Category Archives: business concepts

Boycotts and the impossibility of financial separation

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So apparently the boycott thing has come up again, le sigh–although thankfully it doesn’t seem to be having much impact.

If you ask why it’s happening, you’ll be told many rather nonsensical reason why some K-fans are boycotting–“bad” marketing that somehow sells tons of music and the like.

So, here are the actual reasons why this sorta-boycott is semi-happening.

1. This took place in Japan at the end of May:

2. This is going to take place in Japan in July:

Yup, J-BBCs got a new song and some concerts. That’s the entirety of the issue this time around–last time, it was this kind of thing plus Zico dating.

There aren’t deep minds or great moral thinkers behind these boycotts. These campaigns are coming from the kinds of K-fans who go: WHAT ABOUT MEEEEEEEEE?

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Anyway, I thought I’d back up for a minute and talk about boycotts. Obviously I think they’re a really bad idea with regard to Block B and their current situation, but this actually isn’t due to some blanket dislike for all boycotts.

Let’s start out with the question: What is a boycott? It’s when people refuse to buy something they would normally buy. Why engage in a boycott? Let’s ask Wikipedia:

The purpose of a boycott is to inflict some economic loss on the target, or to indicate a moral outrage, to try to compel the target to alter an objectionable behavior.

So a boycott is essentially punitive: You go after a company’s ability to make money because you think they’ve done something wrong.

But what do we mean by “a company”?

Remember that in K-Pop, the talent is typically paid via some kind of revenue split. So, if something pulls in $100,000, that money is split between the group members and the company.

In theory.

What you get, of course, for many K-Pop groups (even if there is no dodgy accounting) is really craptacular revenue splits. For example, it came out in court that the members of Exo received a lousy 3-5% of profits for promotions in Korea.

Let’s say you’re an Exo fan in Korea, and you are upset about something SM Entertainment is doing to the group, which you are pretty sure is harmful to the members. But you would like to damage SM’s take without hurting the finances of the group members themselves.

Given what you know about Exo’s profit distribution, boycotting promotions in Korea would be a pretty solid idea. For every dollar you don’t spend, SM loses 97-95 cents, while the members only lose 3-5 cents. The members take only 3-5% of the damage because they were only ever getting 3-5% of the profits.

Block B was in a similar position back when they were with Stardom, and Stardom wasn’t paying them anything. Back then, there was no real point in paying for anything that came out of Stardom, because none of that money would end up in Block B’s pocket!

Then the lawsuit happened.

Whatever people’s complaints about Seven Seasons/KQ, nobody denies that the boys are living pretty high off the hog these days. Expensive clothing, foreign travel, fancy cars, costly watches, nice apartments, enormous rooms dedicated to fish–to all appearances, they’re doing quite well for themselves.

What does that tell you? It tells you that the members are getting a decent hunk of the revenues.

How much? Is it perfectly fair? Who gets exactly what? I have no way of knowing.

But I do know that, if the boys are getting a healthy revenue split, it effectively makes it impossible to punish Seven Seasons through a boycott without also punishing the members of Block B.

Why? Because a boycott makes the pie smaller. So instead of splitting $100,000, they’re splitting $70,000. Instead of splitting $50,000, they’re splitting $20,000. Everybody–including your bias!–gets less money.

If you cut Seven Seasons’ revenue by 30% with your boycott, you are probably also cutting the members’ revenues by 30%–and that likely makes a significant difference to their take-home pay, because they weren’t getting nothing to begin with.

The difficulty of targeting punishment–of inflicting damage on a label alone–is why I even argue against boycotting the Stardom albums these days. I think there’s a chance that when Block B settled with Stardom, part of that settlement involved having some third party handle the royalty accounting. (At least, that’s what I would have wanted had I been them.) So I say, you can’t punish the label without punishing the boys!

And that goes a million times more for Seven Seasons, because there’s really no question with them that the boys are getting paid. Their current label is not taking all the money, and that means that when you boycott the group, you hurt the group’s members.

Not just financially, either–I mean, Jaehyo kind of jokingly pointed out earlier that if you want to see him in more things, you need to watch the things he’s in now. That’s very true: If your concern is that all the focus goes on members that are already successful, like Zico, then the best way to help the other members is to support their projects, not to boycott them.

But if all this is true, why doesn’t it bother those K-fans who keep trying to organize boycotts?

Because they are angry at the members.

If you think Zico is your future husband, and he dates someone else, then you’re going to try to punish him. If you think B-Bomb is your future husband, and he premieres his song in front of a bunch of Japanese girls, then you’re going to try to punish him. If you think Taeil is your future husband, and he’s had three solo concerts in Japan but won’t do music shows in Korea, then you’re going to try to punish him.

These people are totally fine with punishing the members along with the label–that doesn’t bother them one bit.

Revenue splits & corporate structures

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There’s been a bit of a hoo-ha about the fact that KQ Entertainment (which clearly gets the vast majority of its revenue from Block B) spends money on KQ Produce (which does not benefit Block B).

While part of me is just like, Ugh, haven’t we been down this road before? Like, very recently? another, more-pedantic part of me is like, Yay! I get to do another business-y post!

So, I thought I’d explain how it is that KQ Entertainment can spend money on KQ Produce without ripping Block B off. In doing so, I get to talk about both corporate structure and how artists get paid, so obviously I’m as happy as a clam right now.

A very dweeby clam.

Anyway, to understand what’s likely going on here, you need to first understand the concept of a revenue split.

What is a revenue split? It is the way money made from an artistic product is split between the artist and the label/publisher/studio/whatever.

Must there be a revenue split? No. You could be hired on a per-job basis for a flat fee, or you could be a salaried worker.

But if you are doing creative work, you often get paid via a revenue split.

A revenue split can be very simple: When I sell books on Amazon, for example, Amazon gets 30% of revenues and I get 70%. Easy-peasy.

In that case. More often than not, revenue splits are really complicated and there are many factors to consider. You might get a different split depending on where you’ve sold or what you’ve sold (CDs vs. digital downloads vs. endorsements vs. concert tickets). Your split may increase if your sales exceed a particular target. What gets split may vary–is it before expenses or after?–and you have to be careful about that one.

If your split sucks, then you get no money. If your split is awesome, then you are Dok2!

However the split is calculated, once the split is made, unless it was calculated fraudulently, the money belongs to whoever receives it.

That person or entity can spend the money as they see fit, because the money belongs to them. Zico can buy designer clothing, U-Kwon can buy Bearbricks, and Kim Kyu Wook can put money into KQ Produce.

To say that Kim should stop funding KQ Produce and put more of his money into promoting Block B is really no different than saying that Zico should stop paying for fancy cars and nice apartments and put more of his money into promoting Block B. If the whole narrative where Zico is a greedy bastard who doesn’t support his fellow Block B members really annoys you (and it certainly annoys me), then you should feel the same way about the whole narrative where Kim is a greedy bastard who doesn’t support Block B.

Kim can spend his money however he wants: fast cars, loose women, or–as the case may be–KQ Produce!

But hey! you say, Wasn’t it a problem when Stardom took money for Block B and spent it on other groups?

Yes, it most certainly was a problem! But Stardom took money that had been loaned to them specifically for Block B and spent it on a different group. There was a legally-binding loan agreement, and Stardumb dumbly breached it, because they were dumb.

But what about the issue of a label spending too much on Group A rather than on Group B?

For starters, I have point out that this is most often an issue only to fansoften it makes perfect business sense for a label to ignore Group B in favor of Group A.

But of course, sometimes it doesn’t: It didn’t make a hell of a lot of sense for Stardumb to violate the terms of its loan agreement, nor did it make much sense for Stardumb to so starve the members of Block B of funds that they left the company and refused to work for it ever again.

I think that, given their experience with Stardumb, the members of Block B were aware that there could be a problem with having all the revenues they made (plus money stolen from their parents, let’s not forget that) siphoned off and spent on God knows what. Furthermore, I think that, since they were armed with this hard-won knowledge, they took steps to protect themselves against this kind of abuse when they signed with Seven Seasons. I think they not only wanted to protect themselves from not being paid, but they also wanted to protect themselves from being neglected if their label added other groups.

Why do I say that? What am I looking at that makes me think this?

I am looking at KQ Entertainment’s corporate structure!

Notice how it’s kind of complicated. Why make Seven Seasons a subsidiary? Why create KQ Produce as its own subsidiary, and KQ Entertainment as an umbrella company? Why didn’t they just expand Seven Seasons to include other groups? Wouldn’t that be simpler?

Because this structure likely guarantees that a certain percentage of resources go to managing and promoting Block B.

I would not be AT ALL shocked to discover that Seven Seasons get its own slice of the revenues that Block B makes, separate from what Kim gets. Those revenues would be reserved for promoting the group and its members alone–not for any other act.

This way, every time money comes in, the members get their cut, their dedicated management gets its cut, and Kim gets his cut–which he can spend on KQ Produce if he wants, because it is, after all, his money.

I realize that Block B might be your “idols” or “gods” or whatever, but they don’t actually have legal rights to every last dime floating around, and their support staff are not their slaves. Some performers do have that attitude–Prince was fairly notorious that way–but the rather predictable result is that not a lot of people will work with them twice!

The members of Block B are, in my estimation, pretty damned savvy. They learned the hard way that the whole notion that K-Pop labels are big friendly families that will always take care of you is a big, fat lie. Instead, it’s the contract, the contract, and always the contract….

What’s up with Block B? SO glad you asked!

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A not-too-terribly bright individual posted this question on OneHallyu:

Block b ? what’s up with them?

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The person goes on, but needless to say they do not like Block B, and their theory regarding the group’s current success is–of course–sajaegi.

My point is not: Look at this idiot! Instead, I want to note that 1. it has been almost six years since Block B’s debut, and 2. the person is completely correct in saying that debut didn’t do very well.

So–let’s take this question seriously: What is up with Block B? What did Block B do in those six years between their not-particularly-successful debut and songs like “Toy” or “Yesterday“?

They persisted.

Now, persistence isn’t just a fun political meme these days or even just an admirable personal quality. Persistence is something that is completely necessary if you wish to pursue a career in the arts.

Persistence is very much needed on a personal level, because there are a lot of people who think they want to work in the arts, but many fewer people who want to cope with the realities of it. (Such as the need to, you know, actually generate some form of artistic content. You would not believe what a stumbling block that is for certain artistes. I mean, they’ve got the clothes, they’ve got the hair, they’ve got the attitude, they’ve even got the drugs–you expect more?)

So in order to enter pretty much any artistic field, you have to endure what is essentially a hazing process designed to weed out the posers. Once you’re in–well, even very well-established creative artists will see crazy and unpredictable responses to their work. That’s why Park Kyung was so philosophical about the sales of “When I’m With You”–I’m sure he’s seen these kinds of sales swings before (anyone with any professional experience has). So, instead of curling up into a little ball under his bed, he put out another song, and lo and behold, “Yesterday” was a big hit!

Even if your very next release isn’t some big hit, you can still make a decent living in most areas of the arts if you are persistent. The Dok2 approach of creating oodles of songs works in many fields–even if no one work has monster sales, you can basically make it up on volume (and recycling is a low-cost way to help generate that volume).

So persistence is really helpful! Or at least it is if–and this is a big if–the industry will let you be persistent.

How could an industry player prevent you from being persistent? That’s easy–through a contract!

What makes a contract a total piece of shit? Well, I would say a lousy revenue split doesn’t help, but I think the more important terms are:

  • The contract is a long-term contract
  • The artist has no power over new releases
  • The contract is strictly exclusive, so that the artist cannot do any other work outside of the contract

How bad can these terms be? VERY, VERY BAD. There have been publishing contracts that contain so-called non-compete clauses that make it a breach of contract for the writer to ever write anything in a genre similar to the (most typically just one) book written for that particular publisher.

Ever.

(You see why people go indie!)

A bad release is a setback. A bad contract can be a career killer. (And you can not only fuck over yourself for your entire lifetime, but you can fuck over your heirs financially as well. Like, literally generations of your family will be wondering how you could be so dumb as to sign that thing!)

The thing to remember is that any largish publisher/label/studio/whatever has a bunch of talent waiting in the wings. Their method of being persistent is to keep releasing different things from different artists to see what takes off. They don’t want to waste time and money doing release after release from someone who’s not currently a hit-maker, so they’re going to focus on whoever in their stable is the most profitable.

That approach doesn’t necessarily benefit a given artist in the stable. In fact, it usually means that the career of the individual artist is quite fragile: One failure, and you vanish from the public eye for the duration of your contract.

It’s not like artists can’t possibly be persistent in that situation, of course. In K-Pop, where shit contracts are the norm, people jump ship when their contracts (finally) expire, or they sue to get out of their contracts, or they convince another label to buy their original contract out. But obviously that’s not the easiest thing to do, and it requires even more (you guessed it) persistence.

What is cost structure?

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Cost structure is pretty dorky even compared to the dorky things I usually write about in these posts, but it is something that is good to know about, because (like liquidity) it is key to the success of a business, and yet is often kind of invisible to consumers.

So, what is cost structure? It is all the costs or expenses that a business has.

We all know the saying, “You have to spend money to make money,” and yes, you do. But if you put out more money as costs than you take in as revenues, you are losing money. That is bad, especially over the long term. For a businessperson, it is every bit as important to understand how and where you are spending money as it is to understand how and where you are making money. (This is why most employees of a company will complain about how their bosses are obsessively cheap–costs matter as much as revenues.)

The fact that cost structure is important is the very reason it is often hidden. If you’re a business, you usually can’t effectively conceal the way you make revenues, especially not from competitors who are in the same business as you and know it just as well. As a result, companies will brag about revenues all day long: We’re the biggest K-Pop label by revenues! OMG! Look at us!! And all our great revenues!!! Which are huge!!!!

In contrast, you often can conceal the ways your business has figured out to spend less. If your company is public, you have to report your costs by certain categories, but those categories are pretty broad. How, exactly, you keep your costs so low is something that you can keep quiet about–it can even be a trade secret, and then your competitors may get so desperate that they wind up engaging in illegal corporate espionage to ferret it out!

If you have the same revenues but lower costs than everyone else, then you will always be more profitable and will always be doing better than the competition–mwa-ha-ha-ha!

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We have become rich! Through thrift!

Costs are usually broken into two categories: Fixed costs, which stay the same no matter how much business you are doing, and variable costs, which increase as your business increases.

So, let’s say you run a traditional K-Pop label–indeed, the very label that handles A Large Group of Attractive People. Plus, you’ve got trainees that you’re hoping to debut one day as A Large Group of Underage Attractive People.

What are your fixed costs?

Office rent, insurance, paying for the dormitory for both groups, feeding both groups, chaperones for both groups, any regular and routine maintenance for the members (training, dermatology, plastic surgery) that is unrelated to any specific revenue-generating activity.

Note that you can alter your fixed costs–they’re not “fixed” in the sense of being unchangeable. For example, you could cut your fixed costs by shit-canning all the A Large Group of Underage Attractive People trainees. But fixed costs don’t rise or fall depending on how many comebacks or other activities you do.

What are your variable costs?

Production of songs, production of CDs, choreography, videos, costumes for appearances, transportation to appearances, shoots and production for photobooks, etc. These are the costs that increase the more active your groups are. Doing a ton of comebacks? You’d better be ready for a ton of variable costs.

In my post on liquidity, I caused your label a liquidity crisis by jacking up your variable costs. However, you can just as easily have a liquidity crisis caused by your fixed costs–the landlord suddenly doubles the rent on those dormitories, and you don’t have the cash on hand to cover it. High fixed costs mean that you need to either have a lot of money (or credit) on hand, or that your label needs to start making a lot of money ASAP.

Are there any benefits to being in an industry with high fixed costs? Yes. High fixed costs are a great barrier to entry–if your industry is really expensive to get into, few people will try, which means less competition for you! (In fact, one big exception to the rule that companies don’t talk about costs is when they spend an enormous shitload of money doing something. That they are very sure to publicize–ideally where any potential competitors can see it!)

You see the connection between high fixed costs and barriers to entry in this interview Decipher had with Snacky Chan. Chan talks about how it used to be that the only way to promote effectively in the Korean music industry was to be on television. The tricky bit was, the only way to be on television was to spend years paying off producers.

Can’t afford the payola? You can’t afford to be in this industry!

You’ll notice that I categorized bribing television producers as a fixed cost. That’s because even if you, the K-Pop label owner, want only A Large Group of Attractive People to appear on television, you’re still going to have to spend years handing out (cash) gifts to television producers for their birthdays, and their children’s birthdays, and their college roommate’s cousin’s children’s birthdays. . . .

If that’s the case, then why wouldn’t you also debut A Large Group of Underage Attractive People as soon as possible? You’ve already spent the money needed to get any group on your label on television; it will be more profitable if you have more than one group out there generating revenue to offset that fixed cost.

But . . . debuting A Large Group of Underage Attractive People will increase your variable costs. From that point of view, it’s better to hold off on debuting your second group, or not debut it at all.

Which is the right call? It depends. As a business owner, you’re going to have to weigh all the variables, make a decision, and hope that your judgement is correct.

In any case, industries with high fixed costs–think airlines or manufacturers of computer chips–tend to be dominated by large players: You need big revenues to cover those big fixed costs. Industries with low fixed costs tend to be waaaaay more friendly to small businesses and individual entrepreneurs (apps or other software development is a good example–all you need is a computer).

Can an entire industry see its cost structure shift dramatically? Yes. Since we’re being K-Poppy here, let’s do two scenarios!

Scenario #1

You own a business in an industry with high costs. You figure out a way to bring down your cost structure–and your cost structure alone. Significantly.

That’s a very nice position to be in. You’ve still got the (perceived) barriers to entry keeping potential competitors out, you’ve got a consumer base that is used to paying a high price for something, and your existing competitors still have high costs. You can cut your prices juuuuust a little below theirs, and you’re going to be a very profitable operation indeed while they struggle to remain solvent.

Of course you’re going to keep your mouth shut about how you keep costs down–that is key. If you make a big deal about your great new cost structure, customers are going to expect you to pass along the savings–plus they may start viewing your brand as the cheap discount one. In addition, existing competitors will start trying to figure out how to copy your methods, while potential competitors will realize that those barriers to entry into your industry that they thought were so high are maybe not that high after all.

Basically in business, you always want your costs to be low, but you want other people to think that your costs are high. That’s the sweet spot.

Scenario #2

You own a business in an industry with high costs. A new technology comes along that is available to everyone and that allows everyone to to bring down their costs. Significantly.

This is actually a much-less desirable position to be in than Scenario #1, and that’s the situation that digitization has brought to many media companies. Newspapers, for example, had this carefully cultivated network that allowed physical copies to be reliably delivered to people’s doorstep every day. But now everyone just looks on-line for news.

The fixed costs that newspapers had–printing presses, fleets of vans, hundreds of employees–didn’t just vanish overnight: It’s hard to change a business model that quickly (especially when it involves laying off half your staff). Meanwhile, new companies stepped right in, offering advertising-supported on-line news, often at no cost to consumers! You see why newspapers (and record stores, and book stores, and encyclopedia publishers) are having such a hard time these days.

Is there a term for these kinds of outmoded cost structures? Yes, those are called legacy costs.

So, here’s the question: Should the cost structure that comes with owning a traditional K-Pop group–which includes payola for television producers and money spent manufacturing CDs–be considered legacy costs?

I would argue that the answer is no–if you can make that business model work. If you want A Large Group of Attractive People to be a conventional K-Pop group, then it makes a lot of sense to have a cost structure that includes things like sucking up to television producers and manufacturing elaborate CD sets and other expensive merchandise, because that’s how you 1. develop a fan base, and 2. monetize your fan base.

But if that’s not what you want to do, it makes no sense to adopt that cost structure. High fixed costs require high revenues–revenues that are often much higher than what is needed to turn a lovely profit when you have a different cost structure–and generating massive revenues is hardly an easy task.

People sometimes buy into the notion that you have to do Big Company things (selling X many units, having huge marketing campaigns, etc.) if you’re serious about your career and want to be “successful”–a term they define very narrowly indeed. But all that rigamarole could potentially bankrupt you.

If you’re happy putting out digital singles and having your major promotional cost be the T-shirts you sell at concerts, and you can make money doing that, there is absolutely no business reason to cough up for all the rest. Don’t borrow trouble, and don’t try to adopt the wrong cost structure.

What is supply & demand?

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Supply & demand (and I’m going to use the ampersand, because these are two concepts that are typically presented as one–hey, at least I didn’t go with “supply ‘n’ demand”) is probably one of the first things someone who teaches economics will try to teach you. They will carefully explain the concept, and you will sit back in your chair, going, “This is crap! I can think of a thousand exceptions to this right off the top of my head!”

That’s because supply & demand is a fundamental concept in economic theory. Theory is lovely and wonderful, of course, but we don’t actually live in the world of theory.

Except when we do. Ooooooh.

OK, let’s go back to the beginning here: What is supply & demand?

Supply & demand has two halves: Supply and . . . (wait for it . . . wait for it . . . ) demand. Both of those things together are supposed to explain why stuff is priced the way it is.

What’s awesome about supply & demand is that it comes with pretty artwork! Here’s Wikipedia‘s version:

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OK, it’s not that pretty. But look at the red lines marked “D1” and “D2.” The “D” stands for demand. (“Q” stands for quantity; “P” stands for price.)

What is demand? It’s how much people want something.

Here’s what you need to know about the demand curve: The cheaper something is, the more people want it.

The blue line marked “S” indicates supply. Here’s what you need to know about supply: The more expensive something is, the more people want to be the ones selling it.

Demand is usually not a hard one for people to grasp. Do you stock up on your favorite shampoo when it’s on sale? Congratulations, you are right there on the demand curve.

Supply can be trickier, because most people don’t think about selling stuff. But let’s say you had a job that you liked that was close to your house, and it paid you $15 an hour. What would you do if a very similar job, with very similar hours, became available in a very similar location–and it paid $20 an hour. $25? $30? $35?

You’d switch jobs–and the bigger that raise got, the more likely you would be to switch.

That’s you, a supplier of labor, finding your place on the supply curve.

Where supply meets demand is where the price is! There you go! It’s all explained! Simple as that! Blog post over!

But . . . what about those thousand exceptions? I learned about supply & demand curve in high school in the 1980s, and of course the first thing we said was, “What about Vaurnet sunglasses? People can’t get enough of those, and they cost an arm and a leg!”

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So cool, man!

In the world of economic theory, goods are the same–sunglasses are sunglasses are sunglasses; in the real world, not to much. This is why, in the real world, branding matters so much–you need to convince people that your product is so super-special that it’s totally worth paying a premium for.

(Is there a really dull term economists use to describe that wonderful feeling that comes from buying a really fancy, sexy pair of sunglasses, because by God you’re worth it and people are going to swoon at your feet when they see how awesome you look!?! You betcha! It’s–get ready for some seriously sexy econo-speak here–called utility.)

The other thing to remember is that, in the real world, price is not simply measured in dollar terms. Is doing something a huge pain in the ass? Does it take a long time? Do you need to travel somewhere special to do it? All these things are included in people’s perception of the cost of getting something (and is why J-Pop doesn’t have the global audience K-Pop does).

From the supply point of view, the important thing to remember about the real world is that suppliers are focused on profit, not revenue. Think of you, supplying labor: If that job with that big raise is located so far away that the commute is absurdly expensive, then suddenly that higher hourly wage isn’t so appealing after all.

Because profit is what matters to suppliers, it can sometimes be difficult to understand why everyone’s pushing Product X instead of Product Y when, to the consumer, both products are priced the same or maybe Product X is cheaper.

But if the expenses of producing Product X are lower, then Product X is more profitable than Product Y, and all the suppliers will be running in that direction. (If you make Product X, then that can be a problem, because the competition will undercut you on price. So again branding is important, as is having areas of expertise that it’s hard for other people to replicate. These kinds of things are called barriers to entry, and suppliers want them so badly that they have to be carefully regulated to ensure that they don’t start hiring armed thugs to kill their competitors.)

Does all this real-life complexity mean that supply & demand are truly useless concepts?

No.

Let’s take as an example: My chocolate consumption. Like many older people (shut up), when I buy chocolate, I cough up some serious money for a single bar of Fancy-Schmancy Chocolate–I don’t buy the three-pound bag of Cheapo Chocolates, even though the cost is the same.

Why not? Well, I have certain unique perceptions of utility. I don’t think Cheapo Chocolates taste as good as Fancy-Schmancy Chocolate, for one thing. Even so, I know that if I buy a three-pound bag of chocolate, I will probably eat it all that day–and then I’ll feel sick and get fat and not sleep very well. The manufacturers could cut the price of a bag of Cheapo Chocolates in half, and I still would not buy them, which seems to suggest that supply & demand is really just a bunch of hooey.

However, were the wholesale price of chocolate to double, I would probably eat less chocolate.

Why? Well, the makers of Fancy-Schmancy Chocolate know that I’ll pay, I dunno, $5 a bar, but am I really going to pay $10? Probably not. So they’re going to start selling a smaller bar for the same price, and hope that I don’t mind.

Some people will mind, though.

And it’s not just Fancy-Schmancy Chocolate who will be doing this–the amount of actual chocolate in anything chocolate that I buy will be less. There will be less chocolate in chocolate ice cream, less in chocolate cake, less in chocolate sauce . . . you see where this is going. There may even be new products introduced to get me to eat less chocolate!

Why? Because everyone knows how the demand curve operates–if chocolate products get too expensive, I just won’t buy them. I’ll start looking for substitute goods–which is bad if you sell goods containing chocolate, so you’d better get ahead of the game and start swapping in substitute goods yourself.

All right–so let’s start looking at supply & demand in K-Pop.

The big thing where you see supply & demand having an impact not just in K-Pop but in the global music industry (as well as many other industries) is the move to digital media.

Digital has come and conquered the music industry because it is much cheaper to consumers. And by “cheaper,” I don’t just mean it costs less, I also mean that it takes less work to buy digital music–click a few buttons and you’re done. (When I was young, we had to walk five miles through the snow to get to Tower Records! And the clerk was super-creepy and kept hitting on us!)

Now, there is no country in which the suppliers of music have been eager to get into digital–when you’re set up to sell things one way, it’s a big shock to have to completely revamp your business model and sell them another way. But digital has come anyway because the demand is so strong. The music industry has been left with two choices: Do you want people to pay for digital, or do you want them to pirate it?

Since the businesses that make up the music industry are suppliers, they sure as hell don’t want people to pirate. So the challenge for them has been to make money even without the larger revenues you get from selling CDs.

Of course, one of the things that helps (which industry associations tend not to advertise) is that digital music can be more profitable, even as it gives you lower revenues. The other thing is what we’re seeing now in Korea and the U.S.: The cheaper and easier digital is to buy, the more demand there is for it. And lots of demand = lots of money in the digital world, because the cost of replicating a song digitally is extremely low.

Now, I’m sure people are thinking of exceptions to this whole Digital Has Conquered All Thanks To Supply & Demand story. For example, many K-Pop groups rely on CD sales, and in Japan, Johnny & Associates won’t produce digital music at all!

But in all these cases, you are seeing the importance of branding. The good news if you’re in the music industry is that every song is different! As a result, while consumers will, say, switch music formats because one is significantly cheaper or more convenient than the other, they are actually not that likely to see one song or group as a straight-up substitute for another. That means that the suppliers of music do have some power. Indeed, if your brand is strong enough, you can create your own shortages if that is your business model!

The bad news here is that if you’re a performer in the K-Pop industry, certain labels want you to be regarded by consumers as interchangeable with other performers. These labels build brand for the label, not the artist. That way they can treat individual performers or even entire groups as substitute goods, swapping out these largely homogenized products without it much affecting demand. It won’t affect their supply of entertainers, either, because there’s always another trainee in the wings.

Are you getting a little uppity as a supplier of labor? See ya later, substitute good!

What is liquidity?

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Liquidity, take me away!

Liquidity is a business concept that made me thrill with joy when I learned about it because it explained so much about what goes on in the world–in particular, it explained why a small company that is growing hand over fist will all of a sudden sputter and die.

So, gosh, what is it?

Liquidity is a way to describe an asset. An asset is anything that is worth money, right? Liquidity indicates how easily you can convert one kind of asset into another kind of asset.

In a normal economy, where there’s no massive currency crisis going on, cash is an example of a liquid asset. If I want to eat, I can bring my cash into a store that sells food, and I can exchange my cash for food–easy-peasy.

Let’s say that, instead of cash, I own a whole lot of land!

If I want to eat, I can’t bring my land into a store that sells food and exchange my land for food. Most stores and restaurants do not accept land as payment for food. Instead I would have to convert my land into a liquid asset–i.e. sell it for cash–and only then can I exchange my liquid asset to get some food.

So, is my land called a solid asset? Sorry, you are the wrong kind of dweeb! My land is called an illiquid asset.

How illiquid is my land? That depends on a lot of things–where is the land located, what it can be used for, what the real-estate market is like right now, etc., etc.

If I was very unlucky indeed, I could be someone who owns millions of dollars’ worth of land that can’t be sold any time soon, and at the same time, I could be someone who needs to pay food and housing right now.

If that is me, I am having what is called a liquidity crisis.

You do not want to have a liquidity crisis. A liquidity crisis is very bad news. If you are having a liquidity crisis, you are desperate for cash–and everyone knows it.

What are your options when you’re a business having a liquidity crisis? They are all bad: Taking out expensive loans, selling assets for way less than they are worth, declaring bankruptcy.

But here’s the real bitch about liquidity crises: They’re very hard for a growing business to avoid. Ironically, because of the potential for a liquidity crisis, success and growth can kill a business just as quickly as failure.

How can this be?

K-Pop is actually a really good industry to look at when trying to explain liquidity. That’s because the traditional K-Pop system–you know, the one where people sell their more-attractive children to labels to raise and train–has a lot of built-in liquidity issues.

For starters, there’s that whole period when the labels are housing and feeding and training young people who aren’t making any money yet. That’s why the whole system of indentures developed in K-Pop–to cover that money gap and help prevent that particular liquidity crisis.

Let’s say you own a new (but traditional) K-Pop label. You’ve gotten over that initial hump OK–in fact, you’ve even got enough money in the bank to debut your first K-Pop group, A Large Group of Attractive People.

The debut goes well! A lot of people are interested in A Large Group of Attractive People, and their debut single, “We Are A Large Group of Attractive People” is pretty darned popular.

Of course, you want to strike while the iron is hot and turn A Large Group of Attractive People into stars!

To attract both dedicated fans and endorsements, you arrange for a photo book to come out that will show everyone how very attractive the members of A Large Group of Attractive People are. You know live appearances are important, and the group is going to have to perform more than just “We Are A Large Group of Attractive People” if you want bookings, so you arrange to have a few cover songs choreographed.

Naturally you want more of the group’s own music out there, so you set everything in place for a mini-album featuring two more lead singles (with videos), “Say Hello to A Large Group of Attractive People” and “Give All Your Money to A Large Group of Attractive People.” Plus you start arranging for the debut of their dongsaeng group, A Large Group of Underage Attractive People.

Sounds smart, right? You are capitalizing on the popularity of A Large Group of Attractive People, so your label is bound to do well, right?

Wrong.

Here’s the problem with your business plan–everything you have in the works isn’t going to pay off for months. The photo book and the album (plus videos) have to go through the whole production process before you can even begin to make money off them; the cover songs have to be choreographed and learned, and then you have convince people to book your group; and you don’t even know if A Large Group of Underage Attractive People is going to pay off at all!

And everything you’re doing now, you have to pay for now. The photographer and the producers and the choreographer and the printer and the video director and the CD manufacturer all require money now. They’re not going to wait until after the photo book/album/videos/dances get your group a lot of money–they have bills of their own to pay, today!

If you do all the stuff for A Large Group of Attractive People that you were planning to do, you’re going to have a liquidity crisis. You are going to owe everyone money, and unless you’ve had the foresight to set up some kind of credit line or get some financial backers, you’re not going to be able to pay them, because you won’t have any cash! It’ll be lawsuits and bankruptcy for you!

But if you back off on all your plans in order to avoid this liquidity crisis, don’t you run the risk that A Large Group of Attractive People will never take off at all?

Yes.

That’s the rub, and it’s one of the more challenging aspects of running a business–it’s actually not a simple or easy thing to take advantage of some big trend, even if that trend seems like it ought to benefit you! Managing growth is a very difficult thing, and it’s hard to do well.

The limits liquidity concerns put on expansion is a big part of the reason why K-Pop fans are often pretty frustrated with the pace of promotion for new groups. The fans are going, “THEY COULD BE HUGE!!! PUSH THEM!!! PUSH THEM!!!! NOOOWWWW!!!!!” while the label is looking at its cash reserves and going, “Slow and steady wins the race.”

But liquidity issues never really go away. They’re a big part of why startup labels that expand relatively quickly (like AOMG) are more likely to hook up with a large corporate backer–they either get into a liquidity crisis, or they want to avoid one, so they look for outside capital. (The people who complain about such “selling out” are invariably completely fucking ignorant of–well, everything, but liquidity in particular.)

On the other hand, if a company really wants to remain independent, then it either has to forgo growth or grow very, very deliberately. There are no easy answers here–every approach involves its own set of risks and sacrifices.

What is ownership?

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According to Google Translate, it’s this guy, except when he’s “Freehold” or “Voters.”

Like I said, I’m going to continue doing posts on business concepts, so here’s one that seems really simple but is actually far more complicated than most people suspect: Ownership.

Ownership seems simple because we all kind of know what it means: If you own a sweater, your sister can’t wear it without your permission. (If she’s anything like my sister, she does anyway, though. Plus she steals your damned toothpaste–I don’t mean she just uses it, I mean she takes the entire fucking tube.)

But as Wikipedia notes, ownership is actually made up of multiple rights and duties. Aaaand:

These rights and duties, sometimes called a “bundle of rights”, can be separated and held by different parties.

What does Wikipedia mean by this talk of a bundle of rights?

Let’s say I own a car. It’s a pretty nice car, and you really like it.

So, one day, without my knowledge or permission, you take my car, sell it, and pocket the money.

Dude–not cool. Because I own the car, the only person who can get money from selling it is me. You can go to jail for what you did!

So you don’t do that. Instead, you sign on as a Uber driver, and without my knowledge or permission, you take my car and pick up riders who pay you.

Still not legal. Because I own the car, only I can decide that it’s OK to make money by using the car.

Fine–you take my car, go on a lovely drive, fill it up with gas, wash it, and return it to my home.

No. Still not legal. You can’t use my car without my permission, no matter how nice you are about it. Why not? Because I own it.

I die. Now’s your chance! You take my car from my driveway as my corpse is transported to the funeral parlor.

Still not legal. I may be dead, but while I was alive, I had the right to decide who inherited my car after I kicked it. The car now belongs to my estate and should be transferred to my inheritors–you have no right to it.

So, those are four separate rights (the right to sell the car, the right to profit from its use, the right to use it in the first place, and the right to leave it as an inheritance) that are contained in the bundle of rights that make up car ownership in the modern-day United States.

Now let’s pretend that instead of owning a car in the United States in 2016, I am the fourth Earl of Wherevershire in England in 1716. As the Earl of Wherevershire, I own a bunch of land.

Do I own the land of the Earl of Wherevershire the same way I own a car?

No. At that time, it was common to entail land–land equaled power and wealth in that era, and nobody wanted the next Earl of Wherevershire to have no land because I was a wastrel. (Then the land might end up in the hands of peasants! Peasants!)

So how do I own this entailed land? What rights are included in this particular bundle of rights?

  1. I can use the land as I see fit.
  2. I can benefit financially from its use (farming, mining, lumber, whatever).

What rights aren’t included in this particular bundle of rights?

  1. I can’t sell the land or give it away.
  2. I can’t leave it to whoever I want when I die; it must go to the fifth Earl of Wherevershire, even if I can’t stand the fucker.

So, the bundle of rights that made up land ownership for the Earl of Wherevershire in England three hundred years ago was really quite different than the bundle of rights that makes up car ownership in the United States today. The car can be sold or left as an inheritance to whoever, but the land can’t be sold and must be inherited by whoever is next in line for the earlship.

What about modern business ownership?

I explained earlier about the difference between a privately-held company (fewer owners; fewer regulations) and a publicly-held company (oodles of owners; lots and lots of regulations).

But what do the owners of a privately- or publicly-held company actually own? What rights are in the bundle of rights called business ownership?

The answer is: It depends.

It is very, very common for companies–be they public or private–to split the control aspect of ownership away from the financial aspect of ownership. You can own 99.99% of a business’ assets, but still not have any control over how the business is run. In fact, the control of a business is divvied up by percentage just like its financial value is–you can have a 47% controlling stake and a 24% financial stake in a company, or a 14% controlling stake and a 93% financial stake, or whatever.

For an example of this, let’s have a gander at Google. The company was founded by two guys, Larry Page and Sergey Brin, and it was very successful. In 2004, Google went public.

While Page and Brin wanted the money that comes from going public, they didn’t want to lose control of their company. So they issued themselves very special shares of the company that give them more control.

Regular shareholders can buy, say, $5,000 of shares in Google stock, and then sell those shares for whatever they are worth later on. But they can’t engage in the kind of exciting boardroom power struggles that are the focus of many a soap opera: They can’t kick out Page and Brin, or even force Google to do anything that Page and Brin don’t want it to do.

Why not? Because the shares of stock they can buy effectively do not include those particular rights. Control rights are absent from the bundle of rights that comes with owning Google stock.

Do you see a problem there for shareholders? What happens if Page and Brin decide to stop pursuing the business model that makes Google money (selling advertising to companies) and to start focusing on all kinds of weird crap that doesn’t make any money, like X-ray glasses and self-driving cars?

They could do it, shares of Google could become worthless, and there is nothing ordinary investors can do about it, except sell their (now worthless) shares. Because control of Google has been separated from financial ownership, that is pretty much the only right ordinary investors have. (Google is working very hard to convince investors that it won’t do anything like that, but the fact remains that it could.)

As you might imagine, in most cases investors will pay more for control. There are plenty of investors who want to be what is known as passive investors–they don’t want to have to actually run the damned company themselves–but most investors get pretty nervous at the thought handing over their life savings to someone with absolutely no control over how that money might be used.

(Of course, if you own most of the assets of a company, and you don’t like the way it’s being run, you can cause a lot of trouble by pulling your money out. So there’s some power there, although it is not technically control. The problem is, if the company is being seriously mismanaged–the CEO is a coke fiend or something–the money might not be there anymore.)

Now, Google is a public company, so (thanks to all the regulations surrounding public companies) it has to tell people–not just investors, but everybody–“We’ve separated control from financial ownership, and this is how we’ve done it.” That is part and parcel of the “public” bit of being a public company.

Private companies are under no such obligation. If you’re actually going to invest in one, of course you should know what you’re buying. But unlike public companies, which have to make public filings that anyone can look up, private companies don’t have to tell outsiders a goddamned thing about how or if they separate control from financial ownership.

So what does that mean for us, the nosy people interested in K-Pop? How do we evaluate and understand the impact of the various deals that go on involving different labels, many of which are privately held?

The short answer is, we really can’t. That’s because if, say, a private company issues a press release saying that it’s sold itself to another company, we don’t know what it sold.

That’s weird, right? If a company is sold to another company, that sounds like it shouldn’t be any different than me selling my car to another person.

It’s far more complicated, though, because when I sell my car, I sell my entire bundle of rights. But if I sell a company, I don’t have to sell all the rights in the bundle.

If a private company sells itself, what exactly did they sell? Control? How much control? A financial piece? How big a piece? Unless one company becomes a wholly-owned subsidiary of another, there’s a lot of gray area, and you don’t know what happened exactly unless you can see the contract. The press releases may say, “Don’t worry, Beloved Producer is still CEO!” but is he still CEO because he controls the company, or is he still CEO because the person who actually controls the company allows it–for now?

And it’s not just when a company sells itself: It’s very difficult to figure out what, exactly, has happened when a there’s a merger, or a partnership, or something is spun off–and of course, there can also be deals that aren’t publicized that alter a company’s ownership as well.

Nobody likes this kind of uncertainty. Everyone likes to know (or likes to pretend that they know) if someone made the right decision in selling their company–especially when it’s a scrappy upstart being sold to a major corporation. For example, when Simon Dominic and Gray recently appeared on Radio Star, the host Kim Gura (whose son is a rapper) told them that his son thinks (and indeed, that everybody thinks) AOMG should have asked CJ E&M for more money when it sold itself.

But guess what? Kim Gura, his son, and everybody has no idea what AOMG actually sold.

Did AMOG drive a poor bargain or a good one? How could you possibly know? Even if you knew exactly what CJ E&M paid, and even if you had comparative numbers from, say, CJ E&M’s acquisition of Hi-Lite Records, as well as revenue numbers that let you compare AOMG to Hi-Lite, you have no idea what CJ E&M bought–from either company–with the money they paid!

There are just too many possibilities, and that makes it very difficult for an outsider to determine if a deal was good or not.

And what makes a deal “good” anyway? Which rights from the bundle are the “good” rights to sell? That depends entirely on what the individual business owner wants–some would never dream of giving up an iota of control, others just want to retire.