Why I Prefer VC to Trading Stocks

Howard writes in the comments to my last post on Rhapsody vs iTunes:

The masses just could care less about this issue.  Check the stock prices.

It is fun watching you stir this up while we wait and see the end game.

I don't want to focus on what the masses are doing now. I want to focus on what they will do in five years or even ten years. Everyone was buying SUVs in 2003. It would have been a great time to buy Toyota stock (TM). Hybrids are where its at now.

The iPod, iPhone and iTunes may be where its at in digital music right now. But what will that market look like in 2015? That's what I want to know.

I am not trying to "stir it up". I am trying to initiate a discussion and debate about where all this goes. And the comments to that post were very helpful. Thanks to everyone who posted one, including Howard!

Comments

[howard lindzon]

You are taking advantage of a grumpy guy.

I wont be the first into that trend, but when people start caring there will be better signals than this blog :) .

Iwas long RNWK as a sympathy play the last 12 months. I thought someone smart like you or anyone who reads this blog would buy the company. NOT.

It is just too early to see how this falls out or IF this falls out against apple.

[howard lindzon]

You are taking advantage of a grumpy guy.

I wont be the first into that trend, but when people start caring there will be better signals than this blog :) .

Iwas long RNWK as a sympathy play the last 12 months. I thought someone smart like you or anyone who reads this blog would buy the company. NOT.

It is just too early to see how this falls out or IF this falls out against apple.

[curmudgeonly troll]

The music dial tone is Nirvana for the High Fidelity set, the diehard fans, the early adopters, the musicians, the industry pros.

The mass market will still be introduced to new music casually, by friends, DJs, what they hear in a movie.

Music dial tone might be marginally more convenient distribution than iTunes (or mp3 sharing networks), but I doubt they'd pay a premium for it.

[John Dodds]

Further to curmedgeonly troll's valid point, I would suggest that the mass market increasingly don't want to own or rent a substantial amount of music.

[Jay]

The vast majority want to own thier music. Whether the previous services (ie Rhapsody) will become the dominant ones in the future-- very doubtful.

The trend is very clear-- piracy, with hard line record labels. Subscriptions were the preferred service of the record labels and EVERYONE HATED THEM. Apple comes along with iTunes gets the labels to actually allow music to be sold. iTunes is huge success. Record Labels unable to leave iTunes. Zune attempts to impose MP3 Tax, fails.

The current trend is very clear-- people are owning their own music with fewer and fewer restrictions, the record labels are losing, Apple is winning, and subscription services are irrelevant.

[tomo]

Is this really only about music or is it more about the emergence of a 'dial tone platform' for consumption of goods and services? It may be applicable for music today and perhaps ideal for future electronic distribution IF it is the most efficient way for producers to distribute and consumers to consume. In theory over an extended period of time capitalist markets gravitate towards efficiency and with the aggregate revenue on electronic entertainment(movies, video games, music, etc), cutting .5% point off costs translates to a significant bottom line impact. The impact isn't limited to only the supply side but also should have positive effects on the demand side as well. Consumers may or may not see quantifiable change in dollars and cents but may have more options to choose from or find a greater utility in whatever it is they consume electronically because of a variety of factors. As it relates to Rhapsody, the pioneers in any market rarely are around to realize the fruits of their hard labor because they are so disruptive, potentially disastrous to powerful forces, and almost always are ahead of their time. One example of an entire market that this happened to is the MSP/ASP area in the late 90s. MSPs were a dime a dozen but somehow nearly none of them survived yet today SaaS is likely the route ISV are going with their products. Sitelite, Sitesmith, NonStopNet, Euclid, Totality, etc were the pioneers in this business and today I don't know of one which is still operating.

[Stewart]

In response to Jay's comment, the only reason people want to "own" their music is that they don't trust anyone else to hold it on their behalf. With Sonos, Sansa, and (eventually) non-Fairplay devices as easy to use as iPod and wireless access to the internet, people will learn to trust service providers. Then the model will shift. (Full disclosure: an investor in Musicnow, recently sold AGAIN to Napster; director of Sonos.)

[Andy Swan]

2015? Hopefully we finally have that flying car that uses our garbage for fuel. Floating skateboard would be a nice bonus too.

[Andy Swan]

I don't see anything in your post that explains why you prefer VC to trading stocks....doesn't your example (Toyota vs SUVs) prove out the concept that the vision necessary to succeed as an investor on a VC level (i.e. ignoring the masses) would serve you well in the equities markets?

[Fraser]

I bet that the fear of renting music will subside in the future. It's a really bad arguement to avoid change. The benefits of music dialtone, especially once internet connectivity becomes ubiquitous, will make it the dominant way to consume music in 5 years I bet.

[Anonymous]

I hope the fear of renting music is perpetuated. I'm an avid music junkie and would never want my tunes to disappear if I go broke.

[Blake P.]

@ Andy:

I am feelin that Back to the Future theme that you have going there.

[Raimo van der Klein]

More and more I have the feeling that "the stock market" will encouter some difficult times. The whole structure of stock markets and focus on growth might work against creating value rather than increase it. "Connected people create their own markets."

Maybe they will create their own stockmarkets..??

[Brandon Watson]

VC versus public market is like offense versus defense in hockey. To score, an offensive player must go to where the puck is going to be. Defensemen tend to go to where the puck is. It's easier to rough up the other player as a defensement, but you don't get your name in the paper as the star of the team by taking the risks and taking the shots that might miss.

[fred krueger]

The short term / long term aspect is artificial. Just because you trade stocks doesent mean you have to have a short term time horizon. Stocks are just pieces of companies, and if these companies are sucessfull / unsucessfull, the effect will be felt in time (just like a VC investment)

[Ethan]

Well, I couldn't resist this thread! Here's a stab at music in 2015/2025...

It's clear that, in ten years, everyone will have unlimited access to every bit of recorded music [past and present; owned or rented...whatever/however the market decides].

At that point music distribution/access is a commodity. Whether it's from some killer subscription service or licensed P2P [like Lefsetz wants], anyone will be able to get anything 24/7 anywhere. And anyone with GarageBand 7.0 and a net connection will have true global distribution.

In this environment the only thing that will practically matter is filtering.

The current system is a little bit hilarious. Or, to paraphrase Umair Haque: digital mp3 grazing is wildly overrated.

More Umair paraphrasing: For the last few decades, high returns on advertising meant the labels could manufacture demand for just about anything, no matter how crappy it was.

Ergo, when digital music came around, folks like me and you, having lost trust in gatekeeper record labels, didn't mind massive search costs [in terms of time] to find good new music.

But really, sitting around reading Mp3 blogs, checking out my buddies' Last.fm pages, all that shit is incredibly boring. The thrill is only in the chase for a few people. And you will find no bigger music junkie/snob than me. I make Jack Black's character in "High Fidelity" look like the president of the Kenny G fan club.

Like most folks [I think], I just want to hear great music, AND I WANT IT PIPED RIGHT INTO MY EARS without spending hours looking for it. It's even MORE frustrating now to know that you can get ANYTHING and you [or Mom] STILL can't find something new you want or like!!!! Waaaaay worse than "100 channels and nothing's on."

Sure, when I do find it, I will want to "own" it.

But that's just another way of saying: I want to be able to listen to it wherever and whenever I want. And share copies with friends. And have a third party aggregate my listening habits to match me with others with similar taste, recommendations, notify my of tourdates, etc. Duh, duh, duh. All the services that deal with this stuff: 2020 commodities (that want to be monopolies).

A lot of overly tech-centric people have their skivvies in a knot because they think that an unbridled mass of mp3's constantly being listened to by digital music grazers constitutes some kind of perfectly efficient market for audible entertainment.

Peer production/recommendation will do a lot for many people but it's far from perfect. And it won't be the only answer...it will combine with traditional word of mouth, music from games, music from web/radio/playlist DJ's, branded music, branded labels, etc.

In sum, I believe the only thing that will matter is quality. No one in 2015 or 2025 has any patience for entertainment they *DON'T* love.

I say, for superior returns in 2025: consistently produce high-quality content. Be the first choice destination for creative people who want to connect with an audience. Identify, attract, enable, differentiate TALENT.

[Haris Khan]

2015.. hmm then lets think crazy… I think if the world continues to progress in social sharing of knowledge/content along with improvement in AI then I believe there is a huge possibility that everyone can be a music star by themselves. We are already seeing sites like Pandora and Last.fm have broken down the music genome to truly understand the music digitally.

Why cant we have a world where I can create my own music on go by mixing few AI techniques and using lyrics/guitar/drumming/voice from my fav bands or singers. So we can be in the world of Music Widgets where market is not selling just the entire song rather voice/lyrics/music are sold separately and we are just using them accordingly…

With such paradigm shift I am sure it will change the music market.. :-) but on the other note I agree with Ethan that quality will be huge…

[Ethan]

Steve Wozniak made good points about the limitations of AI, etc, in a recent online chat hosted by the Washington Post:

"Baltimore, Md.: Do you think Ray Kurzweil is on target with his predictions of computers surpassing human intelligence within the next 25 years or so?

Steve Wozniak: Not even close. So many aspects of AI get done in pieces and never combined. Will a device be created in my lifetime that can hear my voice. For example, can my TV hear my commands from across the room when it's noisy and lots of people are present. A real human could hear and understand me. But this listening device is far far away. Or could we build a robot that could make a cup of coffee? Hardly a prayer unless some young person gets the idea to do it someday in their life. Think about all the steps you go through to make coffee in my house, or vice versa. I was just at a radio station and I could barely make coffee with their machine. This robot would have to find the kitchen and best guess what the coffee machine is and then read instructions and find coffee in one of many forms and find cups, etc."

Music is way, way more complicated than making a cup of coffee. That analogy is a bit tortured, because we're talking about AI analyzing music, not creating it. But I think it should give us some perspective.

The idea that agg intel and some AI could combine to spontaneously create pleasing music in the next 50 years is ridiculous.

On the other hand, a wide-open remix culture where every bit of music published is open to be recombined with other bits BY HUMANS to create new music creates a huge amount of value. Lowering barriers to expression = HUGE VALUE. Look at Kodak film, or YouTube.

Creative Commons run amok satisfies all of Fred's "4 rules of digital media":

- microchunk it [Ha! You thought unbundling albums created value. Try unbundling multi tracks to every song every recorded]
- free it
- syndicate it
- monetize it [identify and dj the cream of the crop]

Anyways, the "Music Genome Project" is barely more than a PR stunt. It probably works okay on it's own, but I'm sure it was a plot to get some attention. A team of monkeys listening to thousands [only thousands?] of songs and using metrics like "degree of chromatic harmony" to "map the musical Genome?" REALLY hilarious.

Anyways, with this stunt, Pandora achieves the critical mass necessary for network effects to take hold quicker than the competition. Good for them!