IV. Intro to longtail/long volatility theoryA) Intro to longtail/long volatility theory1) The music business is dominated by wildly unpredictable outcomesAll successful entities or individuals consciously or unconsciously adopt the “long tail entity”MBUS is not like other businesses, MBUS is built on failure, a lot of songs, artists and albums are not hitsSuccessful artists, musicians, labels and producer, etc simply fail a little less often than what is considered normalA lot of has to be in the right place at the right timeMost people get in the business because of the hope that they’ll be successful-this changes the economics of music businessSimple stupid fact-if the odds are in your favor the more times you play the game the more likely you are to winB) Law of Large numbers-the deal is structured right so you have statistical advantage-the rule in the music business is make as many bets as possible because the law of large numbers says you’ll get closer to have a statistical advantagelook at the randomness in the music industry and break it down logically(All heads=genius probability of being fake genius higher with less flips)Songwriters 100’sMusic Publishers 10,000’sRecord Labels 10,000’sRecord Producers 100’sMix Engineers 1000’s (they mix the record, they do a lot of songs)-they get paid more than producersConcert Promoters* 1,000’s (this is difficult occupations)Agents 100’s (go out and get gigs-sell talent to venue)Agencies 1,000’s (collection of agents)Managers 10’s (concentration of fake genius) Management companies 100’s1) Managers benefit from Mathew effect-success breeds success-one band is successful everyone wants you to be their managers2) larger number of bets tend to be the more successful long lived entitiesPerforming artists/band2?3? chances?2 or 3 CDs and then break up?They have unlimited profitArtists typically stay in business because they’re songwritersC) LongTail/LongVolatility Strategy•THE BLEED: many small “bets” that rarely pay out. (Make lots of bets and they know most of these bets will be successful)•WILDNESS: payouts or "upside" must be virtually unlimited. Payouts must exhibit a "wild" variation. (Potential profit must be virtually unlimited-as demand increases the money goes up)1) When you have a hit you only need one hit to make up for the lots of other songs that weren’t hits)2) example: Taylor Swift generated all sales one week-that’s what wild means•LOW OVERHEAD: “bets” are inexpensive or acquired free in the course of other activities.1) Example: iTunes: apple sells hardware but the iTunes store is brilliant because it brought people in their ecosystem of ipads, mac books in the course of something else. They got 30 cents of every song sold while they were doing something else“harvesting luck”D) Randomness and LuckThe music business is random but there is a reason why songs are hit-you just cant predict if it’ll be a hit in advanceHow does a record companies make money? Because everyone wants to be in show biz you typically underpay for recordings- you’re not only getting paid in money but also in hopeBusiness is dominated by luck so some businesses that aren’t talent will become successful so talent is overratedMBUS 3000 1st Edition Lecture 2Outline of Last Lecture II.Rock Scenes in the 20th century III. Haight Ashbury Outline of Current Lecture IV. Intro to longtail/long volatility theory V.Law of large numbers VI. Longtail/long volatility strategy VII. RandomnessCurrent Lecture A) Intro to longtail/long volatility theory  1) The music business is dominated by wildly unpredictable outcomes  All successful entities or individuals consciously or unconsciously adopt the “long tail entity” - MBUS is not like other businesses, MBUS is built on failure, a lot of songs, artists and albumsare not hits• Successful artists, musicians, labels and producer, etc simply fail a little less often than what is considered normal• A lot of has to be in the right place at the right time• Most people get in the business because of the hope that they’ll be successful-this changes the economics of music business • Simple stupid fact-if the odds are in your favor the more times you play the game the more likely you are to winB) Law of Large numbers-the deal is structured right so you have statistical advantage- - the rule in the music business is make as many bets as possible because the law of large numbers says you’ll get closer to have a statistical advantage - look at the randomness in the music industry and break it down logically (All heads=genius probability of being fake genius higher with less flips)These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.- Songwriters 100’s- Music Publishers 10,000’s - Record Labels 10,000’s - Record Producers 100’s - Mix Engineers 1000’s (they mix the record, they do a lot of songs)-they get paid more than producers - Concert Promoters* 1,000’s (this is difficult occupations)- Agents 100’s (go out and get gigs-sell talent to venue)- Agencies 1,000’s (collection of agents)- Managers 10’s (concentration of fake genius)Management companies 100’s 1) Managers benefit from Mathew effect-success breeds success-one band is successful everyone wants you to be their managers 2) larger number of bets tend to be the more successful long lived entities - Performing artists/band- 2?3? chances? - 2 or 3 CDs and then break up? - They have unlimited profit - Artists typically stay in business because they’re songwritersC) LongTail/LongVolatility Strategy •THE BLEED: many small “bets” that rarely pay out. (Make lots of bets and they know most of these bets will be successful)•WILDNESS: payouts or "upside" must be virtually unlimited. Payouts must exhibit a "wild" variation. (Potential profit must be virtually unlimited-as demand increases the money goes up)1) When you have a hit you only need one hit to make up for the lots of other songs that weren’t hits)2) example: Taylor Swift generated all sales one week-that’s what wild means•LOW OVERHEAD: “bets” are inexpensive or acquired free in the course of other activities. 1) Example: iTunes: apple sells hardware but the iTunes store is brilliant because it brought people in their ecosystem of ipads, mac books in the course