Observations on Content and Distribution

When I interviewed with Rhapsody two years ago, I was asked to divine the future of entertainment: between content creators and distributors, who would have leverage in the long run? Based on what little I knew about the music industry, I sided with content.

Content is king, I explained with borrowed inspiration from the Bill Gates memo. This was true as far as the music industry was concerned, where three music labels (four back then) control a comfortable majority of music content. By contrast, consumers have dozens of services to consume music.

My interviewer took the opposing view: for every example I brought up, he brought up Amazon or Zappos. We went back and forth debating at length, and both of us dug further into our respective positions. At the end of the interview, I remember waking away with this unsettled feeling like neither of us had gained much from the debate.

I got the job but the question has remained with me like an incomplete thought. In the time since, I’ve had some insight into brokering deals with music labels, designing partnerships with everyone from mobile carriers to hardware manufacturers and modeling new product ideas. Today, I am going to share what I’ve learnt so far about the relationship between content creators and distributors.

But first, I want to re-frame the debate because it doesn’t help to talk about the entertainment industry the same way we talk about manufacturing industries. By talking about content and platforms as if they are separate, we are applying an Industrial-age separation to something which is indistinguishable from the consumer’s perspective. In industries where production and distribution are separable activities and/or undifferentiated, this paradigm may be useful. Entertainment is completely different.

Entertainment is a higher-order human activity. These are the products humans create and consume out of choice. As long as it engages the senses for the sake of engaging them, any product has the potential to entertain. Once you define entertainment this way, it becomes obvious that what people choose to consume is not content, or medium piecemeal but something we can only call an experience. It follows then that we should be deconstructing the product that is the experience and plotting the fates of platforms and content creators by how much they contribute to these experiences.

By framing the debate this way, it becomes easier to understand the rules that shape the fates of “platforms” and “content”:

a) new mediums create opportunities for new experiences
b) any new medium can be replicated in the long run

In the short run, the creator-distributor relationships are pitched as David-Goliath battles. The negotiations between Apple and music labels and Amazon and book publishers offer plenty of fodder for a media seeking that type of controversy. But what good comes to platforms that don’t support their content creators? In the long run, as content creators go so go the content distributors. Particularly in entertainment where the experience is the whole package. And those who get this can build great businesses.

Take video gaming as an example. Once upon a time this was a solitary activity. Yet, I can’t help feeling it always had that potential to grow up. I remember the days when I stared over my friend’s shoulder as he played Prince of Persia and passed level after level. And then when my dad bought us a computer, my brother and I competed to complete the games we bought, an activity that has today become a professional feat called “speedrunning”. It took me an entire weekend to complete Dark Forces II and at the end, I gloated. The internet throws that sport wide open to millions of competitors and spectators. Due to platforms like Twitch, video game play has become a professional, lucrative occupation for those seriously talented at it. Twitch idolizes and places these activities on a pedestal. It has turned the deepest myth about video games – that these are anti-social activities – on its side and laughed all the way to the bank with it.

There is no telling from which garage the next big experience is going to emerge. Take James and his team for example – these guys are the brains behind the DepthKit, a set of tools to create true three-dimensional videos using real-time footage. These are the early days for James who describes his work as an “experiment”, although the work others are doing with the DepthKit can scarcely be called experiments. With each iteration of the DepthKit, things are headed in favor of more immersive, interactive and realistic experiences. There is no better way to describe it than to see it in action.

One can imagine how a future iteration of the DepthKit can enable a more interactive format for TV shows and movies. At that point, consumers are not going to care where the story ends and the medium begins. So to answer that question from two years ago: the future belongs to those who create worthwhile experiences. Whether you want to call them creators or distributors is beside the point. So who has leverage? The customer has leverage. Always.

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10 things they didn’t teach me on the outside

I miss college. It afforded me a great deal of time to learn some new things. But these days, undergrad education is getting a bad rap, which is a pity, because in my experience, college was useful.

They say there are some things they don’t teach you in school. Well, there are some things they don’t teach you in banking, private equity, or the entertainment business. And some of the models and tools I picked up in college have changed the way I see the world (for the better):

1. Comparative Advantage: The concept of comparative advantage is simple, but can be counter-intuitive: two parties, no matter how good either of them is at producing a product, can at the very least, benefit from trade. It’s a powerful conclusion and it rests on a truth about any economy or individual: we all have opportunity costs. I remember doing the math the first time, because I had to take a break afterward to enjoy this new idea taking root in my head. How often does that happen to you in the real world? Economist Jodi Beggs does a great job explaining this concept here.

2. Recursive programming: If there is one awesome idea I retain from my comp sci classes, it’s probably this one. If you can express a problem in terms of itself, you’ve discovered something wonderful about the very nature of the problem. This is one of the most practical tools I picked up because I still code as a hobby.

3. Humans as the vessels of ideas: The next best thing to this part of college was picking up a copy of the Selfish Gene, which captures the biological equivalent of this idea. Back in the day when Richard Dawkins was focused on evolutionary biology, he did a great job explaining this idea that organisms can be seen as vessels for these units of life called genes. This helped to explain a variety of behavior where life seemed to favor other life with similar gene sets. Those internet memes you see floating around – they are the social equivalents of successful ideas and will probably outlast you and me for very similar reasons.

4. Ishmael: I came home one day and began talking excitedly to my two roommates like I had just smoked something. We had just been assigned this book by a guy called Daniel Quinn who had wrapped up a depressing outlook on human civilization in a trippy tale centered on a talking gorilla. I retain one important quote from this work to this day:

“There’s nothing fundamentally wrong with people. Given a story to enact that puts them in accord with the world, they will live in accord with the world. But given a story to enact that puts them at odds with the world, as yours does, they will live at odds with the world. Given a story to enact in which they are the lords of the world, they will act as the lords of the world. And, given a story to enact in which the world is a foe to be conquered, they will conquer it like a foe, and one day, inevitably, their foe will lie bleeding to death at their feet, as the world is now.”

To this day, one of my roommates refers to this time as my “Ishmael” period. I think that’s fine because everyone is entitled to a post-paradigm trance.

A couple of other models and skills I picked up in college:

5. The bit (1/0) as the foundation for a useful language. I’m just scratching the surface of information theory here. There is a fascinating history and science herewhere you can get lost (in a pleasant way).

6. The factors that shape human culture. Starting with Guns, Germs and Steel.

7. Asymmetric cryptography. Every cryptography course starts with some interesting problem-solving insights like the Alice and Bob story. Understanding this technology gives you the basis for understanding some of the cloud security issues we face today. If you own a cloud business today, you would be remiss to not take a class on cryptography.

8. Mathematical induction. The idea that combining a truth for n = 1 and a truth for n = n + 1 gets you a truth for all n. More here. Very abstract and basic stuff but extremely powerful.

9. Hypothesis testing and regression analysis on data sets. Once considered very dry but data science is all the rage nowadays. Funny how often that happens.

10. Fund-raising. Somewhere along the way, I began to feel that our economics program could do more to excite undergrads about economics. With the help of a team I drew together, I conceived a journal dedicated to undergraduate writing and research in economics. We had plenty of skeptics, one of whom had attempted the same project the prior year. So although I wasn’t working on a terribly original idea, I persisted. I canvassed the whole economics department and eventually landed several thousand dollars in funding. We managed to release two editions before I had to graduate. Here’s how I sum up what I learnt. Two people with the same idea. One didn’t stay the course. The other did and that made all the difference.

What I picked up in college was more than a couple of mental models and tools that you can find in a library or on the Internet. What I brought away was a far more curated and useful experience.

As individuals, we have a decent understanding of a variety of personal behavior. We can appreciate the survival of the fittest. We can appreciate cheaper is better. These are concepts most of us pick up through our immediate experiences. But our understanding of the world tends to break down as soon as we attempt to rise above this level. Without the ability to consider the sum of the parts, people tend to make poorer decisions or none at all. In my opinion, that’s the essence of a decent college education: it gives you a foundation to make better decisions.

Is it that surprising that so many startup founders are college dropouts or that they spent any time at all there? Where would Facebook be if it hadn’t been founded in a college dorm? Even the universally admired college dropout Steve Jobs found a good reason to return:

“Reed College at that time offered perhaps the best calligraphy instruction in the country. Throughout the campus every poster, every label on every drawer, was beautifully hand calligraphed. Because I had dropped out and didn’t have to take normal classes, I decided to take a calligraphy class to learn how to do this. I learned about serif and sans serif typefaces, about varying the amount of space between different letter combinations, about what makes great typography great.”

We have to shift this debate from the black and white discussion it is today to more useful questions like: how can we make college affordable? Do college degrees need to be four years? How can we make degrees more meaningful indicators? How can we help students gain business experience? Can we rebuild the college education in more digestible chunks? Not everyone can afford a $120K education, but everyone should have access to it in some form.

The best use of the best

I find it ironic when people talk about “hiring the best” and then set up those roles to be the worst use of “the best”.

I get asked all the time: what do you look for in a successful candidate? I wish I was asked something else more important: what about this role makes it successful for the ideal candidate? Quite frankly, what I’m looking for in a team member is pretty cookie-cutter criteria by now. Mind you, cookie-cutter criteria is still tough to fill:

1) Analytical horsepower
2) Intellectual curiosity
3) Creativity
4) Attitude

But what happens when you get that ideal candidate? It is very important to make sure they are set up for success. And that can be as tough as getting the right candidate in the first place. Because the right candidate will:

1) Question the status quo
2) Set personal stretch goals
3) Follow through with their ideas

All these positive behaviors require a culture that rewards dissent. And that is challenging in a company unlike a startup. If a startup is in search of a scalable business model, a company is constantly executing against one. That brings with it a certain amount of structure to ensure execution against rules. But if company leaders don’t reward dissent, before long, you’re left with a wilted culture and sub-par results.

I say reward because anything less is just lip service. There are three degrees of action or inaction in my experience:

1) Tolerance – a passive reaction to dissent
2) Communication – a verbal call to dissent as duty
3) Reward – as in to recognize the value of dissent

I have seen way too much of 1) and 2) and not enough of 3) to ascribe much value to the former. To be fair, I am not saying reward dissent for dissent’s sake. What I am saying is that if you set up your organization to absorb new ideas, kill bad ideas early and measure success early and often, rewarding dissent becomes a path to creating shareholder value.

The Growth Myth

Take an organization, A, that grows exponentially every day and compare it to an organization, B, that grows a factor of 100 slower. All else unknown, which would you rather invest in?

I’m guessing most people would answer A. Growth is good. More growth is great. It resembles validation. It demonstrates network effects. All things that are great in our brave new networked world.

Would you change your answer if I picked up a microsope and showed you A is a newly emerging avian flu virus and B is an amoeba colony with a million-year old genome?

There’s something about our modern world that exacerbates growth and hits. That something skews the music world towards one-time hits and sustained rockstars at the expense of everyone else.

In the question I posed earlier, I supposed that “all else [was] unknown”, which is the case for many investors looking into a business. How often do you have enough information? But all else unknown isn’t the same as all else equal. The less you know about a business, the riskier its profile relative to you. How much do “monthly active users” and “twitter retweets” and “facebook shares” tell you? Bumblebees are active even till the point they die from colony collapse disorder. Earthworms are boringly slow, but they will predictably churn vast quantities of garbage into useful earth.

I’m not claiming that steady, predictable businesses are better than fast-growing businesses. That doesn’t make sense. Bumblebees are at least as useful as earthworms. What I am saying is that growth is a side-effect of something that either works or is broken. Which is not saying much about growth.

I’ve seen a decent business undervalued because it didn’t demonstrate the growth pace set by the new kid on the block. But while the latter was out chasing “millenials”, the former had built an affluent subscriber base set in its ways. It lent the company that acquired it, a foundation to build a growth strategy. Why? Because of churn or the lack of it.

I’ve seen another business throw money at its salespeople to pick up customers. In the sales business, you should “always be closing” and ignoring the “bad leads”. But what happens when you apply that to a subscription business? All else unknown, “closing” can still leave you with plenty of bad leads. In other words, you never end up closing.  A subscription business demands an entirely new cradle to grave sales process. Why? Because of the probability of churn.

How many people in your business understand churn? I suspect many people like to claim they understand churn, but fewer take the effort to dig deeper. There’s a reason why my team looks closely at second bill month churn to evaluate a business. It tells you a lot of the quality of its sales process and customer acquisition strategy. But data on cohort-based churn is hard to come by. You can triangulate to it in other ways. But directly measured data is sparse.

In case you think this doesn’t apply to your transaction-based business, I want to highlight one fact about churn: it is the inverse of brand loyalty and need fulfillment. Adopting a transaction-based model doesn’t inoculate you from the fact that a customer can walk away from you forever or close to forever. So if you aren’t thinking about time till second sale when evaluating a business, then think again. The exception to this rule are businesses that focus on single lifetime transactions (how often are you going to buy a house?).

In brain science textbooks, there are diagrams of how the brain is neatly divided between the hypocampus (characterized as the primitive) and the cerebellum (characterized as the decision-making) because these parts of the brain evolved in different ways in different organisms. To our knowledge, our cerebellums are, as a proportion of total brain mass, the biggest in the animal kingdom. But in our brave new world, it is taking a back seat.

Facebook is getting a bad rep these days because teens are avoiding it. If new sign-ups are a leading indicator of growth, then pundits are worried that Facebook may be heading towards a decline. But I suspect the story isn’t so simple. Social media companies may be like other companies that sell products – they target audiences based on their age profile. They may also be like companies that fade and die on the backs of a community. It depends on the degree to which the social network is a product independent of its network. Does that sound confusing? I suspect Facebook knows itself better than its investors. And that may explain the Whatsapp acquisition.

I hate using personal anecdotes to extrapolate broader conclusions. So I’m going to prefix the following thoughts with the warning that I don’t know that which I am talking about.

Between a world without Facebook but with Whatsapp and a world without Whatsapp but with Facebook, I prefer to be in the former. Why? Because my interactions on Whatsapp are more personal. Because Whatsapp straddles that fine line between a social network and a messaging platform without seeming to sacrifice something significant for it. Because Whatsapp was built for the mobile platform. Because, counter-intuitively the fact that Whatsapp images are stored on my phone’s limited memory, forces me to set a high bar on my interactions. Ok, that last one was a bit of a stretch. But I hope you get my gist.

So I hope Facebook dug deep into Whatsapp’s engagement metrics and retention rates and saw something valuable there. The promise of a sustained customer base. The promise of low churn.

Growth is an easy by-product in our increasingly-networked world. Don’t fall into the growth trap. Dig deeper.