1. “They can’t put no more Weezy baby out. That’s that cash money vasectomy.” From the song: Grateful.
That there was a feud between Lil Wayne and Birdman and another feud with the record label which has distributed Weezy’s music is well known. The core of the issue is “wholesale transfer pricing” (WTP). Simply put: WTP is the bargaining power of A that exclusively supplies a unique product X to B which may enable A to take the profits of B by increasing the wholesale price of X. In this case, the artist (Weezy) is unhappy about by the nature of the revenue split between himself, Cash Money Records and the distributor. The good news is that industry revenue are rising:
“The outbreak of streaming has officially helped the music industry rebound after nearly a decade of decline, with the Recording Industry Association of America reporting $7.7 billion in revenue in 2016. That’s the music industry’s highest gross since 2009 and, at an 11 percent improvement over 2015, its best gains percentage-wise since 1998.”
2.”The garden’s full of snakes so I had to escape.” From the song: CoCo.
What relative WTP determines is the structure of what is called an industry profit pool, which is the total amount of profit earned in an industry at all points along the industry’s value chain. The amount of sustainable profit generated by any business is driven by whether it has a moat and the definitive essay on moats was written by Michael Mauboussin. In that essay he writes:
“A profit pool shows how an industry’s value creation is distributed at a particular point in time. The horizontal axis is the percentage of the industry, typically measured as invested capital or sales, and the vertical axis is a measure of economic profitability… Profit pools are particularly effective because they allow you to trace the increases or decreases in the components of the value-added pie. One effective approach is to construct a profit pool for today, five years ago, and ten years ago and then compare the results over time.”
Mauboussin created this profit pool example which illustrates how some firms can be profitable and others not in the same value chain:
“the industry as a whole destroyed an average of $19 billion of shareholder capital per year through the 2002-09 business cycle”
The nature of a given profit pool can change over time or not. For example, someone can argue that new developments, like the recent reduction the number of airlines has changed the situation now and profit for airlines may be more sustainable. That is true but that is not relevant to the 2002-09 time period in the chart. One really interesting fact about how the airline industry has changed and how its profitability prospects may have improved is the rising importance of selling airline miles.
Bloomberg reports:
“the sale of miles—mostly to the big banks, but also to companies that range from car rental firms to hotels to magazine peddlers. The latter has expanded so much that it accounts for more than half of all profits for some airlines. [one estimate] is that the margin on this business is 60 percent or 70 percent.”
Profit in a business does not always arrive directly. Weezy knows that. The fact that certain complementary goods exist that can lower factors like CAC and churn can create a really important dynamic when a company adopts something like a freemium/land and expand strategy. For example,
“Credit Karma, a popular credit-monitoring site, wants to do your taxes online for free. [Kenneth Lin’s company is] striking out at TurboTax and H&R Block, which are now charging the typical homeowner or investor more than $90. Credit Karma can offer free tax preparation because it makes money in other ways. The company, with 600 employees, gets paid to recommend financial products, such as credit cards and auto loans, to customers. It says it had revenue of $350 million in 2015 and has been profitable for a couple of years. By breaking into tax prep, Credit Karma hopes to get better data on its members and improve its recommendations. The idea is to create a “trusted digital assistant” for its customers’ financial lives, Lin said.”
The impact of this freemium/land and expand phenomenon is highly underestimated since it is happening many categories. The consumer surplus created as these strategies are implemented is massive but so is the producer surplus it eliminates. The end result is great for consumers but a challenge for businesses that have counted on the revenue to generate profits, not just product promotion. In this way the cost of goods sold (COGS) in many categories is being transformed unto CAC by companies implementing a form of the freemium/land and expand strategy adopted by Credit Karma. In a profile of Bill Gurley I quoted him (in bold) and then wrote:
“If a disruptive competitor can offer a product or service similar to yours for “free,” and if they can make enough money to keep the lights on, then you likely have a problem.” Digital offerings have very strange economics in that multi-sided markets are often involved and offerings in such a market can have close to zero marginal cost once it has been created. Solving the “chicken and egg” problem inherent in any platform business usually involves either a free egg or free chicken on one “side” of the market. It’s easy to wake up in a digital world and have whatever you were selling now being offered “for free.”
The profit pool in the music industry is not something Weezy is happy about since he believes his share should be bigger. He once said in an interview: “I want off this label and nothing to do with these people, but unfortunately it ain’t that easy.”
The most important aspect of a profit pool analysis is that it is not just a statement about the top line revenue of a business. Revenue is not profit! It is odd that this even needs to be said, but I am doing so anyway. Too many people think: “Well this business in generating a lot of money!” The assumption is that it must be profitable or is generating the most profit in the value chain, when that is not the case. Music streamers may have a lot of revenue and yet zero profit. That’s why a profit pool analysis is so interesting.
Here’s another example created by Mauboussin:
Mauboussin’s profit pool graphics illustrate that some sectors of some industries generate huge amounts of value for society and yet no overall profit. This is also true about innovation. Sometimes all of the benefits of an innovation go to consumers. As an example, Bill Gates said once:
“If you look at an industry where you have such a rapid increase in supply, usually that’s pretty bad, like when radial tires were invented, people didn’t start driving their cars a lot more, and so it means the need for production capacity went way down, and things got all messed up. The tire industry is still messed up. Supply is the killer of value. That’s why the computer industry is such a strange industry. We’re dealing with amazing increases in supply.”
Sometimes disruption only benefits consumers and producers end up with nothing. Whether something is “disruptive” does not determine whether it may be a direct source of profit for the producer. This increase in the rate at which producer surplus is transformed into consumer surplus also distorts all sorts of economic statistics like GDP.
3. “If Cash Money Records coming for me, I’m goin’ out like Tony.” From the Sorry 4 the Wait 2 mixtape.
Lil Wayne has considerable leverage in these WTP disputes since, among other things, he is needed to promote the product. He has been able to maintain some leverage for that reason and that so far has produced a stalemate. Lil Wayne’s suggestion that he would rather go out like Tony Montana did the 1983 film Scarface is an often seen negotiation tactic. In an interview Weezy noted: “Carter V is super-done. Cake baked, icing on top, name on top, candles lit. I would have released it yesterday if I could. But it’s a dead subject right now. It’s a jewel in the safe. It’s that stash-house money.”
4. “Right now, anybody could put out a new song on the Internet and it could become the hottest thing ever. When I was starting, you couldn’t do that type of shit. But that’s wonderful – the game is wide open, and my job is just to stay vital.”
The internet has been a destroyer of many moats that were based on distribution scarcity (for example newspapers and music). People like Weezy have had to increasingly make their profits on concerts and merchandise. I discussed this in my post on Louis CK, Biggie and Rza. Even at Universal mech is a significant revenue line as is streaming:
5. “I got the key to success, get money invest.” From the song: Over Here Hustlin.
Lil Wayne understands that it is income from services and other work (“get money”) that enables investments. Investments are certainly important, but so is a source of income which is fundamental, especially for younger people.
6. “I’m just chillin, but my money still running ’round.” From the song: Over Here Hustlin.
Lil Wayne is channeling Warren Buffett with this lyric, who once said: “If you don’t find a way to make money while you sleep, you will work.” The best way to earn money while you sleep is to invest wisely.
7. “My money so old I tell my new money ‘respect your elders.’”From the song: Living Right.
It is not completely clear what Lil Wayne is talking about in this lyric, but it is possible he is referring to the fact that older assets tend to have a lower tax basis and deserve respect. To lower the tax hit, new assets should be sold first to raise cash for expenses like VIP sessions at clubs or private jets.
8. “I need a Winn-Dixie Grocery bag full of money.” From the song: Got Money. “I gotta posse full of hittas and a pocket full of In God We Trust; It’s been so long since I said “it cost too much.” I’m so addicted to the fast money lifestyle and withdrawal sucks; And dead presidents act immortal, but I know you see money’s not a problem” From the song: “I Feel Good”
People tend to acquire significant hobbies and other habits that require involve significant cash burn rates. Lil Wayne is saying that this can create problems unless you have a lot of cash. For example, as well all know the only unforgivable sin in the VIP section of the club is to run out of cash. Lil Wayne seems know the Warren Buffett admonition well: “Nothing sedates rationality like large doses of effortless money.” So having a grocery bag full of cash is helpful.
9. “I invest, I stock trade, From Eagle Street, to Wall Street.” From the song: Hot Boy (Freestyle)
It appears that Lil Wayne is an active stock market investor. He may hold some passive investments in Vanguard and other funds and ETFs but it is not clear from the context of this song lyric. Some people can invest in an active way successfully, but not too many. Charlie Munger believes that ~3% of investors can do so.
10. “Getting mugged from everybody you see.” From the song: Got Money.
Lil Wayne in this lyric is agreeing with the Charlie Munger idea that jealousy is a worthless emotion. Munger points out: “A member of a species designed through evolutionary process to want often-scarce food is going to be driven strongly toward getting food when it first sees food. And this is going to occur often and tend to create some conflict when the food is seen in the possession of another member of the same species. This is probably the evolutionary origin of the envy/jealousy tendency that lies so deep in human nature. Envy is a really stupid sin because it’s the only one you could never possibly have any fun at. There’s a lot of pain and no fun. Why would you want to get on that trolley?”
11. “Real Gangsta’s die of old age.” From the Song: Cream.
As Hyman Roth said in the movie The Godfather: “Good health is the most important thing. More than success, more than money, more than power.” In keeping with Mr. Roth’s admonition Lil Wayne appears to want to take better care of his health. I need to do that too.
12. “Soon as I learned how to talk I talked business.” From the song: Cream.
In another blog post entitled “A Dozen Things I’ve Learned About the Music Business (and Businesses Like It)” I quote Kurt Cobain as saying: “I wish there had been a music business 101 course I could have taken.” Lil Wayne is saying he learned about business very early in life. That was a good idea. As Warren Buffett likes to say: “I am a better investor because I am a businessman, and a better businessman because I am an investor.”
Notes:
Streaming http://www.rollingstone.com/music/news/music-industry-rebounds-in-2016-thanks-to-streaming-w474394
Airlines https://www.bloomberg.com/news/articles/2017-03-31/airlines-make-more-money-selling-miles-than-seats
MIDiA https://musicindustryblog.wordpress.com/2016/05/25/the-2-spotify-charts-you-need-to-see/
Should Tax Preparation Be Free? Credit Karma Challenges TurboTax – Bloomberg https://www.bloomberg.com/news/articles/2017-04-07/should-tax-preparation-be-free-credit-karma-challenges-turbotax
25IQ Gurley https://25iq.com/2013/09/09/a-dozen-things-ive-learned-from-bill-gurley-about-investing-and-business/
Comcast Wireless https://www.bloomberg.com/news/articles/2017-04-06/comcast-enters-wireless-business-with-45-a-month-service
http://www.mtv.com/news/2055325/lil-wayne-sorry-4-the-wait-2-birdman-lines/
http://www.rollingstone.com/music/news/hear-lil-wayne-call-out-cash-money-feud-on-grateful-w438959 and http://www.mtv.com/news/2211964/lil-wayne-birdman-club-liv-drink-thrown/
- A Dozen Beliefs About Business, Money and Life that Kanye West Shares With Other Great Entrepreneurs and Investors
- A Dozen Lessons about Business Valuation from the Iridium Debacle
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