“What these [Wu-Tang clan] guys have done — without taking a single business school course — is to go right to the head of the class in terms of strategy development.” James Cash, Harvard Business School (New York Times, 1996)
Rza (Robert Fitzgerald Diggs) grew up in Brooklyn and Staten Island. He learned about business by actually being in business on the street from an early age. As Warren Buffett likes to say: “Can you really explain to a fish what it’s like to walk on land? One day on land is worth a thousand years of talking about it, and one day running a business has exactly the same kind of value.” Rza hustled and learned early in life how to operate and negotiate as an entrepreneur. Buffett says the earlier in life you are in business the better it is for your business skills since you can learn bad habits otherwise. One thing Rza and many other hip hop musicians have learned that they are both the product and the business. Jay Z’s famous words on this point are: “I’m not a businessman, I’m a business, man. Let me handle my business damn.” Rza points out: “Wu-Tang was a financial movement.”
As HBS Professor James Cash notes above, you don’t need to go to school to be good at business. As Warren Buffett has said of another self-taught entrepreneur Rose Blumkin, who began working at the age of six, becoming a store manager at 16: “Aspiring business managers should look hard at the plain, but rare, attributes that produced Mrs. B’s incredible success. If they absorb Mrs. B’s lessons, they need none from me.” With just $50 cash and a net worth of $72,264 to start she built Nebraska Furniture Mart into a major retailer.
What hip hop musical entrepreneurs like Rza have built is very impressive, especially given where they started:
“You look at hip hop right now, you know, they’re estimating $4 to 10 billion business [circa 2005], so, the start from the guys who had to spend maybe $100-$200 for a turntable and a mixer, now, there’s a whole generation, a whole world.”
“When I first heard hip-hop, in 1976, there were maybe only 500 people that could do it. Now you got 5 million people.”
Rza understands that supply is the killer of value and that being first to scale is very important in determining success in a business. Rza’s example shows that you do not need to go to school to be good at business. To illustrate this point here is Rza talking about wholesale transfer pricing which is by far the most important factor determining profitability in the music industry:
”You could sell weed and make a little money, but most of it gets made for the guy you’re selling it for. It’s the same thing in the music business, except it’s legal.”
Here’s me on wholesale transfer pricing:
“Wholesale transfer pricing power is a term I heard John Malone use in a conference room circa 1995. You won’t find the term in textbooks. Simply put:
Wholesale transfer pricing = the bargaining power of company A that supplies a unique product XYZ to Company B which may enable company A to take the profits of company B by increasing the wholesale price of XYZ.
As an example, John Malone made himself rich by owning the cable systems and saying to new channels, “I will be glad to give you distribution on our cable system as long as you issue us AB% of the equity in your company.” The wholesale transfer price of getting distribution on his cable systems was AB% of the equity. On the flip side, John Malone always made sure there were at least two suppliers of set-top boxes for his cable business so he was not on the ugly side of wholesale transfer pricing. The term “wholesale transfer pricing power” is similar to, but not the same as what some people call a “hold up problem.” The best lens to look at the wholesale transfer pricing power/supplier hold up set of issues is Michael Porter’s “Five Forces” analysis, specifically “bargaining power of suppliers.” As an example of avoiding the problems of wholesale transfer pricing power, the iPod/iPhone business model was a work of genius in that the wholesale transfer pricing power of the music labels is 100% neutered because Apple makes all its profit on the device and not the music. If Apple sold the device at a loss and tried to make profit on the music, Apple would be doomed by the wholesale transfer pricing power of the music owners.”
The New York Times recently contained an article about how few traditional delis remain in Manhattan. The ones that survive tend to have one thing in common: they own the building in which they do business, which means they do not have a landlord with transfer pricing power .
The New York Times also explains part of Rza’s business genius: “When record companies ignored Wu-Tang’s early demonstration tapes, RZA collected $100 from each member to put out its debut single, ”Protect Ya Neck.” Selling copies from the trunks of cars, the group traveled from Virginia to Ohio, promoting itself to radio programmers. When ”Protect Ya Neck” turned into a regional hit, the same labels that had rejected the group came calling, but now Wu-Tang had some leverage.” Having leverage is essential. Rza surely learned that lesson very early in life.
Rza was able through force of personality to convince a large number of hip hop artists to band together. They included his cousins GAZ and the late Ol’ Dirty Bastard. Other crew members include Method Man, Raekwon, Ghostface Killah, Inspectah Deck, U-God and Masta Killa. From a marketing standpoint Rza was and is very creative in leveraging comic book and Shaolin themes. In the book The Big Payback: The History of the Business of Hip-Hop the author Dan Charnas writes: “RZA convinced his comrades to sign with his company, Wu-Tang Productions. “Give me five years,” he told them, “and I will take us to the top.” They cut one deal for a specified amount of music but were free to cut their own individuals deals outside of that, which is not always the case. The label at Rza insistence waived the “leaving member clause” allowing individual members to sign with other labels. Chamas writes: “Wu-Tang not only kept the right to determine the destinies of its members individually, but —fatefully—they also retained their brand, their name, their merchandising and their publishing rights.” And the subsequent individual deals were with many different labels. This is where Rza describes how he nailed the key negotiating points, which apply to any deal between the musician and the label:
”They offered us small amounts of money, like $200,000 for all eight members. ‘So I said, ‘Forget the money; let’s get a deal that gives all of us the power to get more deals.’ ”
“We reinvented the way hip hop was structured, and what I mean is, you have a group signed to a label, yet the infrastructure of our deal was like anyone else’s. We still could negotiate with any label we wanted, like Meth went with Def Jam, Rae stayed with Loud, Ghost went with Sony, GZA went with Geffen Records, feel me? And all these labels still put “Razor Sharp Records” on the credits.
This result is straight up genius. From the freedom and ownership of licensing rights came clothing and other merchandising deals. Rza realized that the best negotiating position exists when you have what Roger Fisher calls a BATNA (best alternative to negotiated agreement). In short, it is your alternatives that matter says Charlie Munger. If you do not have an alternative supplier and you must have what that supplier sells, you are screwed. This is such a simple idea, but so poorly understood. Revenue is not profit. You must be in control of your cost of goods sold to ensure you can earn a profit. Nothing is guaranteed with just control over wholesale transfer pricing, but at least you are in the game.
More on transfer pricing here:
“I started this thing as a dictatorship. The second album? That was the beginning of democracy, right? But, you know, it was like Russia. It ain’t working.” RZA laughs then, squeaky, self-aware. “So I went back, tried the dictatorship again. But everybody’s a father now, everybody’s got their own companies, their own ambitions. Career. They run things, they own things. They still might need a dictator. I don’t know. For now, I’m erasing the political analogy. I’m just gonna become the spiritual leader. I don’t want to be a politician. I want to be more like the pope.” Rza: “Raekwon’s demand was strong, actually, for money up front. I basically just came out of pocket with that. [You paid him yourself?] Rza: Yeah. I gotta hold that weight. I said, “It can’t happen. A budget can’t sustain that. There’s no budget that can sustain what you want.” But then I went to the band and asked, “If one of us had the power to make this happen without it hurting the rest of us, would you do it?” And about 60 percent said “yes.” I went with the 60 percent.”
My longer post on wholesale transfer pricing is linked to in the notes below.
The usual “Dozen Things I’ve Learned,” in this case from Rza, are:
1. “‘Cash rule everything around me,’ we told them in the old days. ‘Cash rule everything around me.’ but it don’t rule me, it rules things around me. You got to set yourself aside from those things and guide yourself right. And I think you’ll find that balance, man, which is the key.” ‘C.R.E.A.M.’ really says what we went through to get this money. And cash does rule everything around me, but it don’t rule me. That’s how come we got it. It’s good because we came from the bottom of the bottomless pit.” “My money don’t own me.” How can I say it better? I suspect some people don’t understand that just because cash rules what is around you, it is possible for it to not rule you.
2. “You see people falling victim to all sorts of unnecessary things because they just don’t know the way and nobody is showing them the way.” Find mentors and anti-mentors. If you are a know nothing investor the Chappelle show episode on Wu-tang Financial makes it clear: “Diversify your bonds.” GZA reminds investors to “protect your goddamn neck!” This is just like Buffett saying: “Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”
3. “The 85% are walking around [like] cattle.” This is straight up disrespect of Eugene Fama’s rational expectations theory. He believes that Mr. Market is bi-polar rather than wise. Buffett agrees: “There’s this holy writ, the efficient market theory. How do you teach your students everything is priced properly? What do you do for the rest of the hour?”
4. “Those times when you feel most desperate for a solution, sit. Wait.” Patience. Do not over trade. There is no prize for hyperactivity.
5. “I’m me and the me that’s me is me and is going to continue to be me.” Stay in you circle of competence. Stay real. Risk comes from not knowing what you are doing.
6. “Confusion is a gift from God.” Be contrarian when it is smart to be so. Rza would agree with what Charlie Munger says: “For a security to be mispriced, someone else must be a damn fool. It may be bad for the world, but not bad for Berkshire.” And would agree with Howard Marks that it is the search for other people’s mistakes that enables outperformance.
7. “Even when I didn’t go to school, I would always study.” “I will give you a bit of advice: the best thing to do when trying to find somewhere is to get a map.” READ! Find mentors. Never stop learning.
8. “Through great input you get great output.” Research matters. Do the hard work.
10. “One thing that definitely did calculate properly for me was the mathematics that makes sense every day, no matter how I look at it, I can’t get around it. I try to get around it, I keep trying to find one plus one is not two, somehow. I can’t. People can talk about string theory, parallel realities, different dimensions, it’s still one plus one is two, baby.” Rza would agree with Buffett that an investor should not: “do equations with Greek letters in them.” Buffett adds: “If you stand up in front of a business class and say a bird in the hand is worth two in the bush, you won’t get tenure. Higher mathematics may be dangerous and lead you down pathways that are better left untrod. If you need to use a computer or a calculator to make the calculation, you shouldn’t buy it.”
9. “I’ve never really been a money hungry guy or chasing money. And I already gave a lot of my money away to people who needed it more than me, I guess. But what I mean is that we go through our society, a lot of us is underprivileged, especially in today’s recession, there’s a lot of hard times out there for people. And if you think that money is the only cure or the solution, you’ll never find a cure. Wisdom is the cure.” Charlie Munger puts what Rza is saying this way: “Well envy/jealousy made, what, two out of the Ten Commandments? Those of you who have raised siblings you know about envy, or tried to run a law firm or investment bank or even a faculty? I’ve heard Warren say a half a dozen times, “It’s not greed that drives the world, but envy.”
10. “P. Diddy said in one of his old songs, ‘More money, more problems.’ You know what I mean? Sometimes the simpler life is better for you.” Munger again agrees with Rza: There are a lot of things in life way more important than money. All that said, some people do get confused. I play golf with a man who says, ” What good is health? You can’t buy money with it.” Now P. Diddy is cool, but Seneca said “The less money, the less trouble” a long time ago. http://25iq.com/2015/05/28/a-dozen-things-ive-learned-from-seneca-the-younger-about-venture-capital-startups-business-and-life/ a bit earlier. But I would say that of all the figures from ancient times, Rza perhaps reminds me most of Seneca. The Greek historian Cassius Dio wrote that Seneca acquired a fortune of more than 300m sestertii, which easily in the top 0.1%.
11. “A lot of my peers in big places are sending me emails like ‘Great idea. Perfect idea. World-changing idea.’ And that’s the goal. I mean, money, I make money.” Buffett’s equivalent statement: “Find your passion. I was very, very lucky to find it when I was seven or eight years old… You’re lucky in life when you find it. And you can’t guarantee you’ll find it in your first job out. But I always tell college students that come out [to Omaha], ‘Take the job you would take if you were independently wealthy. You’re going to do well at it.'”
12. “I live in a capitalist country so I respect, ‘Cash rules.’” Rza is not a fan of EBITDA or creative accounting! Similar to what I wrote about Jeff Bezos, what matters most is “Absolute dollar free cash flow.” http://25iq.com/2014/04/26/a-dozen-things-i-have-learned-from-jeff-bezos/ As Bezos puts it: “free cash flow, that’s something that investors can spend. Investors can’t spend percentage margins.”
Chappelle show video (Wu-Tang Clan Financial) https://www.youtube.com/watch?v=KmGnl7quDbY
Rolling Stone bio: http://www.rollingstone.com/music/artists/wu-tang-clan/biography