa and the Middle East. The inner workings of the kidnapping business were also revealed in thousands of pages of internal Qaeda documents found by this reporter while on assignment for The Associated Press in northern Mali last year.
 

With this level of money, the kidnapping business has grown in sophistication.

To minimize the risk to their fighters, the terror affiliates have outsourced the seizing of hostages to criminal groups who work on commission. Negotiators take a reported 10 percent of the ransom, creating an incentive on both sides of the Mediterranean to increase the overall payout, according to former hostages and senior counterterrorism officials.

Their business plan includes a step-by-step process for negotiating, starting with long periods of silence aimed at creating panic back home. Hostages are then shown on videos begging their government to negotiate.

Although the kidnappers threaten to kill their victims, a review of the known cases revealed that only a small percentage of hostages held by Qaeda affiliates have been executed in the past five years, a marked turnaround from a decade ago, when videos showing beheadings of foreigners held by the group’s franchise in Iraq would regularly turn up online. Now the group has realized it can advance the cause of jihad by keeping hostages alive and trading them for prisoners and suitcases of cash.
 

Incentives, as expected, seem to work. The piece notes that the two countries that don't negotiate, the U.K. and the U.S., have seen many fewer citizens kidnapped these past five years than countries that are known to pay ransoms.

Aging canned food

Food scientist extraordinaire Harold McGee explains that you can age certain canned goods to positive effect.

There must be many such minor treasures forgotten in kitchen cabinets and basements and emergency stashes all over the country. My own supply still being fairly young, I consulted the eminent Sacramento grocer Darrell Corti, who very kindly shared a few items from his storeroom. I compared a new can of French sardines in olive oil with 2000 and 1997 millésimes. The brands were different, and so were the size and color of the fish and the quality of the olive oils. That said, the young sardines were firm and dry and mild; the older vintages were fragile to the point of falling apart, soft and rich in the mouth, and fishier in a good way. A 2007 (70th anniversary) can of Spam was also softer than the 2012 (75th), less bouncy and less immediately and stingingly salty, though the aromas were pretty much the same. Some Corti Brothers mincemeat aged for a year under a cap of suet was delicious, its spices and alcohols seamlessly integrated. A five-year-old tin of French goose foie gras: no complaints. Two vintages of Corti Brothers bergamot marmalade: the older noticeably darker in color and surprisingly reminiscent of Moroccan preserved lemons. And 3-year-old Cougar Gold—still moist and not as sharp as open-aged cheddars—was deeper in color and flavor than the yearling version, with a touch of caramel and the crunchy crystals that are the hallmark of hard aged Goudas.

...

I’ve found that braising cans change the flavors and textures within, but unpredictably so. It doesn’t seem to do much for sardines, but tuna in water loses its beefiness and becomes more pleasantly fishy and also a little bitter, while tuna in oil somehow gets more meaty and less fishy. Like its aged version, can-braised Spam takes on a softness that’s especially nice when you fry the surface to a crunchy crust.

I don’t recommend cooking foods in the can as a routine thing. Cans have various linings that may gradually release unwanted chemicals into foods, and this process will also accelerate at high temperatures. But it’s a way to explore how canned foods are capable of developing.
 

Amazing. Coming soon to a pop-up restaurant near you: a vertical tasting of 1988-1993 canned Spam. Excuse my while I go sous-vide a can of Chicken of the Sea.

[via The Browser]

In decline

Things I did not realize were in decline:

• Soda sales: “Coca-Cola’s carbonated sodas fell 2 percent in the U.S. last year, according to Beverage Digest, the ninth straight year of decline. Diet Coke tumbled especially hard, dropping 7 percent, almost entirely the result of the growing unpopularity of aspartame amid persistent rumors that it’s a health risk.”
• Ramen consumption in Japan: “Both the number of bowls sold and the number of restaurants selling ramen in Japan have steadily declined in recent years, according to figures from the Shinyokohama Ramen Museum.”
• Car theft: “The most important factor is a technological advance: engine immobilizer systems, adopted by manufacturers in the late 1990s and early 2000s. These make it essentially impossible to start a car without the ignition key, which contains a microchip uniquely programmed by the dealer to match the car. Criminals generally have not been able to circumvent the technology or make counterfeit keys.”