The Superstar Effect

by adamzerner5 min read3rd Jan 201553 comments

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Modern microconomist Alfred Marshall explains that technology has greatly extended the power and reach of the planet's most gifted performers....He referenced a classical of the British opera singer Elizabeth Billington. She was a well-acclaimed soprano with a strong voice, that, naturally did not have access to a microphone or amplifier in 1798, let alone to MTV, CDs, iTunes, and Pandora. She could only reach a small audience. This limited her ability to dominate the market in the way that artists to do today. Marshall wrote, “so long as the number of persons who can be reached by a human voice is strictly limited, it is not very likely that any singer will make an advance on the £10,000 said to have been earned in a season by Mrs. Billington at the beginning of the last century, nearly as great [an increase] as that which the business leaders of the present generation have made on those of the last.” 

- Wikipedia

Technology has made it easy for us to reach large audiences. And to do so at no marginal cost. If a musician writes a song and puts it on iTunes, it doesn't cost him any money for one more person to download it.

The fact that technology has made it easy for us to reach large audiences has implications on the consumer side of things as well. As a consumer, I can go on iTunes and choose the best music to buy. To understand my point, consider a different world. In this world iTunes doesn't exist. In this world the best music is 200 miles away, but mediocre music is only 5 miles away. Because traveling 200 miles is inconvenient, I choose the mediocre music.

In today's world of iTunes, this doesn't happen. Technology exists that allows us to reach large audiences and to do so at little/no marginal cost. And so, the consumer can (and will) choose the best the market has to offer.

Now for the implications on the supply side. We've already seen that consumers can and will choose the best the market has to offer. "The best the market has to offer" is usually provided by a small number of talented people. Think about it: the best artists, performers, writers, athletes etc. These talented people end up serving a large proportion of the market, and are paid accordingly. This... is The Superstar Effect.

Because of these joint consumption economies, there is a unique opportunity to create and capture value. If you are the best, you capture insane amounts of value. Thus, there is a huge incentive to be the best.

So, should you invest in an attempt to outdo The Superstar and capture this value? Well, investment decisions are all about expected value. Balancing risk with reward. In this case, the potential reward is huge. Astronomical. These joint consumption economies allow you to reach tremendous markets. However, the question is "how big is the risk?".

Outdoing The Superstar is a large and complex task, and I won't pretend to have all the answers. However, I've had this nagging suspicion in the back of my mind for years. My suspicion is that people drastically overestimate this risk, and that with a good plan and enough resources, you could have an excellent chance at "outdoing The Superstar".

Before moving on, let me go through the logic one more time:

  • Today's joint consumption economies allow for firms to reach large amounts of people with little/no marginal costs.
  • Thus, consumers have tons of options to choose from.
  • Consumers often have similar enough tastes such that a large percentage of them end up choosing The Superstar.
  • In serving all of these people, The Superstar has created and captured a ton of value.
  • If another firm came along and outdid The Superstar, this new firm would replace The Superstar. It would now be the one to serve the large market, and would be compensated accordingly. There is a large reward for outdoing The Superstar.
  • Investment is all about balancing risk and reward. Investing in an attempt to outdo The Superstar has a very large potential reward. The question is, "what's the risk?".


Outdoing The Superstar

People seem to view large ventures like starting startups as a roll of the dice. They say things like, "9 out of 10 startups fail". I don't see things that way. I don't see it as "a roll of the dice". I see it as a deterministic puzzle that can be solved.

I should qualify that previous statement. I'm not trying to make a philosophical point, just a practical one. People seem to be afraid of what I'll call, Large Puzzles. Because of their size and complexity, people seem to be put off by them, and they fall back on outside view arguments like "9 in 10 startups fail".

I'll admit that Large Puzzles are complex, but I maintain that with enough resources and with a good plan, a lot of them are very solvable. I sense that a lot of these large joint consumption winner-take-all industries are ripe for the taking, and that with enough resources and a good plan, they can be taken.

My confidence isn't that high though. I don't understand these Large Puzzles well enough to really say. What I'm referring to are "relatively strong suspicions", not "beliefs" (my thoughts are cloudy enough such that I'm having trouble being more precise than this, sorry).


Investing

This is a bit of an aside and a rant, but here we go. Investors currently seem to be heavily biased towards investing in businesses that can be built incrementally. They want to...

  • See some sort of promise/traction before investing at all (usually).
  • Invest 10s/100s of thousands of dollars in a seed round.
  • See some more traction before they invest a couple/10s of millions in a series A.
  • See some more traction before they invest 10s/100s in the next round.
  • etc. etc.
What about firms that are trying to replace The Superstar? Such a task usually requires very large amounts of upfront investment. Because of the winner-take-all nature of these industries, you usually need to exceed a certain threshold of "firepower" before you have a shot at showing some traction, let alone at replacing The Superstar.

However, the fact remains that investment decisions are all about expected value. Risk vs. reward. Risk isn't inherently bad, it just needs to be balanced by the reward. An in the case of superstar industries, the potential reward is huge.

In fact, the idea that the distribution of returns in an investment fund follows a power law seems to be well accepted. This means that it makes sense for an investor to seek huge exits. Replacing a Superstar seems like a great way to do that to me.

But in reality, it seems that investors don't actually understand the power law. It seems that they try desperately to "minimize risk", and look desperately for signs of traction, and end up investing mostly in companies that can be built incrementally. Unfortunate.



Education

The Large Puzzle that I understand best is Education (which causes my System I to care disproportionately about it). I'll indulge myself and say it: the education system today is shit.

I think that Elon Musk said it well. He said (paraphrasing):

Consider The Dark Knight. It's awesome! It has all the best actors, directors, special effects etc. Now imagine if you took the same script and asked the local middle school to reproduce it. It'd suck. That's education.

I think that this division of resources is really the core of the problem. Things you could do once you pool resources:

  • Put a lot of effort towards making each lesson great (in dath ilan, "One hour of instruction on a widely-used subject got the same kind of attention that an hour of prime-time TV gets on Earth"). Figure out how to word things properly. What examples to use. What analogies to give. Make lessons visual, animated, interactive. Gamify them and make them fun (when appropriate). Make them beautiful. Apply design thinking. Make them skimmable so students can refer back to them when they're studying. Include convenient references to things the student might have a question on.
  • Break lessons into chunks and organize them according to their dependencies (this is an important and difficult task). I'm a big believer that knowledge is hierarchical. That concepts have dependencies (to know A, you have to know B). I think it makes a lot of sense to have students learn things that they have the proper foundation for. I think this makes more sense in the negative: you shouldn't have students learn things that they don't have the proper foundation for. (This is a bit of an aside, but I think that mastery should be fixed, and time should be variable. Currently it's the opposite.)
  • Open up time for teachers to spend personal attention on their students. In today's system, they're usually too busy to do this. (Note: even with these great lessons, I still think that teachers will be useful. The lessons could be pretty good, so I'm not sure if they'd be necessary, but I suspect that they'd still be useful. I think using a human will still be the best way to diagnose and address the holes in a student's understanding.)
  • Come up with great practice problems, exercises, projects etc. 
  • Make tests way more accurate and effective. Make them smaller. And for gods sake, have them created by a separate financial entity than the entity that does the teaching!
  • This applies to a lot of what I said above, but iterate, iterate, iterate!! See what works and what doesn't work and change. Given the amount of "experimental subjects (students)" and "technicians (teachers)", there's a tremendous opportunity to do this. Effective collaboration and coordination might be tough, but I sense that it's doable.
Sorry, I may have mixed in a few opinions that aren't directly related to the idea of pooling resources and that should really be asides.

Anyway, I think that the Large Puzzle of Education is very solvable. I think that with enough resources, you could do a good enough job such that it becomes an industry where The Superstar Effect takes over. Where one Superstar addresses a large proportion of the market. And I think that this would have a huge and beneficial impact on the world.
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