Make Making Money

Ok Go Explains There Are Lots Of Ways To Make Money If You Can Get Fans

from the everything's-possible dept

Over the last few years, we've covered many of the moves by the band Ok Go -- to build up a fanbase often with the help of amazingly viral videos, ditch their major record label (EMI), and explore new business model opportunities. In the last few days, two different members of Ok Go explained a bit more of the band's thinking in two separate places, and both are worth reading. First up, we have Tim Nordwind, who did an interview with Hypebot, where he explained the band's general view on file sharing:

Obviously we'd love for anyone who has our music to buy a copy. But again, we're realistic enough to know that most music can be found online for free. And trying to block people's access to it isn't good for bands or music. If music is going to be free, then musicians will simply have to find alternative methods to make a living in the music business. People are spending money on music, but it's on the technology to play it. They spend hundreds of dollars on Ipods, but then fill it with 80 gigs of free music. That's ok, but it's just a different world now, and bands must learn to adjust.

Elsewhere in the interview, he talks about the importance of making fans happy and how the band realizes that there are lots of different ways to make money, rather than just selling music directly:

Our videos have opened up many more opportunities for us to make the things we want to make, and to chase our best and wildest ideas. Yes, we need to figure out how to make a living in a world where people don't buy music anymore. But really, we've been doing that for the last ten years. Things like licensing, touring, merch, and also now making videos through corporate sponsorship have all allowed us to keep the lights on and continue making music.

Separately, last Friday, Damian Kulash wrote a nice writeup in the Wall Street Journal all about how bands can, should and will make money going forward. In many ways the piece reminds me a bit of my future of music business models post from earlier this year -- and Kulash even uses many of the same examples in his article (Corey Smith, Amanda Palmer, Josh Freese, etc.). It's a really worthwhile read as well. He starts by pointing out that for a little over half a century, the record labels had the world convinced that the "music" industry really was just the "recorded music" industry:

For a decade, analysts have been hyperventilating about the demise of the music industry. But music isn't going away. We're just moving out of the brief period--a flash in history's pan--when an artist could expect to make a living selling records alone. Music is as old as humanity itself, and just as difficult to define. It's an ephemeral, temporal and subjective experience.



For several decades, though, from about World War II until sometime in the last 10 years, the recording industry managed to successfully and profitably pin it down to a stable, if circular, definition: Music was recordings of music. Records not only made it possible for musicians to connect with listeners anywhere, at any time, but offered a discrete package for commoditization. It was the perfect bottling of lightning: A powerful experience could be packaged in plastic and then bought and sold like any other commercial product.

But, he notes, that time is now gone, thanks in large part to the internet. But that doesn't mean the music business is in trouble. Just the business of selling recorded music. But there's lots of things musicians can sell. He highlights Corey Smith and Smith's ability to make millions by giving away his music for free, and then touring. But he also points out that touring isn't for everyone. He covers how corporate licensing has become a bigger and bigger opportunity for bands that are getting popular. While he doesn't highlight the specific economics of it, what he's really talking about is that if your band is big, you can sell your fan's attention -- which is something Ok Go has done successfully by getting corporate sponsorship of their videos. As he notes, the sponsors provide more money than the record labels with many fewer strings:

These days, money coming from a record label often comes with more embedded creative restrictions than the marketing dollars of other industries. A record label typically measures success in number of records sold. Outside sponsors, by contrast, tend to take a broader view of success. The measuring stick could be mentions in the press, traffic to a website, email addresses collected or views of online videos. Artists have meaningful, direct, and emotional access to our fans, and at a time when capturing the public's attention is increasingly difficult for the army of competing marketers, that access is a big asset.



...



Now when we need funding for a large project, we look for a sponsor. A couple weeks ago, my band held an eight-mile musical street parade through Los Angeles, courtesy of Range Rover. They brought no cars, signage or branding; they just asked that we credit them in the documentation of it. A few weeks earlier, we released a music video made in partnership with Samsung, and in February, one was underwritten by State Farm.



We had complete creative control in the productions. At the end of each clip we thanked the company involved, and genuinely, because we truly are thankful. We got the money we needed to make what we want, our fans enjoyed our videos for free, and our corporate Medicis got what their marketing departments were after: millions of eyes and goodwill from our fans. While most bands struggle to wrestle modest video budgets from labels that see videos as loss leaders, ours wind up making us a profit.

Of course, that only works if you have a big enough fanbase, but that doesn't mean there aren't things that less well known bands can use to make money as well. He talks about an up-and-coming band in LA that doesn't even have a manager that was able make money:

The unsigned and unmanaged Los Angeles band Killola toured last summer and offered deluxe USB packages that included full albums, live recordings and access to two future private online concerts for $40 per piece. Killola grossed $18,000 and wound up in the black for their tour. Mr. Donnelly says, "I can't imagine they'll be ordering their yacht anytime soon, but traditionally bands at that point in their careers aren't even breaking even on tour."

The point, Kulash, notes, is that there's a lot of things a band can sell, focusing on "selling themselves." And, the thing he doesn't mention is that, when you're focusing on selling the overall experience that is "you" as a musician or a band, it's something that can't be freely copied. People can copy the music all they want, but they can't copy you. "You" are a scarce good that can't be "pirated." That's exactly what more and more musicians are figuring out these days, and it's helping to make many more artists profitable. And, no, it doesn't mean that any artist can make money. But it certainly looks like any artist that understands this can do a hell of a lot better than they would have otherwise, if they just relied on the old way of making money in the music business.

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Everyone likes to be right and the easiest way to be right is to surround oneself with people and opinions that are predisposed to be similar to ours. When investing, it pays to be contrary. That sets you up to be wrong some of the time. The thing is, if you are right 60% of the time, and manage risk properly, there is a good chance you’ll make money. The most basic principle of investing is buy low and sell high. When doing this you’ll seldom hit the actual bottoms or tops; you are buying when the market is going down and selling when it is going up. That in itself is contrary to most retail investors’ practice of buying high and selling low.

Mutual Fund Flows and Sentiment as Contrarian Indicators

The majority of retail (casual) investors use mutual funds and ETFs (Exchange Traded Funds) to invest in the markets. Fund flows (deposits vs. withdrawals) are generally regarded as contrary indicators. This is a component of a broader series of indicators classified as investor sentiment that provide some insight into future directions of the market. The basic principle is: when many investors are bullish the market is more likely to go down and conversely a higher level of bearishness or negative sentiment indicates the market is likely to make a move higher. TrimTabs Investment Research reports on these fund flows and in a recent report stated:

We observed that equity prices tend to fall after equity exchange-traded funds (ETFs) rake in large sums of money. Conversely, the market tends to rise after equity ETFs post heavy outflows.

The report then issues this conclusion:

We have two explanations for the strongly negative correlation between equity ETF flows and future market returns. First, ETFs are traded mostly by retail investors and day traders.  These are the least informed and most emotional market participants—the ones most likely to lose money over time.  Second, we suspect hedge funds use ETFs when liquidity dries up.  Hedge funds were forced to close individual stock positions during the credit crisis, so they bought equity ETFs instead. Equity ETFs posted large outflows in 2009, when liquidity improved.

These concepts are not really as complicated as they seem to be. It’s Economics 101. When demand outstrips supply, prices go up and when supply is larger than demand, prices go down. When funds are flowing into stocks, markets rise but at some point most people are invested and there isn’t enough uninvested capital left to drive prices higher.

Whatever the internal dynamics, the retail investors are generally the last to join in a rally and their main vehicle of investment are mutual funds and ETFs so large inflows into those instruments suggests that  the market is near the top. That’s why many retail investors get the timing wrong and end up losing money. Nobody likes being wrong or losing money, it makes us feel pretty lousy about ourselves! This is borne out in the current rally where the retail investor is reticent to return to the markets after being burned so badly in the housing/banking crisis of 2008 – maybe one time too many in the last decade. As Adam Shell recently wrote in USA Today:

Yet, increasingly, investors on Main Street are not playing the stock market game with confidence like they used to, mainly because the game of making money has gotten tougher and more volatile since the financial crisis. Retail investors are buying fewer stocks. They are paring back on stocks and stock funds they already own. Instead, they’re moving into safer investments, like cash and bonds. “Investors are on strike,” says Axel Merk, president and chief investment officer at Merk Mutual Funds.

Fox News Doesn’t Make You Dumb. It Just Keeps You that Way

I don’t think the decision by retail investors to stay away from the markets is a good one. Markets have historically been a better investment than many other asset classes with the S&P 500 returning roughly a 7% annual rate of return.  Stocks should, at the very least, be a strong component of a diversified portfolio. Instead of shying away from being wrong, investors – people in general – should expose themselves to a broader group of opinions, to alter unsuccessful behavior and improve decision making.

The findings of a new study, Misinformation and the 2010 Election, from the University of Maryland’s World Public Opinion show that 9 in 10 voters in the 2010 election believe they encountered information that was misleading or false, with 56% saying this occurred frequently. The study also concludes that those who watched Fox News almost daily were significantly more likely than those who never watched it to believe misinformation.

The bad news for FOX News viewers is that merely watching the channel appears to be toxic. Most voters believed a few whoppers during the 2010 election cycle. But daily watchers of FOX News believed more misinformation than everyone else.

The underlying problem uncovered by this study is that today’s news organization are not unbiased deliverers of the day’s events, these outlets are partisan interpreters of the day’s events packaged to appeal to their viewership or constituency.  I don’t claim one network or source is a more egregious offender than another.  Everyone is entitled to their opinions, but each carries a bias that should be understood before assuming what we are digesting is “news” and not opinion.

This Article is Biased

This article exposes some of my own biases. We all have them and those views can be positive as they give us the strength to make decision with confidence. Most of the stocks I own are lesser-known, yet-to-be-recognized small technology stocks. I short stocks that people recommend as buys, such as Coinstar (CSTR), and I shy away from momentum stocks with historically unjustifiable valuations. I believe you should never buy a stock for which you can’t make a historically significant case of undervaluation. In our markets his is contrary behavior, but it works, and it helps me sleep at night.

If we are making bad decisions, like buying market tops and selling bottoms like the recent bottom in 2008, it is positive to examine our biases and correct them where possible. The best way to correct faulty assumptions is to take in a variety of disparate view points and make informed decisions. We can’t do this confining our media consumption to sources that only reinforce our previously held views. Religion and patriotism should allow for independent thought and interpretation. We should all try to broaden our information sources in 2011 and perhaps we can overcome the ‘misinformation’ gap and make some more profitable investment decisions.

I hope technology positively affects your life in 2011 and all your stock investments are winners.

Steven Bulwa is an investment analyst with a focus on new developments in technology and the companies poised to benefit. He has contributed to TheStreet.com, Realmoney.com, Business Insider, Huffington Post and SeekingAlpha.com, among others. Visit www.bulwatechreport.com, or follow @BulwaTech, to learn about technology companies with true growth prospects for 2011 and beyond.

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