A Dozen Things I’ve Learned from Louis C.K. about Money, Investing and Business

The comedian Louis C.K. was born Louis Szekely in 1967. He began his career writing for other comedians including David Letterman, Dana Carvey, Conan O’Brien and Chris Rock and has created several video series including the FX comedy show Louie, which he wrote, directed and edited. Louis has been a notable innovator in the business of comedy including releasing his debut standup routine Live in Houston directly through his website in 2001. He has also been an innovator in the use of direct-to-fan sales of tickets to his stand-up shows as well as using free video downloads to promote his other work. Most recently, he created and financed the video series Horace and Pete.

“I have a no problem with something going down in flames. I’m not afraid of that. It’s very important to me that it works, but that doesn’t come from fear of failure — failure is okay.” The entertainment business has a distribution of financial success that reflects a power law. A tiny number of entertainers find huge financial success in the entertainment business, while most everyone else makes a modest living, very little or even virtually nothing. Like venture capital, entertainment is a tape measure home run business. An entertainer like Louis is not going to break through and be financially successful unless he or she swings for the fences and takes risks. Power laws exist because of the tendency of what is popular to get more popular and for anything which loses advantage to lose further advantage. So-called “cumulative advantage” is an example of positive feedback. Positive feedback can also be seen in the technology world. There is also cumulative disadvantage. When things change so rapidly for the better or worse for a company like Blackberry, people can be shocked. Humans are simply not good at understanding exponential change. Nassim Taleb calls this phenomenon “Extremistan.” Some people may say, “Well, Extremistan and cumulative advantage have always been the case.” The difference today is that more systems are digital, which magnifies cumulative advantage or disadvantage. We do not yet know the full societal impact of this Extremistan phenomenon.

“You can’t make a show without losing money first…Then there were these stories that say, ‘Horace and Pete lost money.’ And I thought, well, I didn’t lose money. I invested money. I’m so not broke. I’m so not broke. It’s kind of crazy to see how wrong it gets, and to see how far that wrongness spreads. It’s an interesting pipeline to have tested. Because the interest thing about this show, this experience for me, is that I made a thing that’s usually made by a corporate entity but I don’t have any of the apparatus. We didn’t send out big press releases. We actually avoided the press when we were making the show, so they don’t have any guidance or relationship with us. If Fox or ABC makes a show, they have a staff of people that are all about PR and about handling the press.” “It was just a weird distortion of what I said because I said on Howard Stern that I took on debt. I mean, Howard’s a comedy guy, so I wanted to make it sound funny, and I knew he would laugh if I said I’m in debt… I told him, ‘Yeah, I’m millions of dollars in debt,’ which I was, technically — I took a line of credit to finish the show. But there’s no other way to make a TV show — every TV show that you ever see is running a deficit… I took debt so I could get through production, but I knew that I would make the money back — I knew it.” “The tax rebate we’re getting from New York State and the amount of sales we have so far have put the show in the black.” Louis has talked several times in public about how fast his joke on Howard Stern’s show about losing millions making Howard and Pete series went viral. He believes that the story was particularly “clickable” since it has story elements people love. For example, people want to read stories that indicate great success is followed by failure and vice versa. The less interesting reality behind the fake viral story is a near inevitability: investing requires that money be invested up front. Unless all you are putting in to an investment are talent or sweat equity, cash must go out, before cash comes in. Even if you are not personally putting cash in first before cash comes out, someone else inevitably is funding the business. Charlie Munger once told a humorous story about absolute dollar free cash flow: “There are two kinds of businesses: The first earns 12%, and you can take it out at the end of the year. The second earns 12%, but all the excess cash must be reinvested — there’s never any cash. It reminds me of the guy who looks at all of his equipment and says, ‘There’s all of my profit.’ We hate that kind of business.”

3. “[Horace and Pete] is paid for — with no advertising. There isn’t a TV show with this kind of cast that has that kind of success. So why the dirty fuckballs did I charge you five dollars for Horace and Pete, where most TV shows you buy online are 3 dollars or less? Well, the dirty unmovable fact is that this show is fucking expensive. The standup specials are much more containable. It’s one guy on a stage in a theater and in most cases, the cost of the tickets that the live audience paid, was enough to finance the filming. But Horace and Pete is a full on TV production with four broadcast cameras, two beautiful sets and a state of the art control room and a very talented and skilled crew and a hall-of-fame cast. Every second the cameras are rolling, money is shooting out of my asshole like your mother’s worst diarrhea. (Yes there are less upsetting metaphors I could be using but I just think that one is the sharpest and most concise). Basically this is a hand-made, one guy paid for it version of a thing that is usually made by a giant corporation. Now, I’m not complaining about this at all. I’m just telling you the facts. I charged five dollars because I need to recoup some of the cost in order for us to stay in production.” It has become quite hard to charge a fee for many types of consumer services since people have become accustomed to getting many services “for free.” When business people say things like: “We are going to start charging a subscription fee” for a product or service they often do so without having the slightest idea about how hard it is to actually do so. Getting people to pay for anything is never easy, but getting them to commit to pay real money is even harder especially if the commitment extends into the future. Five key factors will drive the financial success of any business. They are:

Average revenue per user (ARPU) – How much do customer’s pay?

Customer Lifetime – How long do customers stay?

Cost of capital – What is the rate of return on your next best alternative for investing money?

Gross Margin – What’s left of revenue when you take away the cost of goods sold, divided by the total sales revenue, expressed as a percentage?

Customer Acquisition cost (CAC) – How much was spent to acquire the customer?

Every business can be analyzed in this way. Louis has been an innovator with respect to many of these factors. For example, he makes his shows in innovative less costly ways, acquires customers more cheaply with less advertising and prices services for value.

“The thing that was left out is that I own a television show. I own a complete series. I own it. I’m at the head of the stream. I’m in the mountains. I’m the snow that’s melting to feed the water. It’s an enormous asset and it’s mine forever. That doesn’t exist. You might own a small piece if you get points on your show, which is a hard position to get to even. But I own this thing. I own a show that has Steve Buscemi, Edie Falco, Alan Alda, Jessica Lange, Aidy Bryant.” Hopefully we’ll get Emmy nominations, which I’m going to push for. And then we’ll sell it to Netflix or somebody else or Hulu.” “We’ll sell the show to other services. We’ve got a few offers and we’re kind of not paying attention to them right now… I’d like to spend the rest of the year seeing how it does in the wild, and then when it’s time sell it, I can split these checks with my cast, who all own big pieces of the show.” By financing, making, promoting and distributing a series or other entertainment himself Louis has fewer suppliers who can extract value from his work via “wholesale transfer pricing.” The wholesale transfer pricing concept is important to understand especially if you are in business or an investor. I wrote in a previous blog post:

“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. The term “wholesale transfer pricing power” is similar to, but not the same as, 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.”

Every business has a value chain and each element in the value chain is trying to extract value from the value chain. How much anyone gets in that value chain is determined by negotiating leverage. And negotiating leverage is determined by what Roger Fisher calls a BATNA (best alternative to a negotiated agreement), which is essentially an opportunity cost process. If you have only one supplier of an essential component at any point in your value chain (like the music streaming business does), then may God have mercy on your business. Hopefully God will have mercy because suppliers (for example, music owners) will not.

“The advertising budgets on these shows often eclipse the production budgets. They’ll spend millions of dollars on advertising.” “While we’re sitting here, [my show] is selling and selling and selling. So far to date, my advertising budget is zero.” Louis knows what Jeff Bezos knows, which is that these days it is far better to invest in your product than to spend money amplifying your shouting about it. Jeff Bezos:

“The balance of power is shifting toward consumers and away from companies…the individual is empowered… The right way to respond to this if you are a company is to put the vast majority of your energy, attention and dollars into building a great product or service and put a smaller amount into shouting about it, marketing it. If I build a great product or service, my customers will tell each other. In the old world, you devoted 30% of your time to building a great service and 70% of your time to shouting about it. In the new world, that inverts.” “Your brand is formed primarily, not by what your company says about itself, but what the company does.”

What Louis has done is a smart personal rebellion against the type of ad spending shown in this chart below.

ads

6. “I just make the show, I don’t really get paid a thousand bucks a show. I have a fee but it’s the lowest legal fee that I could possibly take. The skills minimum across the board for SAG, Director’s Guild and all that stuff. But I might get an enormous amount of money on the road because of the show. So that’s the tradeoff.” Even if Louis takes very little salary for a video series he is still able to use that exposure as advertising or promotion to sell complementary products and services like concert tickets. A term used for this phenomenon is content marketing. As an example, almost all of the blogs you read are content marketing for something else that is being sold. It could be wealth management that is being sold or venture capital. What people get from content marketing is not always financial. Charlie Munger says that he gives his speeches and talks as a form of penance.

7. “There is fatigue [in creating the shows]. It’s fucking hard. What I know from experience is that if I was getting a million dollars a show it wouldn’t make it easier. It wouldn’t make it more fun.” Work is work. That’s why they call it work. If your work is 100% fun, then you should call it fun, not work. Some work is more fun than other work. Some work pays more than other work. Some work pays a lot and is mostly not fun. Some work is mostly fun and pays a lot. The mix for everyone is different.

	Pays Well	Pay is Lousy
Fun	Top tier comedian	River rafting guide, most comedians
Not fun	Proctologist	Migrant fruit picker

8. “Everything is amazing right now and nobody’s happy. In my lifetime the changes in the world have been incredible. When I was a kid we had a rotary phone. We had a phone you had to stand next to and you had to dial it. And then when, if you wanted money you had to go in the bank for when it was open, for like three hours.” Standup comedy delivered on a grassy field in New York’s Central Park is not an effective way to capture revenue since anyone can listen without paying. Louis can’t exclude people who do not pay in that park setting without walls or barriers being constructed. Anyone on the grass can record his performance and transmit it to billions of people. The free experience that consumers get in that situation generates “consumer surplus.” Consumer surplus is the difference between the total amount consumers are willing and able to pay for a product and the total amount that they actually do pay. By contrast, if Louis does standup comedy in a theater, the ticket revenues received from people who desire to be in the building can bring in big loads of cash. In a theater, an entertainer like Louis’s performance is “excludable” in that only people who pay the required fee can attend. That value captured by Louis in a theater is “producer surplus” and can be very significant. For example, in a music setting just five concerts at the Staples Center in Los Angeles generated $8.9 million in box office revenue for Taylor Swift in 2015. The services provided by a business like Netflix are similar to a Louis CK performance in a theater in that they are both designed to create something hard to consume for free. Software running in server in a data center providing a web service is similarly able to capture revenue and profit since users can’t make their own copy of the streamed service just like they can’t see Louis doing stand up in a concert hall without buying a ticket. This matrix below illustrates how “excludable, non-rival” has become a sweet spot for digital business models. In contrast, “non-excludable, non-rival” is a danger zone for profitability.

	Excludable	Non-excludable
Rival	Louis CK t-shirt	Unregulated fishing in the ocean
Non-rival	Louis CK in concert in a theater	Digital Louis CK comedy routine obtained via BitTorrent

You may be saying, “Well, I’m not Louis and that solution won’t help me.” This is true, but like him, you will need to adapt your business in order to prosper in this ever-changing world. You will need to think about how you create value and what your own business model will be. What is a business model? I like the definition created by Mike Maples, Jr.: “The way that a business converts innovation into economic value.” Steve Blank has his own view: “A business model describes how your company creates, delivers, and captures value.” One effective way to find a business model is to apply a trial and error process in which the optimal result is discovered via experimentation rather than a grand plan generated from whole cloth. The task of people who create business models is often to take software-based products or services that might otherwise be in the bottom right quadrant of the previous matrix (sometimes called public goods) and moving them into the bottom left quadrant to make them excludable. Software is a non-rival public good, since more people can possess it at no additional cost. The object of the business is to somehow make that public good excludable or attach its use to something complementary that is excludable.

“I never viewed money as being ‘my money’ I always saw it as ‘the money.’ It’s a resource. If it pools up around me then it needs to be flushed back out into the system.” Andrew Carnegie famously said that a person who “dies rich, dies disgraced.” In effect, he believed that money is like manure, it does the most good when you spread it around. Of course, you shouldn’t spread it around so much that you are not able to take care of yourself and the people you love. But someone like CK who is spending money to create things people enjoy is a very good thing.

“The worst thing you can lose is some money, and money grows back, time doesn’t, that’s what my mom used to say.” The older you get the more you realize that money can’t buy you time. Nothing is more valuable than time. If you are young, trust me on this one.

“When people are getting richer and richer but they’re not actually producing anything, it can’t end well.” Why is Louis’s joke funny? I think it is because there is a core of truth involved, like all good humor. If it is not funny to you then you probably do not see any truth. Great comedians are great observers of truth in life. The truth here is similar to Charlie Munger’s point is that simply trading pieces of paper is not a very noble way to make a living.

“My bank is the worst. They are screwing me. You know what they did to me? They’re charging me money for not having enough money. Apparently, when you’re broke, that costs money.” “I had five dollars [in the bank] that I couldn’t have for three days until they charged me another $15. Leaving me with -$10. What does that mean? I don’t even have no money any more. I wish I had nothing. But I don’t have it. I don’t have that much. I have “not ten.” Negative ten dollars. I can’t afford to buy something that doesn’t cost anything. I can only afford to get something that costs ‘you give me ten dollars.'” Being poor is very expensive. Just one element of that problem is what the poor pay for financial services, which is what Louis is joking about just above. Facts are:

“About 28.3 percent, or one in four American households, are what the FDIC calls “under” or “unbanked.” Underbanked households use a bank account, but also use alternative financial services, such as payday loans or check-cashing outlets. The unbanked don’t use any accounts at all.”… they have to rely on expensive alternatives like non-bank money orders, check-cashing services, prepaid debit cards and payday loans. For the poor, even being lucky enough to have a bank account means high fees. You don’t have enough to meet the minimum balance requirements so you pay a monthly fee that eats away at any money you have.

Notes:

Louis CK Web site: https://louisck.net/news/about-horace-and-pete

Link to the Bill Simmons Podcast: https://soundcloud.com/the-bill-simmons-podcast/ep-92-louis-ck [Listen to it]

Hollywood Reporter: http://www.hollywoodreporter.com/race/awards-chatter-podcast-louis-ck-891278

Quartz: http://qz.com/688194/the-price-of-ether-a-bitcoin-rival-is-soaring-because-of-a-radical-150-million-experiment/

The Verge: http://www.theverge.com/2016/2/4/10918924/louis-ck-horace-and-pete-money-email

Esquire: http://www.esquire.com/entertainment/tv/news/a44528/louis-ck-debt-jimmy-fallon/