I have a sort of love/hate relationship with Digital Music News. I’m really pleased somebody is trying to do it, but they keep posting stuff that makes me angry.
They do these little bullet-point roundups of what’s going on, often linking to original sources. That’s really useful.
They also do analysis, and it’s often really stupid.
Two themes keep cropping up:
1) Somebody in a suit says something stupid, and they treat it like it’s important
2) Some third-hand speck of data surfaces, and they construct around it an absurdly speculative narrative
The two surface together quite prominently in this story from last year, in which Lyor Cohen is quoted saying that vinyl will outlast CDs at about the same time as the news came out that vinyl sales had gone up and CD sales had gone down.
Let me explain why this is daft.
It makes me want to get a t-shirt that says “There’s no way of knowing. Why the hell are we even talking about this?”
That was a year ago. So what am I whining about now?
Well. Yesterday, they published a story entitled “I took one look at this graph and suddenly lost hope for streaming music” and it contains some even odder fun with statistics.
The graph in question looks like this:
(Original source here)
So Pandora and Spotify have got to the point where they’ve convinced customers to give them about a quarter of a billion dollars a year, but neither are profitable, and their losses have got bigger.
Now, if you had no idea how companies work, you might think this was because Pandora and Spotify were not able to work.
The relationship it’s easiest to see in this graph is that, particularly for Spotify, bigger sales means bigger losses. It’s like they can never win.
Except that’s not the important relationship, which is why people running companies don’t often look at graphs like this.
Companies are rarely profitable from the outset. A few are, and they fund their own growth while turning a profit for their shareholders. This is how my company works, because I didn’t have any expensive set-up costs, and my only marketing expense was some admittedly horrifyingly expensive business cards.
Generally, you need to spend some money to get the company to the point where it turns a profit. This is called “investment”. Digital Music News knows about investment: they keep publishing updates on how it’s up or down. They can count it, but they don’t seem to know what it’s for.
If you wanted to look at a graph that told you how you were doing in a company’s early phases of growth, you’d want to isolate the setup costs from the running costs to see if what you were doing was sustainable.
From the outside, that’s difficult, but if all you have is revenue and profit to go on, you can do something far more useful than looking at the graph above. You can look at the ratio between revenue and profit/loss. This is the profit margin and it will tell you if the company is heading towards profitability. You want it to be above zero.
Put like this, the situation seems to be getting better, rather than worse.
Of course, either of these companies might know exactly where they could shave off $20m-$50m in costs and make themselves profitable tomorrow, and they might be sensibly investing in further growth before they sit back and let the cash roll in. Alternatively, they might be as close to profitable as they’ll ever be.
We just don’t know, and there’s no point in talking about it.
Daft analysis like this isn’t just pointless, though. It’s misleading because it sells the lie that the answer will come if you stare at the runes for long enough.