Monday, May 31, 2010

Facebook and the Vilification of Leisure

Ok time for a confession: I don't have a Facebook account.

Geez what kind of dinosaur doesn't have a Facebook account these days? Even my grandma has a Facebook account. Well the rationale was that I do not need to have a Facebook account bcos I meet my friends LIVE and those that I have lost touch, I am happy that the relationship stays that way.

Well the same argument can be used for cellphones. Who needs cellphones anyways? We have letters, land lines and if we wanted to link up with an old friend, we would just call them up for dinner using fixed line phones. When we want to meet outside, we determine the exact time and place to meet, before meeting up. If they are late, we would just wait until they show up! And we write letters to our penpals, who needs phones?

Well, I am just saying it. (Borrowed from RWJ, one of the funniest on Youtube, go Google "RWJ =3")

I guess Technology cannot help you manage your life if you don't want it to. Grandma just wouldn't use Skype even if she could use it to see her adorable grand-son playing happily on the other side of the globe, every day. Dad refuses to use the cellphone with a GPS even if it means that he never needs to read the map again, Evar (yep fr RWJ too!).

Does anything change? Well actually it doesn't. Grandma and Dad are still very happy, oblivious to what they are missing out. It's ok, life goes on. What's wrong with just seeing cute little Toby once a year? Or with reading maps anyways? Technology is not everything. Yes that is true. It is also true that we had horses, hence we didn't need cars and we had letters, hence we didn't need phones. In fact, if we had continue to use horses today, maybe the big environmental issue might be avoided! And the mailmen wouldn't have lost their jobs and contributed to the 10% unemployment.

Well, I am just saying it.

Okay, in the bigger scheme of things, technology ultimately leads to better productivity. However technology does not increase productivity overnight. It needs enough time and people to embrace it before the curve takes off. Not all technology becomes truly beneficial, like Segway or even Gaming. Technology also comes with side-effects: like carbon emission. But on the whole and over the long run, it has allowed humans to progress faster than otherwise.

Back of Facebook, how does it help improve our lives? Now that we are at it, how do we define Facebook anyways?

Well, according to most, Facebook is a social networking platform where you can link up with friends, share photos or music or interesting weblinks, or you can use it to chat with friends, play games or just surf around for interesting stuff. In one sentence: it is a leisure, edu-infotainment and networking hub. There are now close to 400mn users on Facebook, (ie about the whole of US plus 20 Singapores) which also makes it a super powerful marketing machine. Facebook has recently turned profitable, I expect it to make a few billions in revenue in a few years and profits might reach a couple hundreds of millions. However, if it ever gets listed, the PE would be like 80x ie there wont be a chance to buy it at a reasonable price.

So how does one's productivity increase with Facebook? Well the most compelling argument would be Photos. The age of digital cameras means that people no longer print out as many photos as in the past. Most photos are stored in hard drives and the only time we get to see friends photos now is, well, through Facebook! Unless you are talking about wedding glamour shots or specifically going to some friends' house and ask them to show their Hawaii photos (which would be in their PCs btw and the reason you would ask is bcos they don't have a Facebook account where they could upload it).

Other than that, Facebook just becomes this viral photosharing-networking-eduinfotainment hub that sucks away time from the TV, the phone, the radio and other forms of leisure. There might be some productivity increase bcos instead of passively receiving entertainment/leisure/knowledge you actively search for it. Well the argument works both for Facebook and for the internet.

But what is happening with Facebook is actually much bigger than Facebook or Internet or Dinosaurs with no Facebook account. I call it the Vilification of Leisure.

In the past, like say 30 years ago there are only about 3 forms of home leisure activity.

1. TV
2. Radio
3. Books/Newspaper

Well there is a fourth one involving kids: either playing with them or making them, but let's just leave this one aside for now.

Then. gaming consoles came along, followed by the internet, then American Idol (needing both TV and cellphone), then Youtube, iPod, Facebook, iPhones, Wii, Skype, World of Warcraft, iPad, Natal, Twitter, PPS etc etc. The whole home leisure scene just exploded. But sadly we still only have 24 hours per day. Even sadder, we probably spend only 2-3 hours of our day doing these things. So 30 yrs ago, we spend 2-3 hours every night in front of the TV. Now it's gonna be spread over this huge maelstrom of activities. (Of course it would be more like maybe Family A goes Facebook, Family B still watches TV, Family C goes Wii or Brother of D goes Warcraft, Sister of D goes iPad etc).

In any case, the home leisure which used to be dominated by just TV now becomes a million things. This is the Vilification of Leisure.

In the next post, we discuss its impact.

PS: Well I lied, I have a Facebook account since 2008.

Sunday, May 23, 2010

Economics of YouTube Musicians

I have been spending some time watching Youtube recently and was amazed by the talents of all these YouTube Musicians all over the world.

Check out Sungha Jung
http://www.youtube.com/user/jwcfree#p/u/16/JykAgIVT6-s

And Singapore's own YouTube Sensation
http://www.youtube.com/user/ling86#p/u/8/bUY8iT525yQ

The analyst in me started wondering about the business economics of these musicians. So here I will simply share some random thoughts on how things can work.

First, as pointed out by Mary Meeker and her famous Price to Eyeballs, the no. of hits should have some value. Btw this is a crazy idea in finance and still draws laughter to this day. I guess Meeker's greatest mistake is to attribute the price of a stock directly to eyeballs, which grossly overstates the true profits that millions of hits actually generates.

It is surely quite a tough job to determine the true profits from millions of hits.  But it's been 10 years now and we have a history of stuff to help us. Also, I will stop short at revenue and not profits, which  requires another few levels of analysis. For a start, let's look at some online businesses out there:

Online social games: Zygna, revenue paying users: 5-10%
2nd Life: Revenue paying users 5% or less
Facebook: Revenue paying users probably 2% or less
Blog clicks: 8percentpa, monetize clicks 1% of all page views
Less than successful targeting online: e.g. selling Amazon books on personal websites, less than 1% of all page views

So with these historical no.s, we can roughly say that maybe 1% of the eyeballs, or hits can be converted to money. Obviously the kick comes from the per user revenue, or just to throw in a technical term: the ARPU or average revenue per unit/user. The ARPU varies widely depending on the nature of the online business. For Zygna, this is pretty high, at $4-5 or even more . For Blog clicks, unfortunately, it's more like 10c or less.

Back to YouTube Musicians, so a million hits converts to perhaps 10,000 potential revenue paying users and then if we put ARPU at $1, that's $10,000. That's the theoretical value of a Youtube Channel with a million hits.

In reality, we need some form of infrastructure to realize this $10,000. Specifically for YouTube Musicians would be distribution: like iTunes to sell the music via downloads, or record labels to sign them up, make albums and sell CDs through music stores like HMV, sponsors, experienced artists to help them (like with joint live performances), capable producers, good agents etc. And depending on many other factors, the realized value can be much greater (or smaller) than the theoretical value.

Now you might be thinking, this isn't all that attractive right? Even if we scale up the value by 10x, a million hit channel can only generate $100,000. That cannot even buy the cheapest HDB flat. I guess there are two points pertaining to this.

1. In the world of internet, the scale needs to be in 10-100 million or more

Sungha Jung has over 130mn hits for all his performances, going by my simple calculations above, his channel's theoretical value is $1.3mn, and in reality he has probably monetized even more. He succeeded with help for famous guitarists all over the world, supportive parents, perhaps generous sponsors and producers etc.

When we look at some old world artists with just one hit song, like Lisa Loeb with "Stay" or Berlin with "Take My Breath Away", CD sales are formidable at just a few millions, that is bcos the no.s left out people who listen half-heartedly and decided not to buy. Whereas the internet captures all these no.s as hits. To put it another way, if "Stay" started out as an internet song, it could have generated 100mn hits.

2. Longevity issue

A channel that can generate $10,000 in revenue one off might not be any good. But a channel that can generate $10,000 annually for say 10 years is something. Singapore's GDP per capita is $40,000. One channel that can year in year out gives $10,000 is worth a lot. But needless to stay, that can only be achieved with constant maintenance and updates. This in itself is a lot of hardwork.

Most musicians, if you ask me, don't really survive 10 to 20 years. Think of all the hits in the 80s and 90s, and where are the singers? Tiffany, Debbie Gibson, NKOTB, Jewel, Boyz To Men, Michael Learns to Rock, Cranberries etc. Well one might argue they made enough, called it a day. Or they might have drifted into oblivion against their will. Actually the pace of human civilization is so fast that most careers don't last that long as well. Guess that's why a lot of people in their 40s and 50s struggle with jobs and competition from the younger generations.

Back to YouTube Musicians, longevity is an issue, there is no two way about it. It would be quite a feat to last even just 10 years.

--------------------

To sum it all up, let's try to think about how to then maximize the full value of a popular channel.

I guess one logical answer would be tremendous hardwork and then promotional work in the first two years. This would include quick updates of new videos, selling via iTunes, finding sponsors and producers etc. This would then be accompanied by live performances, appearances in media, shows etc. Hopefully, with these, the revenue scaling really does go from $10k to $100k for a million hit channel. Of course, the better leverage factor would be generating more hits ie from million channel become 5 mn channel. This would in turn translate into more revenue down the road.

As the years progress, things will definitely slow down, so the focus might be on recycling the songs for other uses: awareness videos, commercials etc. And perhaps selling distribution rights but retaining a very small revenue share.

Thus the maximum absolute dollar value extracted could probably be somewhere between $300-400k. Well good enough to get a 3-4 room HDB in the suburbs, I guess.

Sunday, May 16, 2010

Farewell Dr Goh

Friday was a sad day for me.

One of the greatest minds in Singapore history passed on. The Chief Architect of Singapore, Dr Goh Keng Swee. To quote MM, generations of Singaporeans benefited and will continue to benefit bcos he laid the foundations of modern Singapore. EDB, SAF, JTC, CPF, MOE, MAS, GIC, Temasek, you name it. Down to the SSO, Zoo, Bird Park, Sentosa and even the Chinese and Japanese Gardens. He started everything! And the best part, he was selfless, he was humble and he cared for the people. He put his best 25 years into making Singapore a better place.

Dr Goh was a thinker way ahead of his time. He knew that Singapore has limited chances of surviving without a hinterland after the separation with Malaysia. So he came up with an original plan with Dr Winsemius, Singapore's economic adviser from the UN during the early days, to invite foreign MNCs to setup factories in Singapore, enticing them with tax breaks and cheap labour from Singaporeans. The site would be in Jurong, which was a swamp at that time. It was his most major gamble and he said himself it could be his greatest folly. But it worked. Singaporeans were just happy they had jobs, MNCs got their competitiveness and Singapore prospered. Years later, other countries including China followed his strategy.

He started our sovereign wealth funds, Temasek and GIC, in the 70s and 80s. The term "sovereign wealth fund" did not exist until a quarter century later. He did that because he saw the need to manage such large pools of money with dedicated teams of professionals to ensure decent returns (at least market returns) on our monies. The combined size of our sovereign wealth funds exceeds our GDP multiple folds today.

Dr Goh is truly one of Singapore's finest leaders. All Singapore flags should fly half mast for a week, in my opinion. All our dollar bills should have his face on it. May 14 should become a public holiday. The parliament house should have a statue of him. And yes, Jurong Industrial Estate should be renamed Goh Keng Swee Industrial Estate.

I wish I have the dollar bill with his signature. I would frame it and put it beside my Buffett and Munger dollar bill.

Someone is doing major update on Dr Goh's wikipedia page. Information has improved tremendously over the past few days.
http://en.wikipedia.org/wiki/Goh_Keng_Swee

I guess the sad revelation that I learned from reading his life story over the past few days was that he sacrificed his personal life and his health for the sake of Singapore. Or maybe he just wasn't as lucky as MM. After 25 years of intense innovation, adding immeasurably huge contributions to our society, he was diagnosed with bladder cancer. The fortunate part was that he still lived over 20 years after with his current wife, children, grandchildren and great-grandchildren.

So, live life to the fullest, but also in moderation and take good care of our health.

Just to put down here one of Dr Goh's best quote:

"The only way not to fail, is by not doing anything at all. And that, in the final analysis, will be the ultimate failure."

This quote was passed down to me across generations, from people who worked directly with him. and now it is with me. Thus his legacy lives on in all of us, Singaporeans. And it is up to us to let our children and our children's children understand his greatness and continue to learn from him. Like how schoolchildren today in the US still adore Benjamin Franklin and Abraham Lincoln, benefit from their foresight, worship them and still learn from them. Our children and their children will also continue to benefit from Dr Goh's far-sightedness. This is the least that we should do: pass on the legacy of one of our greatest Titans.

Thank you Dr Goh, thank you for all that you have done for Singapore.

Thursday, May 13, 2010

On Wikipedia and Markets

I was reading this book "The World Is Flat" and this small little story on Wikipedia caught my attention. Btw this is quite an old book and one can so obviously deduce I am so behind in my reading... I think the author has written like three updates and published at least a sequel. There wasn't much of truly good insights but lots of small interesting stories which makes it an entertaining read and perhaps that's why it's selling million copies.

Anyways the story on Wikipedia was that even though it was a free encyclopedia,  contrary to popular belief that Wikipedia has a lot of crap, things posted can actually be quite accurate. The rationale was that for every topic, there will always be those that are Pro and Against. So the Pros will write their story, but whatever is overboard gets deleted by the Against. This goes on until what is written on it presents the most valid view and nobody edits the page any further.

Of course this only works when there are many people editing the pages. At the end of the section, the author did state an example where a senator was accused of involved in killing JFK on Wikipedia, and since a lot of sites simply take what is on wiki, he was shocked to find newspapers calling him asking  whether he killed JFK. Similarly you can go and write a wiki page full of rubbish to spite your idol's rival and if not enough fans edit the pages, you achieve your aim.

Now the link here is that markets work in the same way too. Someone who thinks the stock is too cheap buys it, someone who thinks otherwise sells it. Until equilibrium is reached. Now this equilibrium is based on every market participants judgement on the stock at that point in time. So the current stock price should reflect the most efficient price to most of the participants at that time. This is the basis for the efficient market hypothesis.

Needless to say, if the stock is very thinly traded, ie not too many people have an opinion on it, the stock can be mispriced and stay mispriced for a long time. Value investors buy stocks that are  mispriced by being very cheap and wait for the market to find its true value. Or in the Singapore context, these stocks get taken out private at a cheap price. Of course, the way the human mind works, a lot of people actually don't mind overpaying for garbage, like companies with no earnings, LV bags and Mickey mouse apartments at $1000psf. So stocks can stay mispriced on the upside for a couple of years too.

Now you might be asking if the market is efficient, how does value investing fit in? If the stock is always at the right price, there is no gap between price and intrinsic value, how can value investors benefit then?

The answer is Patience. Most of the time, price trade very close to value. There won't be 50% upside. But there will always be times when things go out of whack. In the big way, it would be like 2007 financial turmoil, where great companies get whack down to very cheap levels even though nothing much has changed in their businesses. Think Coke or P&G, do people stop drinking and stop shampooing in a financial crisis? In the minor ways, some stocks trade down on temporary, one-off issues. Most market players then get emotional and judge the stock only in one direction (ie down) in the span of that few days or weeks.

E.g. bcos of bad weather, less people go out shopping, fashion clothing stocks get sold down. We all know that girls need to change their wardrobe every month, so when chances like these come by, just go buy Gap or Victoria's Secrets or Zara. (disclaimer: I have never researched these co.s, just arbitrary naming fashion stocks) Sooner or later, they go back up to their true value.

In a sense, this is how value investors can beat the market. But this is still easier said than done. Well at least now we know Wikipedia may be more accurate than your beloved local press reporting, so for those who thinks Wikipedia is unreliable, give it more credit!