•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”MBUS 3000 1st Edition Lecture 4Outline of Last Lecture II. Jobs in music industry III. Jacksonion randomness vs Ertegunian RandomnessIV. There is no hit machine V. TalentOutline of Current Lecture VI. Producers VII. Double entry VIII. Accounting equationIX. LongTail/LongVolatility StrategyX. Volatility XI. Looking at the graphXII. Randomness XIII. Hit machine XIV.Wild vs. normal distrubutionXV. Scalability at work Current LectureA) Producer is paid a percentage of the growth retail sale- Ex: if album sold for $10 on iTunes and the producer gets 2 points (2%) of the retail price then producer would get .20 cents for each album sold Producers are supposed to “get it done” no matter what it is- example: setting up thingsB) Why do we have “double entry” book keeping? 1) Two big reasons: - You cant really keep track of profit and loss correctly or how much someone owns in a business unless you do it this way - You cant really tell if your business is making money otherwise. You can accurately keep track of the owners share of the business - The alternative example. A simple checkbox ledger. “double entry” cause every credit has a corresponding debit in another account 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.C) Basic elements of financial position: The accounting equation- The financial condition or position of a business enterprise is represented by the relationship of assets to liabilities and capital 1) Assets: properties used in business that are owned and have monetary value, for instance, cash, inventory, buildings, and equipment - Examples: cash, checking account, balance in you paypal account, the touring van, guitars, amplifiers, PA, office furniture, band laptop, sound recordings(copyright of song), sound publishing, goodwill(value of the name of the band) - basically they’re things that have enduring value that the business owns - things that are not assets: something you rent, something you use up quickly, guitar strings(expenses) 2) Liabilities: amounts owned to creditors, including all payable accounts. Liabilities may also include certain deferred items - Examples: money you borrow from the bank, money you borrow from your parents, expenses you put on your credit card (you owe credit card companies $700)- EXAMPLE: the band borrows 100 from their parents and put it in their checking account Assets =liabilities + Equity$100 in checking=$100 loan from parents +$03) Owners Equity(capital): The interest of the owners in an enterprise - Represents the owners share of the business A) Owner’s equity increases in two ways: - Owners contribute things (assets) to the business- From profit earned - Owners can contribute equity or capital in many ways: Cash, equipment, real estate, vehicles, even intangibles like the name of a business or song publishing- EXAMPLE: A business owner contributes $500 in cash and a truck worth $5000 Assets= Liabilities + Equity $500 cash +$5000 vehicles= $0 + $5,5004) Equation: Assets=liabilities +owners equityThe equation should balance D) 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 intheir ecosystem of ipads, mac books in the course of something else. They got 30 cents of every songsold while they were doing something else - “Harvesting luck” E) Volatility:1) Long volatility- you make money when things are volatile or you make money when things change - Make money if volatile things happen- As long as demand increases my profit goes up –potentially unlimited upside is long volatility2) Short volatility-make money if the stock stays at $40 but if in a year the stock price changes then you lose money - Lose money if volatile things happen- Example: No matter what the demand is at 40 watt you can only sell 600 tickets-that means profit is limited (limited upside) and that’s short volatility F) Looking at the graph- The vast majority of the profits are in these random hits (the spikes in the graph)- These spikes are equivalent to what stock traders have lately called “black swans”- Hits are black swans! - The only way to get ALL the profit is to have unlimited upside=long volatility - Mumford and sons at Buckhead was a black swan hit-all tickets were sold G) Two kinds of randomness 1) Ertegunian Randomness-designed the modern day music industry - “Throw ten records against the wall and see what sticks “which basically means we don’t know which song will be a hit - Unpredictable which artists is successful- 9 artists will lose money with their songs and then one will be a hit 2) Jacksonion randomness-created by Michael Jackson- Why was “Thriller” 40-80 million better than “off the wall?”- Unpredictable the size of the hit - Once a song is a hit, the size of the hit can vary - Two different