al berrios & co. CONSUMER STRATEGIES REPORT 09.09.03: Entertainment "Is Core To The Growth of Human Beings Emotionally, But It's Not Food, Clothing, or Shelter."
THIS WEEK'S CONTENTS ARE:
 UPDATES: Events
 OUR EVENT: Executive Panel Series: Marketing Content - Entertainment "Is Core To The Growth of Human Beings Emotionally, But It's Not Food, Clothing, or Shelter."
 OUR EVENT: Executive Panel Series: Entrepreneurship - If Cash Is King, Negotiation Ability Is Your Queen
 OUR EVENT: Grand opening of Altagracia's Studio 45 Gallery
QUOTATION OF THE WEEK
"Entertainment 'Is Core To The Growth of Human Beings Emotionally, But It's Not Food, Clothing, or Shelter.'" - Mark Shimmel, Senior Vice President, Marketing and Artist Relations, Arista Records
Good morning execs,
First, I'd like to apologize for not sending out our report last week. During the summer, we hosted 4 panels and sponsored an art gallery opening. Last week's report was supposed to feature them, in addition to a trade event we attended. Alas, I didn't have enough time to write about all of them.
Although we published one of our event reports last week ("Is There A Need For An Ethnically Focused Agency?"), I originally intended to publish all 5 of our event reports, and because I didn't have enough time to do it, decided to wait to send them all out today. To entice you, I included one or two paragraphs of each report in today's emailing, and if you're interested in any of them, they are published in their entirety online.
In addition, there are two special events I'd like to draw your attention to: Our marketing forum in November and our presentation of our research methodology.
Enjoy your REPORT!
Executive Panel: Marketing Content - Entertainment "Is Core To The Growth of Human Beings Emotionally, But It's Not Food, Clothing, or Shelter."
Skip To Section...
> Worth Magazine
> A Case For Understanding Music Consumers
> Why Being Insular Has Hurt The Music Industry
> Controlling The Value of Your Product With Your Distribution
> Media Consolidation Is Good?
The quote that serves as the title for this panel came from Mark Shimmel, Senior Vice President of Marketing for Arista Records (a division of Bertlesmann's BMG and home to artists such as Whitney Houston, TLC, Avril Lavigne, Bone Crusher, and Dido) at our panel, originally titled Pitching & Closing. However, the other panelist was Mahesh Krishnamurti, Publisher and CFO of Worth Media, publishers of Worth magazine, (which was recently sold to CurtoCo.'s Robb Report, a publication directed at the upper crust of society), so the discussion, not surprisingly, went into the state of content in today's multi-media, low-attention-span, changing-business-model marketplace.
If you've read many of my earlier reports, I firmly advocate change in the music business. So, it was with great anticipation that I had one of the most successful senior executives in the business share his views on the subject on our panel. And picking up on the direction of the discussion, Mr. Krishnamurti's bird's eye view on the print business and the direction the media industry should take, as well how his company reaches such a prized audience, was equally engrossing, and lent credibility to our own views.
For those of you that don't already know, Worth magazine's audience is a sophisticated, high-net worth connoisseur of financial products. Experienced with high-technology, they are actively involved in their financial management, which Worth content advises them on by filtering out the best of the best. Worth helps them spend their wealth, and as a result has become an extremely desirable lifestyle brand, as well as a powerful environment through which advertisers can reach this audience. Worth has successfully gained the trust and credibility from its audience so that when advertisers want to reach them, it is more relevant than any other medium. But how does Worth even reach this audience? Content. Without content that's relevant to its audience, readers wouldn't stay.
A Case For Understanding Music Consumers
Well, how is content marketed? More to the point, how is music marketed? And why is music important to its audience? "Music is something few know how to make, but everyone knows how to enjoy." Mr. Shimmel's assessment comes from over 30 years in the music industry and brings to light something that painfully answers the challenges facing the entire industry: little is actually scientifically understood about music's effects on consumers and how and why they buy it. Like his introductory comment made clear, music isn't an absolute necessity for consumers (or is it?), but it's still a $40 billion dollar business. According to Mr. Shimmel, ~99.6% of all music fails, so either a new definition for success is needed or executives do not know how to study why so much of their product fails.
(Editorial Note: I know, music is creative, and therefore, subjective in appreciation. But at $40 billion, without a clue as to what makes their customers tick, it's a slap in the face of basic business practices. Let's not forget, though, that traditional economics doesn't account for emotional factors, which music is known to influence. But at the same time, it's not like music is a new product, either. We've had millennia to try and make sense of it. I mean, if movies, TV shows, and writing can all understand the way they are perceived by consumers, why can't music?)
By understanding how consumers consume music, marketing music to them would be more sophisticated than guerrilla marketing and buzz. As it is, the only things that are measurable are what genres they buy, where they buy, and what formats they buy them in. And using regression analysis, we can determine what'll catch on. But why not analyze the composition of our population (i.e. how many consumers are here from what countries), then analyze what they like, then their perceptions to specific genres, all to get deep below the surface of what they prefer? (It's the same problem faced by food manufacturers.) As discussed in the panel of advertising research experts the week prior to this panel, there are unlimited ways to answer all these questions, so why aren't content executives taking advantage of them? Based on these deeper consumer data, music product and other content can actually have strategy attached to their development that isn't influenced by advertisers, but actually part of the creative process.
Why Being Insular Has Hurt The Music Industry
It could have been I was being overly sensitive, but I sensed condescension from Mr. Shimmel towards my questions, as he described how he marketed his artists. Besides buzz, the industry depends heavily on radio and music magazines. But most surprisingly, they depend on each other. Every major hit makes money for everyone and it's in their best interests to protect and defend their turf from innovation and customer service. This strategy has been the foundation of music marketing for decades and it explains why in the face of consumer piracy, they were caught, and continue to be, unprepared.
Which is why Vivendi Universal's recent price cuts on their product has startled and irritated the rest of the industry. Vivendi's is a strategy based on customer service and innovation, which are the two biggest no-no's when colluding the way the industry has been. As Vivendi stated, music is priced higher than DVDs, which creates value problems in the minds of consumers. According to them, they simply did what should have been done a long time ago.
Controlling The Value of Your Product With Your Distribution
But it's not just the marketing and pricing where the music industry faces challenges - it's mainly its distribution. In a vain effort to protect its margins, the industry shuns any innovation in distribution of its product. However, with specialty retailers loosing battles for consumer traffic against the mass discount retailers, the industry's cost structure controlled by creatives, not financial types, and most importantly, the advent of the internet and digital content, how can the industry continue to do business as usual?
(Editor's Note: It appears that the only strategy that the industry knows how to implement is legal. But how effective can this be when it's not criminal masterminds violating their rights, but their very own customers?)
Without understanding how and why consumers like music, the industry has no idea what consumers value about their product. As a result, it becomes difficult to negotiate with distributors and provide effective customer service. This is the same dilemma faced by any content company that does not control their distribution.
Because creativity is subjective, its value is determined after the product is already made. Television programming has overcome this dilemma by combining the producers with distributors, and better controlling the value of their product. In effect, they have attached the value of the content to the value of the distribution, which is easier to evaluate based on fixed costs of delivery and objective consumer standards about the service.
Media Consolidation Is Good?
Ultimately, this argument also offers another reason why media should consolidate, since it would provide a standard by which content can be valued. It could be that music producers join music retailers or radio stations. Or it could be that movie studios join movie theatres. Even Barnes & Noble has realized that there's more money to be made by publishing their own books than simply serving as a distributor for book publishers.
Like Mr. Shimmel, Mr. Krishnamurti
also conceded that the best solution is what is commonly known as a market correction,
where many of the competitors simply leave the marketplace by going bankrupt
or consolidating. With fewer labels and magazines, the stronger ones benefit.
However, the market can't correct itself fast enough when the barriers to entering
the market are so low. It is more likely that the challenges facing content
producers will remain for decades. But even more striking is that consolidation
of media isn't necessarily as big a problem as we're lead to believe, since
consolidation is the absence of entrepreneurship, which the content and media
industries never seem to run out of.
Executive Panel: Entrepreneurship - If Cash Is King, Negotiation Ability Is Your Queen
Skip To Section...
> What Do You Want And Why?
> Preparing For Your Deal
> Advisors vs. Friends
> Collaborate or Compete?
This event was originally scheduled for Thursday, August 14th, at 6pm, so it was not supposed to happen. (The blackout, remember?). But I was fortunate enough to get two of the original speakers to reschedule, Joel Rudenstein, an angel investor and former CFO of TDI, Inc. (now part of Viacom Outdoor) and Richard Dodd, strategy consultant and co-founder of Veriscape, a software developer. The final speaker, re-scheduled at the very last minute, (Thanks, Myron!), was Myron Glucksman, a 30-year veteran of Citigroup and current legal advisor to boards of directors. With this combination of experience, the discussion remained high-level and covered two of the most valuable tools any business executive needs to have to succeed: funding and negotiation skills.
What Do You Want And Why?
Regardless of what stage in our careers we are in, the entrepreneurial bug can strike. When it does, are we prepared? How does one go about starting a business? As an investor, Mr. Rudenstein countered with instead of starting a business, why not buy one?
As an entrepreneur, this possibility had never been one I contemplated. After all, we start businesses to make money. So, if we don't have money, how could we buy another business? Furthermore, isn't the point of starting a business to do something no one else is doing? Well, WPP, the global advertising agency holding company originally started out as a metal works company, making things like supermarket shopping carts. It still has that business, but it's revolutionized the advertising business. Vivendi, as I'm sure you know, is a water utility that turned itself into a media company by spending $11 billion on acquiring sprawling media businesses.
So the first questions you should ask yourself is what do you want and why do you want to do it? Research the market, figure out your capital needs, and understand the customers in that industry. Although experience and contacts help, opportunity is also valuable. Do investors feel like investing in your business at that point in time? Are current industry suppliers not meeting consumer demands?
Preparing For Your Deal
One of my biggest challenges when starting my business (if you recall, originally an interactive advertising agency) was not being able to recruit qualified persons. I'd always approach with that it's-the-internet-so-work-on-faith mentality, rather than taking into consideration the recruits' concerns: salaries, benefits, and security. It was these initial encounters that lead me to become a consultant that could work without staff, but also helped me understand how to prepare for deals. In any deal, our panelists emphasized taking the other sides' views into consideration, understanding their objectives and interests, and most importantly managing expectations ("underpromise and overdeliver"). They reminded us to do our due diligence and investigate our choices and options. What are industry benchmarks and standards? Can we compare other successful businesses to our transaction, to prevent ending up with the short end of the stick? They anecdotally referred to not being able to meet deadlines as a leading cause of poor negotiation.
Assuming you know what you want and why, you've also got to set goals and be persistent in reaching them. Without goals, what are you negotiating for? Contrary to what you may think, your opposing party will respect your trying to achieve your goals. This helps creates a transparent environment that breeds trust and allows you to influence the other party. But also, setting your goals will allow you to more quickly identify a lack of trust and transparency, which helps you in determining how much authority you carry during your transaction. Our panelists suggested that having contracts, enforceable by your legal team, is a great way to maintain your authority over the opposing party during a negotiation. And if you don't have a legal team, the perception of authority can still be maintained by deferring it to a boss, a majority, or simply by not revealing all of your weaknesses.
Advisors vs. Friends
Nothing can be worse for a new enterprise than crooked employees or clients. And even the strongest negotiation terms and appearances can't prevent harm. In such an event, our panelists made two suggestions: Get an advisory panel and avoid working with friends.
Advisory panels are composed
of professionals with inside connections and know-how that will help you move
mountains when they need to be moved. They are underutilized by new enterprises,
to their detriment. Friends can often prevent you from dealing as effectively
as you would with a stranger, because your sense of fairness is skewed more
with friends. They too will feel that they don't have to be as ethical or dependable
since there isn't a clear sense of authority with friends. This relationship,
more often than not, creates conflicts so potent, that it results in the termination
of businesses. Henry Morrison Flagler, Treasurer & Secretary, The Standard
Oil Company, once said that "a friendship founded on business was superior
to a business founded on friendship". John D. Rockefeller took this advice
to heart throughout his career.
Collaborate or Compete?
Once your business gets off the ground, how does it take off? The most often repeated advice was to always have cash. Cash is king. Everything happens with it. But it's a matter of getting it. Friends and family, sure. Banks and investors, ok. Clients, even better. Competitors? If you're a small business operating an industry with established players, should you attempt to compete or collaborate with your competitors?
Machiavelli says choose sides. It's strategically sound because either side will stand by you against opponents, whereas neutrality leaves you with one big foe (everyone that's not neutral). So collaborating makes sense.
Competing depletes your resources, and potentially puts you in a situation, which although behaviorally valuable, economically stupid. Let me explain: when you need to motivate your team, you identify an enemy to fight against. That'll get everyone on the same page and help you succeed. However, in the face of adversity, it is illogical to compete with a handicap to your opponents.
So, as a new enterprise, collaborate until you have enough cash to compete on a level playing field.
Grand opening of Altagracia's Studio 45 Gallery
Please visit www.alberrios.com/s45 for press release/invitation.
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