THE LEFSETZ LETTER: Denial

I’ve been trying to understand the financial crisis.

I finally sat down with the newspapers and decided to read every article. Surprisingly, I found the answer not in the "Wall Street Journal" but the "New York Times". The problem is denial. The investment banks just wouldn’t admit their assets were worth less than they thought they were.

The writer analogized it to the housing market, to the individual. You put your house on the market at too high a price. You think it’s worth a mil, but really, it’s only worth $900,000. Then, when you finally drop the price to $900,000, it doesn’t sell either, because now it’s worth $750,000. Then you drop it to $750,000, but it’s too late, it’s now worth $600,000. But this is a real problem. Because you owe $650,000. Maybe having taken out equity loans against it. You just can’t get what you need. You walk away. Not only from the sale, but in many cases the house.


Bob Lefsetz, Santa Monica-based industry legend, is the author of the e-mail newsletter, "The Lefsetz Letter". Famous for being beholden to no one, and speaking the truth, Lefsetz addresses the issues that are at the core of the music business: downloading, copy protection, pricing and the music itself.

His intense brilliance captivates readers from Steven Tyler to Rick Nielsen to Bryan Adams to Quincy Jones to music business honchos like Michael Rapino, Randy Phillips, Don Ienner, Cliff Burnstein, Irving Azoff and Tom Freston.

Never boring, always entertaining, Mr. Lefsetz's insights are fueled by his stint as an entertainment business attorney, majordomo of Sanctuary Music's American division and consultancies to major labels.

Bob has been a weekly contributor to CelebrityAccess and Encore since 2001, and we plan many more years of partnership with him. While we here at CelebrityAccess and Encore do not necessarily agree with all of Bob's opinions, we are proud to help share them with you.

You’re upside down, it’s the bank’s problem. If only you’d priced your house according to the real market value in the beginning, you would have sold it at a profit and been out!

But the people holding the debt are in the same situation. They’re overvaluing the asset. Instead of selling the securities for what they’re truly worth, they’re holding on to them, waiting to get their price, as the true price keeps falling and those mortgage defaults, from people abandoning their houses, continue to rise. Merrill Lynch was saved from bankruptcy by selling some assets at 22 cents on the dollar. Only a new CEO, appointed in 2007, could do this. The old guys, who’ve been around forever, like Fuld at Lehman, just couldn’t believe how bad things had gotten, they expected the situation to turn around through the sheer force of their own will.

Is this getting familiar yet? Does this sound like the record business?

What we’re going through in America replicates what happened in Japan in the 1990s. But rather than taking the bullet, eating the loss, the government continued to try to prop up the country’s financial system, to its detriment. It took almost a decade for it to revive. Every analyst says this was a mistake. They should have taken the hit immediately and started over.


The major labels refuse to believe we’re living in the twenty first century, they refuse to bite the bullet and get with the program, they want to continue to live in the glory days of the 1990’s. Isn’t that what Warner’s failed Estelle effort was about? Getting people to buy an overpriced CD to get the one good track? As they said in that old 1990’s TV show, homey don’t play that no more.

The labels have to confront reality, and bite the bullet now.

1. People want ownership.

No streaming, no rental. P2P is about neither. IM transfer is about neither. CD burning is about neither. In an era where you can e-mail a track, which label employees do every day, why would anybody want to rent?

2. Music is overpriced.

That’s the perception. To try to change it is futile. The only option is to lower the price and get more people to buy. Historically, most of the product was purchased by a small percentage of the public. We have to follow the cell phone example. Everybody must pay for and consume music. If big consumers get a bit of a break financially, it’s made up for by all the people who weren’t buying previously. And these new customers also go to gigs, purchase merch…

3. File-trading cannot be stopped.

Give up the ghost. Either license what exists or come up with a pay model that delivers the essence, legally, for a very inexpensive price.

4. Record companies screw artists.

Without honest accounting, without the artists getting the lion’s share of the money, indies will continue to siphon off both the cream and the newbies. With the labels left with wannabes who don’t sell tonnage and superstars they’re overpaying.

5. 360 deals are a land grab.

Until the labels can prove they’re giving service for those rights, no one in his right mind would make this deal. Just because the label’s in trouble, that doesn’t mean you’re obligated to bail it out. Just like the government refused to bail out Lehman Brothers. Just like you refuse to buy a gas guzzler to help Detroit.


6. Diamond sales are history.

It’s almost impossible to get national attention. The era of ubiquitous superstars selling a ton of product are gone. It’s not about P2P, it’s about eyeballs. You just can’t garner them.

The above are facts. Which the labels continue to deny to this day. Coming up with one lame, half-assed solution after another. MySpace Music, Nokia’s "Comes With Music"… But it’s worse, they won’t innovate, won’t license new thinkers for fear of giving away the store. And adding insult to injury, Universal, like a Mafia family, requires a huge up front fee, irrelevant of whether you ever sell anything or make any money. If all American business were run this way, the whole country would be bankrupt. Furthermore, with files, people will always want to replace them. Because their computers crash, because better quality ones infiltrate the system. It’s like the original Napster… Who cared if your computer crashed, you’d just log on and grab your files again. You didn’t have to hoard, because you had access. There is no giving away the store, people will always want to come back!


Truth is most people already own a lot of product and the labels pretend that the black market doesn’t exist. BitTorrent, Limewire… If we don’t talk about them, if we sue some people, we can make like they’re a gnat on the ass of the business, when in truth, it’s the legal market that’s the gnat on the ass of the illegal market.

We need new blood, to take the hit now and realign the business.


It won’t be Guy Hands. Because he broke rule number one. He overpaid for EMI. Doesn’t matter who he hires, what he says. The bank would take the company back now, if it only knew what to do with it, if it could only sell it.

Warner has the best digital initiatives, but that’s like saying the Corleones are the friendliest Mafia family.

Sony is lost. And Universal are bullies. When Jean-Bernard Levy, CEO of Vivendi, stands up and says he thinks things are turning around, he reminds me of the nitwits on Wall Street, but it’s worse, at least they’re familiar with the business, whereas Jean-Bernard Levy just parrots what Doug Morris tells him. Doug Morris is not living on the computer, he’s so out of touch that taking advice from him is like asking your grandfather about Facebook.

Maybe you have to leave new music development to new companies, just making money off your catalog. Or, maybe you must turn yourself into a financial services company, doing the deals and paying the royalties for everybody for a small fee, with an option, exercised by the artist, of upstreaming. There is power in market share, the majors are headed for marginalization, only interested in what sells a lot, whereas what sells a little, in aggregate, is where the lion’s share of the money is going to be.


Things are not turning around. Things are really dire. Arguing about iTunes prices is like debating whether windshield wipers on SUVs are overpriced. All the companies say the digital market isn’t making up for the CD downfall. Doesn’t that say that a new digital model is necessary?


Of course, but these guys are living in denial.

On Wall Street as on Main Street, a Problem of Denial

Related Post