Reflexivity Capital Group

Europe Tel: +49 30 916 875 73 Fax: +49 30 916 875 87

USA Tel: +1 702 992 0389 Fax: +1 720 269 0153
Internet link: www.Reflexivityfund.com
E-mail: iadvisor@Reflexivityfund.com

BIFURCATIONS IN THE MUSIC & MEDIA INDUSTRY

INTRODUCTION

If by deutero learning (Learning to learn) we became aware of how pragmatic gestalt philosophy is to daily life, the
cybernetics and systems theory approach would become increasingly used in solving our daily troubles. I have always
thought Nobert Weiner’s ideas in his masterpiece “The Human Use of Human beings” went unheard, unnoticed and
unappreciated. Yet his ideas and train of thought provide great insight into the problems many of our industries face
today.

“The significant problems we face cannot be solved at the same level of thinking we were at when we created
them.” … Albert Einstein

The idea that we are capable of reaching finite solutions valid for all time is tantamount to saying omniscience will
eventually be given to man. All our endeavors for a perfect solution have a common pathological element of finality.
Many a times we look the wrong way and search for solutions to symptoms rather than their causes.

ABSTRACT CONCEPT

A conceptual solution should contain a certain isomorphic relation to the problem about which it purports to elucidate.
Certain patterns on a Meta level that are not subject to change provide the nascent insights to changing patterns on a
lower logical level. I use the heuristic that the structure of the solution should have an analogical parallel to the problem.
Using Russell’s theory of logical types I contend the solution has a hierarchical Meta level structure similar to the
problem.

Without drifting too far off the subject lets analyze the structure of the music industry. The participants are the Record
Companies, The Public, and the Artist. (By Artist I generalize the term to include the Music Producer, Publisher,
songwriter, Singer, performer or dancer). These three are inextricably connected by the flow of finance. What is the
relationship between each participant? What is the pattern that connects in this relationship and how has it evolved? Is it
one of succoring – dependence? Exhibition – spectatorship? Dominating – submissive?

MEDIA COMPANY OWNS

RECORD COMPANY

ARTIST

DISTRIBUTION

SUBSIDIARY RECORD COMPANY

BUYING PUBLIC BUYING PUBLIC

Reflexivity Capital Group

Phone number: +49 30 916 875 73 Fax: +49 30 916 875 87
USA Tel: +1 702 992 0389 Fax: +1 720 269 0153
Internet link: www.Reflexivityfund.com
E-mail: iadvisor@Reflexivityfund.com
 Reflexivity Capital Group
Europe Tel: +49 30 916 875 73 Fax: +49 30 916 875 87
USA Tel: +1 702 992 0389 Fax: +1 720 269 0153
Internet link: www.Reflexivityfund.com
E-mail: iadvisor@Reflexivityfund.com

The standard model used by most in analyzing the media industry is depicted above. It is clear and can’t be refuted that
a hierarchical pattern does exist. In the food chain of finance the Media Company takes the greatest risks in producing,
marketing, advertising and selling the unknown artist. As a consequence and rightly so it enjoys the hegemony in this
industrial chain of control. Reaping the largest profits and taking the bulk of losses generated.

The system has stayed in this homeostatic state (What Soros would call static disequilibrium) for a long while and
enjoyed a benign cycle of growing profits during the past decades. With the advent of the information highway, faster
bandwidth and new technologies various new facets present themselves:

Statistics & Facts Provided by IFPI:

(i) Global recorded music sales down 5% in first half 2001

(ii) World Sales fell 5% in value and 6.7% in units 2001
(iii) Globally, CD album sales saw their first fall in more than a decade. First year
of a down cycle!
(iv) CD Albums market dropped by:
a. 5 % in the US,
b. 13 % in Germany,
c. 7 % in Sweden,
d. 24 % in Denmark
e. Sharp falls in Canada, Italy, Netherlands and Belgium

Two schools of thought exist today to explain the disappointing figures.

• One camp advocates causal explanation to elucidate the decease in demand to global economic
slow down. They claim piracy and illegal distributions through the internet further aggravated the
figures.

• The other school of thought contends that demand for music has continued its rise as in past
decade. The figures they argue are symptoms the industry is sending out of an imminent problem
in the distribution sector.

I belong to the second school of thought. As a case in point consider the statement made recently by the President of
the IFPI:

"These are disappointing figures, showing a marked slowdown in recorded music sales across the world in the
first half of 2001. There is positive news, which is that demand for recorded music is fundamentally strong, and it
is getting stronger everywhere. The problem is that too much music is being made available through pirate
websites and by copying. That is hurting the business globally".

The good news is that demand has been increasing as he puts it but unluckily it has been channeled into illegal
distributions of Internet, piracy and cdroms copies.

The telnet of my thesis and proposed solution rests on me being able to elucidate and show a clear demarcation
between so called “symptoms” and the pathological origin. There is a fine demarcation of how symptoms should
be treated as opposed to problems.

Reflexivity Capital Group

Phone number: +49 30 916 875 73 Fax: +49 30 916 875 87
USA Tel: +1 702 992 0389 Fax: +1 720 269 0153
Internet link: www.Reflexivityfund.com
E-mail: iadvisor@Reflexivityfund.com
 Reflexivity Capital Group
Europe Tel: +49 30 916 875 73 Fax: +49 30 916 875 87
USA Tel: +1 702 992 0389 Fax: +1 720 269 0153
Internet link: www.Reflexivityfund.com
E-mail: iadvisor@Reflexivityfund.com

To give an abstract example, take the case of an individual with a tooth ache. The nerves around the tooth
respond to infected cavities by sending pain signals to the brain. Should the individual ignore this pain it
increases!

a) He can decide to concentrate on the “cause of this pain”. In doing this he focuses on
the origins of the problem. He will go to a dentist for treatment and in the worst case
have the tooth out. The pain could increase, reach a threshold and then diminish. The
symptom and the problem vanish into thin air.

b) He can focus on the “pain itself.” He seeks pain killers. Goes to the pharmacy and
buys ethanol. If this still doesn’t work, he seeks stronger and more powerful pain
killers. Tries to get drunk to lose his senses. What I am trying to elucidate here is a
vicious pattern with infinite regress which is pathological to the individual’s health. In
the end he might indeed stop the specific tooth ache. The body however will soon
emit new symptoms of a higher and more complicated form to say “All is not well”.
Other complications will develop that may cause severe damage to the individual. I
am not a dentist but it does put my point across …

How did the Music industry respond to the new forms of distributions available?

Symptom I:

Sells began dropping. News of piracy cdroms and Cd burning by college kids was making headline news. The so called
“bootleg” CD’s were sold for 1/4th the price.

Reaction I:

The Industry targeted the symptom by sending various police raids across college campuses to catch the culprits.
Bringing them to justice and seizing illegal copies was supposed to do the trick. As evolutionary theory predicted the
symptom became more complex, with the advent of fast internet access

Symptom II:

Peer to peer systems developed. Foremost among them was “Napster” and the file format mp3. Everyone herald it as
the new wave. The system could not survive for it obviously lacked the hierarchical pattern of the existing industry’s
structure which gives the participant with the most financial speculative risk hegemony over the others. However as a
symptom it showed the initial phase of piracy raids wasn’t addressing the actual causes.

Reaction II:

How did the industry react to this new variation of the symptom? They never looked for the underlying problem but
waged the biggest war on Napster. The most erudite lawyers were contracted to fight Napster and shut down the
service. Their efforts paid off temporary as they forced Napster to shut its doors.

Symptom III:

The symptom evolved. Gnu distribution made available source code for its Gnutele platform. Various freeware programs
were introduced into the market from Limewire, Morpheus, Bareshare etc all much faster and with more music content
than Napster ever had. To shutdown these systems would require shutting down the whole Internet!

Reflexivity Capital Group

Phone number: +49 30 916 875 73 Fax: +49 30 916 875 87
USA Tel: +1 702 992 0389 Fax: +1 720 269 0153
Internet link: www.Reflexivityfund.com
E-mail: iadvisor@Reflexivityfund.com
 Reflexivity Capital Group
Europe Tel: +49 30 916 875 73 Fax: +49 30 916 875 87
USA Tel: +1 702 992 0389 Fax: +1 720 269 0153
Internet link: www.Reflexivityfund.com
E-mail: iadvisor@Reflexivityfund.com

Reaction III:

The MPAA began targeting downloads and suing families with any trace of these applications. They further placed an
injunction with various devices technology companies that were developing instruments to play mp3 formats. An
injunction in the US Supreme court was filed to delay shipment of Diamond Rio’s Mp3 Player. When this failed almost
every technology company developed their own version from Sony, Creative Labs, to MCY.

Symptom IV

Without recognizing the deference between symptom and problem Sony (my favorite technology company) is getting
ready to launch the album of one of music’s biggest stars ever in our epoch. Michael Jackson’s much anticipated new
album “Invincible”. They tried the old trick in the book to encode and password-protect the music.

Reaction IV:

Within less than 24hours the code was cracked and the album is in free circulation on the internet

At the risk of sounding redundant someone suggested using more complex encoding. Such train of thought is
pathological as there will never be any human creation that is an ultimate and does not subject itself to further
elucidation. If Microsoft, Sun Micro Systems, Adobe are having a hard time keeping hackers from breaking their codes
what chances do the music industry have in encoding its product. Arguing that a specific code could be created that
does not conform to further elucidation is tantamount to saying omniscience and omnipotence will eventually be
bestowed on man. To put it another way, you might as well say that we as a race will cease to evolve and learn.
Regardless of which camp you belong the solution crystallizes to a choice between focusing on the symptom or the
actual problem.

THE CONCEPT:

The hallmark of the Media’s problem is “distribution”. The old mundane form of Cdroms, Music Cassettes, Mini Cd’ s
are on their way out. These are very provocative statements but by the time I present my theoretical concept it will make
my case of the pertinent trend in the industry more substantial.

As stated in my introduction all the participants are intertwined by money. The merits and measurement of an Artist’s
success are now measured in terms of money. How many Albums he or she can sell? How many sold out concerts?
What is his or her Nelsen’s TV Ratings? The feedback works as thus. The Record Company puts out speculative capital
on an Artist. They market, produce and entertain the Artist. Depending on how well the record sells, either they recoup a
portion of their money back, consider the venture a flop or they hit a home run. With the latter result they have a valuable
commodity and a feedback relationship develops between both Participants. The Record Company increases its budget
on the artists in branding, producing and advertising in the hope of increasing the value of this new commodity. This is
done till the threshold of diminishing returns is reached. The recoding company plays a pivotal role in the life on Artist.
The very existence of the whole industry therefore is shaken on its foundation when this symbiosis and feedback
relationship is endangered by new forms of distribution.

A solution to this problem would require a concept with a structure that is hierarchical, retains the existence of the record
company’s hegemony, provides greater feedback and introduces better ways of increasing the Artist’s value.

Reflexivity Capital Group

Phone number: +49 30 916 875 73 Fax: +49 30 916 875 87
USA Tel: +1 702 992 0389 Fax: +1 720 269 0153
Internet link: www.Reflexivityfund.com
E-mail: iadvisor@Reflexivityfund.com
 Reflexivity Capital Group
Europe Tel: +49 30 916 875 73 Fax: +49 30 916 875 87
USA Tel: +1 702 992 0389 Fax: +1 720 269 0153
Internet link: www.Reflexivityfund.com
E-mail: iadvisor@Reflexivityfund.com

NEW DISTRIBUTION FOR THE MUSIC & MEDIA INDUSTRY

NTT DoComo (NT) France Telecom (FTE) Deutsche Telecom (DT) Vodafone (VOD) British Telecom (BTY) O2

*DATABASE*

Third Party Resellers:

Venista Group
Jamba etc
Public Public

The tenet of this concept is availability and ease of use. (*Update the system is in use as of today)

THE IDEAL MUSIC FRAMEWORK

A Customer gets his 3G service activated for a basic fee of some arbitrary figure per month. There are options such as
music for $8, video services $5, E-mail and Web browsing $7 etc. He has a total regular monthly basic fee of $49 per
month. Should he want to listen to the full album of Celine Dionne he simply chooses the music menu searches for the
artists and presses away plugging earphones to his 3G Walkman device. He could as well take out the Memory Stick
from his Cellular, plug it into his home entertainment set and from the comfort of his home listen to his programmed
collection of songs without paying a penny more. The ease and convenience of the system will make the youth
subscribe to it. The Free Markets will determine the price of subscription. A music fan may prefer paying $8 extra for a
music subscription and having all songs available at his finger tips as opposed to spending countless hours searching,
downloading, copying and burning the cdroms. That price is what the free Market will determine. Charge too much and
you push the user to the brink where he will forego ease of use and hack. Charge below the Market threshold and he
would rather pay the subscription than struggle to find every piece of music for free. The ease and convenience of a
system makes it a necessity.

Every transaction or selection chosen by the user is queried off a central database. Money is distributed from the $8
Music subscription fee to the Record label based on a % of requests the database got queried for. There are also
revenues which are split for the subscription requests. If a client listens to a specific Artist more than once, the record
company’s portion of that client’s 8% subscription fee rises exponentially. A similar scenario occurs with video services
and other forms of media streaming content. The various details and intricacies of the split are best left to the experts in
that field. All we need to know is that a revenue avenue exists!

The Record Company in this format is guaranteed a target audience for new releases. It knows exactly what kind of
music a specific client likes and is able to better advertise and target market new artists towards you. Old albums remain
a source of constant revenue generation. Videos which previously were used as a tool to sell music become a revenue
avenue source. Lower production costs, greater market access, better feedback with markets to determine what works
and what doesn’t will increase the efficiency and expediency of the participants. There is an isomorphic relation between
this concept and old standard radio system which has existed for decades.

Reflexivity Capital Group

Phone number: +49 30 916 875 73 Fax: +49 30 916 875 87
USA Tel: +1 702 992 0389 Fax: +1 720 269 0153
Internet link: www.Reflexivityfund.com
E-mail: iadvisor@Reflexivityfund.com
 Reflexivity Capital Group
Europe Tel: +49 30 916 875 73 Fax: +49 30 916 875 87
USA Tel: +1 702 992 0389 Fax: +1 720 269 0153
Internet link: www.Reflexivityfund.com
E-mail: iadvisor@Reflexivityfund.com

THE EMERGING MUSIC GIANT “VENISTA GROUP” “UPDATE *):

As a market participant it is intriguing to see a trend evolve closely to a previously perceived outlook. Venista Group is at
the forefront of this evolution. It has piggybacked well off Jamba (Jamster), exploiting errors in judgment its predecessor
has been making. A case in point Jamba pays a huge yearly licensing fee to the record labels for the right to list artists
songs on their ringtones platform.

Jamba proceeds to advertise this platform of ringtones with major old mundane TV commercials, posters and radio
commercials. For every song sold for a hypothetical €2, half of that revenue goes to the record label €1. The remaining
€1is then divided between Jamba and the various licensing institutions in Germany. If Lucky Jamba is able to retain less
than 50 cents off the transaction. This forced Jamba to become creative. Rather than market Artists songs, they
proceeded to create electronic tunes whereby the company had 100% ownership. Examples are “Sweetie the Chick”
and “Crazy Frog” characters. Thanks to their advertising these went on to become number one hits in Europe, making
millions for Jamba as they kept the lions share of the transaction revenue ( Close to €2).

Venista Group saw opportunity in Jamba’s change of focus. Within the last four years it has accumulated a gigantic
database of cellular numbers all over Europe: England subscription database exceeds 30 Million subscribers, Spain
exceeds 20 Million, Germany etc. Each cellular subscriber legally accepted to receive information from their provider and
third party participants. Venista does direct marketing with the digital edge. Rather than use the old mundane shot gun
lead generation via T.V, it uses digital rifle leads. When promoting an artist’s album or single, a simple SMS push sends
a warp portal to over 80 Million subscribers who Venista know have previously bought such and such or are in the
following edge brackets. The numbers they generate are amazing.

Venista markets and sales only songs that artists have produced exclusively for their platform and are not tied to the
major record labels. Revenue generated is split 50/50 between the artist and Venista. As the most famous singers are
locked in long term contracts with the major record labels, Venista targets singing actors and actresses as well as
recently free musicians whose labels dropped them due to poor sales. Ironically the Artist will make by far more money
than he ever made, reach a wider audience and wonder how all this was possible. While discussing with Mr. Roman
Tietze, head of Sales of Venista Group I was left in awe at the number of singles sold. It made Michael Jackson’s thriller
sales look like child play. Distribution, embrace it and the gates open.

Every innovation requires a piecemeal introductory phase. The new system emerging from Venista Group with time will
become the dominant source of profits. During the introductory phase albums and Cdroms will continue in distribution.
Only as the revenue from the new system supersedes the old one will it become the major dominant player in the
industry unless of course it is bought out by the current major participants.

Andrew Shawn
Principal Investment Advisor
Reflexivity Capital Group

Reflexivity Capital Group

Phone number: +49 30 916 875 73 Fax: +49 30 916 875 87
USA Tel: +1 702 992 0389 Fax: +1 720 269 0153
Internet link: www.Reflexivityfund.com
E-mail: iadvisor@Reflexivityfund.com