Transcript
Paul Winkler: Investor Coaching Show, Paul Winkler talking about the world of money and investing. And of course there is going to be a lot to talk about. I have never heard the daytime hosts on this radio station. So, you know, we’ll have plenty to talk about. We’ll get into a lot of the interesting goings on regarding some of these individual stocks and what’s been happening with some of these trading platforms.
A Glimpse of the Future
One of the things said from, you know, when, when we look at money and finance and investing, you know, one of the things that I’d like to do is just kind of give you a glimpse of the future a little bit. And when we invest in companies, we invest in the stock market. You’re buying companies, you’re basically buying things and people get all worked up over individual stocks, news about what’s happening, what’s going on in Washington. And you know, the reality of it is you’re buying companies that produce things. They produce goods and services. And I always say that, Hey look, who are the most successful people in America? They are the people that own companies, business owners, what do you get to be when you invest in the stock market, you get to be a business owner.
So it is kind of fun to talk about where the economy is going because we get into a scarcity mentality. And what do I mean by that? I was teaching a workshop down in Austin, Texas last year. And at the very end of the workshop, a young person actually said, I got a question and she’s had this panicked look on her face. And I said, yeah, yeah, what’s going on then? This one younger person was just panic stricken that the economy was changing, that the world was changing and disruption was occurring.
And would the world be like it was for our generation, the older generation. And that was her concern, you know, are things basically different now. So in this hour, what I’ve got is I’ve got a guest friend of mine from over at Trevecca. It is one of the deans over at Trevecca. So the reason I thought that all of you would be really interested in what he had to say is because he comes from an industry and those who got a lot of people that are in the music industry that listen to this show and a friends of mine that are in the music industry, people that are, you know, touring musicians that are staying put right now a little bit more than they like to, but the industry in the music industry has gone through tremendous disruption.
And it is a good model for the rest of the world.
Dean Diehl: You’re welcome to come teach one if you’d like.
The Music Industry Had to Reinvent Itself
Paul Winkler: I will. Thanks. So let’s talk a little about disruption in the industry. And it’s just interesting to me, let’s talk about the music industry in general at first, and then bring that parlayed into how that’s actually happening in other industries. Because, you know, it was back when we had the, the whole revolution of people, stealing music. I mean, literally, you know, getting Napster and those types of things I’m taking downloads and free downloads and the industry had to reinvent itself.
Dean Diehl: It really did. And you know, you and I have talked about this before that the music industry actually went through two waves of disruption. And this happens in many industries, the first wave was the move with iTunes. And what often happens with companies that move into the internet space, that first wave of disruption is you do what you’ve always done. You just do it online. Right, right, right. Right. And so what we were doing is we were selling physical CDs and now iTunes was still selling music, but they were selling it digitally. Now, what was really disruptive about that was not that it was cheaper. You know, when iTunes came out, the typical CD, believe it or not was selling for $17.98.
Can you remember those days? Oh, absolutely. And all of a sudden, overnight iTunes is selling songs for a dollar a piece. Right. And, and even that wasn’t so bad if you take it and they’re going to buy 10 songs for $10. Right. But what really happened was the unbundling of the CD. We were selling 10 songs at a time. And now with iTunes, you could buy one song. You could cherry pick, you could just buy that one song that you liked. And, and even though our margins were better, like if you do a download, my margins are much better. It’s a lot cheaper to sell somebody a download than a physical piece of product. But $10 is more than $1, no matter how much you get to keep of it or how.
Paul Winkler: Well sure. You look at the legal look at the technology and the brick and mortar. And we’ve seen that over the last year, you know, people have been very, very panic-stricken and I made a comment on a, on a live workshop I taught last week that in the last year we have seen companies put money into R & D than we have seen in the previous decade. Right. And as part of it as technology. So that was part of what you, what you’re talking about right here is actually finding cheaper ways to get products to people, which is not necessarily a negative. But then again, you go and say, well, how many people are actually pulling this stuff off online? Because it makes the product more mobile. Now. I mean, I can, I can pull it offline a little bit easier and share it with people more easily.
Dean Diehl: Yeah. Well, and you know, there’s been a lot of talk about piracy and there was talk about, you know, in the day back when all this was going on, everybody was crying about the, the sharing of files, the illegal sharing of music files. And that’s always been a problem, but it wasn’t the problem I’m telling you that financially, the problem in the music industry was the unbundling of the CD. The ability for people to buy one song at a time because the music industry is only ever monetized. Let’s say 1 out of 10 people for every person that buys a CD, there’s always been nine people that just listen to the radio or they’re getting their music some other way. I mean, even back when I was in college, we would have, I probably shouldn’t admit this, but I think it’s past the statute of limitations.
But in college we would have a cassette player there and we have the radio and they’d have pre announced their favorite, your favorite songs coming, you’d hit record. And you record your favorite song. And we would have these tapes, these mix tapes of our favorite songs. We recorded off the radio. It’s always gone on, it’s just the scale that people are able to do it. And the quality is good, the quality is different. But you know, when you’re 19 and don’t have any money, quality isn’t always your first thing. I actually did my doctoral dissertation on this whole topic. And when you look at every change from Edison’s wind up, you know, wax cylinder thing to the present day, what people have wanted is any song anytime, anywhere for free. And now they’ve got it right.
And I think the lesson is people have totally got what they want. Consumers eventually get what they want. The market’s always chasing what the consumers want. When we went from LPs to cassettes and eight tracks and to CDs, we were in control, right? In fact, Sony owned several of those technologies. And the people that were creating the music were controlling the platforms. They were controlling the software when it went digital and the MP3 came out, we weren’t in control. That happened outside of the music industry. And that’s where a lot of times disruption comes from.
Now here’s the thing to keep in mind about disruption, all change is disruptive, right? Because people are going from doing one thing to something else, but not all things are true, disruptive innovations and most true disruptive innovation happens outside of the industry that’s being disrupted.
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All Change Is Disruptive
Paul Winkler: That is so interesting because we’re seeing that in the oil industry right now, we’re seeing it in every industry. And I just use it as an example because a lot of people have been concerned that, Oh my goodness, you know, they’re looking at, and I made this comment on the workshop I taught this week and I said, Oh my goodness, they’re actually, they’re going to be banning all oil. You know, the looking for oil on federal lands. I say, you know how much that represents people? 9%. Yeah. But at the same token, we’re looking at some of these oil companies and saying, are they going to be the ones that come up with a new technology that gets us from A to B as far as vehicles.
Dean Diehl: Most of the time, the answer is going to be no, none of the railroads invested in air travel right now. Why does that happen? Why is it that the companies that are in control of the existing current way are never the ones driving. And I’ll tell you why it’s because in every industry, successful businesses become addicted to the status quo, right? I use the word addicted on purpose. So in the music industry, we were addicted to all of our systems, all of our economy, the way we did things, the way that the laws were written, copyright laws and everything were written, were built around an album of 10 songs. We were addicted to selling 10 songs at once.
That’s why all of a sudden, the, the ability of the consumer to just go, I don’t want those 10 songs. Cause we all know what it’s like. You would buy an album based on the single you like, maybe three of the songs and you just wasted your money on the other seven. And, and we started making albums that way, as long as it’s kind of like, sure, an artist will start. I probably shouldn’t admit this either, but I’m not in the music industry anymore. Artists came in with seven, eight, nine huge songs. And I’m like, I can’t afford to have seven songs on this album that are that great. We’ve got to spread it out. We’ve got to spread it out. So why don’t you take these three and hold it on purpose? What else have you got? Oh, wow. Boston’s first album was that it was an anomaly. That was very much an anomaly.
I guarantee the music industry wasn’t in control. And that’s actually true of a lot of debut albums. The industry is not in control, but by the time we get to the second, let’s slow the hits down. Oh, right. Because we need those. And who knows how many of those you have in you? Yeah. And we were only going to get two, three singles deep in this record before we’re ready to launch a new record. So let’s pull a couple of these singles and, and hold them back. So now when you can just buy the hits in those other songs are just sitting there right now. We’ve got a problem. So now fast forward to what I call second wave disruption, which is Spotify and streaming I found out were not only addicted to selling 10 songs at once. We’re actually addicted to selling things.
Okay. Because you know, now in Spotify, we’re not selling things. We’re, instead of making a bunch of money off of a few people, we’re making a very little bit of money off of a lot of people. People are now, it’s like, you can own some songs or you can buy access to every song, right? So the subscription model actually worked better for us. It was scary at the front end, but it became evident that making a little bit of money off of a whole lot of people worked out better for us than making a bunch of money off of a few people, especially in a small niche genre, like Christian music, which is where I’ve spent a lot of my career.
You know, we were always in a weird way with Spotify. The fact that everybody’s throwing these pennies in makes the pond, we’re getting a tiny slice of a really big pool of money, as opposed to the very small number of people willing to buy a whole collection of music from our small genre record companies are doing okay with this new model. Absolutely. Really are the artists doing okay? The artists some here, here’s the thing, artists, here’s the way the deals always worked in the recorded music business. Artists have never made the bulk of their money from their recorded music.
Okay. So they make their money off of tourings. This is why they’re hurting so much in 2020, because they make their money off of touring. So let’s say they’ve always been making absolutely that’s the way it’s always been interesting. Here’s the scenario. So you’re a new artist you’re out in your, on your own and you’re playing shows. And let’s say that you’re at the beginning of your career, you play some local club or something. They pay you $500 in some beer or something that you, if that’s what you’re getting paid to play, and then you finally get your break, you come to a record label. And so what we’re going to do is, and of course I’ve worked in Christian music. So my guys weren’t getting paid in beer and wherever they were playing churches, taking up a love offering or something like that.
So that’s interesting. Crack coffee. Exactly. That’s a good thing. Coffee. That’s much better, a lot less trouble with that. Getting paid with a love offering and some coffee and lasagna. We pay all of our artists on the lasagna. And we’re going to make most of the money off of that because we’re investing so much money into your career, but here’s, what’s going to happen after you have your first number one radio single, you’re going to be getting offers for $5,000 a night.
So you’re going to go from a love offering and fried chicken and lasagna to $5,000 a show, $10,000. You know, it grows rapidly in supply and demand. So that’s, that’s, what’s going to happen. We’re going to get, not only that you’re touring in Tennessee, Alabama, and Georgia, we’re going to open up, cause we’re going to get you airplay in Michigan. We’re going to get you airplay in Texas. We’re going to get you demand for your live show, create demand for your live show across the nation t-shirts and in exchange for that, you know, and if you, you sell a lot of records, right? You’re going to make money off of that. If you’ve written your songs, you’re going to make a lot of money, right. But we’re going to make the bulk of it, particularly on the front end, because we’re about to put a half a million dollars in a year.
And guess what? You don’t have a half million dollars. The reason artists come to labels is money, expertise, and connections, right? That’s what you need from a record label.
Here’s what happened: not only was it disruptive, but it was very targeted disruption because the artists aren’t getting paid in this new economy. But the thing is we were still getting them on the radio. We were still building that national platform. We will still hold up our end and invest all the money. The one thing that hasn’t changed is that it hasn’t gotten cheaper to break an act, right? We’re still spending all this money, but our return was shrinking rapidly because now we’ve met, a big song gets hits on the radio. People were just buying that song. They weren’t buying the whole records. So now we’re getting a dollar when you love that song. And then with streaming, we’re getting paid streaming on what they’re actually listening to.
And they’re only listening to that song, but the artist was still getting the benefit of going from, you know, a love offering and fried chicken to $5,000 a show. They’re still getting their payout. So I’m like, why is everybody worried about the artists? They’re still getting theirs. It’s the record labels that all of a sudden our whole, this is what I mean by saying you would get addicted. And it’s not just music history. It’s all industries, right? All successful industries are addicted to the status quo. And there that makes them not only like I’ll give you another story outside of the music industry, blockbuster and Netflix, Netflix comes out, blockbuster looks, that’s a good example and goes no interest.
They’re not reaching our people because here’s what were the core drivers in that when, when Blockbuster was at its peak and Netflix came out, there was convenience and selection and they look and they go, well, that’s not convenient. You order it. And you got to wait for it to come in the mail and then you have to mail it back. And then the next one comes in. These aren’t our customers. Netflix, you go knock yourself out. Right? Right. And Netflix actually went to Blockbuster. This was part of my dissertation to Netflix actually went to Blockbuster and said, you know, we’ve got a good business. This is starting to grow. Would you like to buy us? Would you like to buy in and take part of them off now? We’re not interested. Yeah. We’re not interested. And the guy that was president of blockbuster, he, they, they said, are you worried about Netflix?
And he said, we’re about as worried about Netflix as the United States is worried about the army.
How Was Netflix Created?
Paul Winkler: That’s like Kodak saying, you know, we’re not terribly worried.
Dean Diehl: The digital camera with a camera. Who’s going to ever worry about Polaroid. Exactly, exactly. And so, Netflix gives to this new thing called streaming again, the second wave. They’re basically doing what Blockbuster does only they’re doing it online. Second wave. They’re doing something that can only happen online. And by the time Blockbuster saw what they were doing, it was too late. Right. And Blockbuster’s now bankrupt and out of business. They’re gone.
By the way, the way Netflix got created, the guy, the future creator of Netflix was driving in his car. He gets the yellow light, gets the red light, hits the brakes hard. And a VHS from Blockbuster rolls out from under his seat and hits him in the back of the foot. He looks down and he goes, I paid more in late fees than it would’ve cost to buy the movie. And the thing his head went, I am going to beat this. I’m going to figure out a way, yeah to not have late fees. Then came about what Netflix is today. And then they said it started by trying to avoid late fees.
Paul Winkler: Well, it’s interesting how many companies started that way. And we’ll talk more about some other, because there are other examples besides that. And I think it’s one of those things that, you know, from an investing standpoint, you go, okay, so what, how does this apply? Well, think about it. What is, what is the area of the market that everybody seems to think is just going to go off forever. It’s going to keep, and it’s going to, it’s going to continue on forever is large US stocks, but who are going to be the disruptors who are going to be the companies that come in and do something totally different, totally off the radar screen. It’s going to be a small company that you’re not even watching right now. And it has implications for what’s happening so far this year, which we’ll get to later, take a quick break. You’re listening to the investor coaching show right here along with Trevecca’s Dean Diehl.
So if you’ve got kids that are wanting to get into the music industry and understand how this stuff really, really works, go check it out. So we were just talking about disruption in the music industry and just talk about how technology has disrupted the industry and companies adapting to this, I think is really, really important because, you know, we look for, who’s going to be the next, you know, next, whatever. And it’s usually not who you think is going to be the next it’s going to be something completely different. And it’s kind of like people are right now, who’s going to be the next Tesla and people have their eye on certain companies that they think are going to be next. And what you don’t realize is most of the time, it’s not the companies they think are going to be next because it’s going to be something that comes in with something totally, totally different.
Addicted to the Status Quo
Dean Diehl: Yeah. And in fact, I teach in the doctoral program at Trevecca in the DBA program. And one of my favorites, I read a lot of Clayton Christianson who kind of defined the term disruptive innovation. But another guy I talk about a lot is a guy named Michael Porter. And one of his favorite things is to say better is not a strategy. Yeah. I’ve heard that. Yeah. Different is a strategy. Yeah. Yeah. And so what happens is you have what they’re called incumbent firms, the firms that dominate an industry, they’re the winners, they’re the blockbusters. They’re the Sony’s, the Warner brothers. They’re the big Universal, they’re the big sure companies.
They are not only addicted to the status quo. They have built everything around the status quo. And it actually becomes what Clayton Christian would say in the investor. I mean, the innovator’s dilemma is the investor’s dilemma, I think is somebody else’s. But the innovator’s dilemma is that they actually are shackled. They can’t be a Blockbuster. In some ways they couldn’t respond to Netflix without blowing up their business.
Paul Winkler: It is so interesting that you say that is, it’s a philosophy that I have about it just in general, if you’re in business. One of the things that you’ve got to do is, and this reminds me of this guy. Short story that I tell people. This guy goes onto an island, and he’s sitting in it, he’s hanging out in a hammock. The sun is shining. It’s 73 degrees and is beautiful. And the person walks on the Island and says, you got to get off this island. There’s a way better Island over here. And this guy looks at him, goes, you’re kidding me. I’m happy. I’ve got, it’s nice out. Everything’s perfect. He said, no, what you gotta do is get on the island and say, you know, I’ve done seismic readings on this Island. There’s a volcano underneath it. And it is about to blow and it’s going to take you out.
And any time you want to be successful in business, you’ve got to find a huge problem and solve that problem. And you’ve got to show people what the issue is with what they’re doing right now and how it is backward compared to what else is out there. So sounds exactly what you’re talking about.
Dean Diehl: Talking about. Yeah. It is very difficult for firms that are successful within the status quo to be able to move into the new space. And I’m actually creating a class for our DBA right now called entrepreneurial management, which is for the person that’s in the big company to go. Can you think like an entrepreneur within a corporate setting, can you be the guy that’s on the island and look at the other island and go, can they can get well, yes. In fact, over the last 30 years, we’re beginning to see more and more innovation coming from the incumbent firms, the firms that are established within the industry.
Now the major disruptions, like the Tesla, still tend to happen from firms outside. Right. But what happens a lot of times that the firms are getting a bit, the incumbent firms are doing a better job of going all right? They’re starting to see the risks. Let’s put money into this, right. We’ll buy it in and let it keep its appearance of independence. Let it continue to be this fascinating, this thing. And we’ll sit back here, but we’ll, we’ll kind of, we’ll kind of hedge our bat a little bit and, and put money into this. So it’s not that they’ve gotten better at innovating themselves, but they’ve done better at identifying the nascent stage of the threat and buying in on it.
And sometimes they buy in on it and squelch it. But when you do that, that’s something that a lot of people think that happens probably more than it really does. No question it does happen on occasion. But what happens is it’s like playing whack-a-mole. You just can’t win. Whac-A-Mole there’s always more of them than you. You’ve got one little thing and they’re popping up everywhere, but it is satisfying, right? It’s a satisfying game. But what happens is you try to squelch, but, the thing is very rarely innovations come out of some Thomas Edison brain, somewhere.
They come out of market demand. The consumer. Remember me telling you from the beginning of recorded music, people have wanted any song anytime, anywhere for free, and that somebody gave it to them, to give the people what they want. Exactly. So if Spotify had just sat around and dreamt up subscription model music with a free offering and consumers weren’t asking for it, it wouldn’t have worked. And if we had bought Spotify and then shut it down to squelch it, somebody else would have come up with it because it wasn’t being driven by a genius sitting around going, this would be cool. It was being driven by someone going, this is what people want and we’re going to give it to them.
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