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The Physics of Music and the Asian Innovators

“Bamboo Innovators bend, not break, even in the most terrifying storm that would snap the mighty resisting oak tree. It survives, therefore it conquers.”
BAMBOO LETTER UPDATE | March 23, 2015
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Dear Friends,The Physics of Music and the Asian Innovators

At the admission interview of the high school applicants into the Accountancy program at the Singapore Management University last week, one of the  candidates “C” cried during the interview – and I gave her the highest score 19/20 amongst all the candidates and wrote down “strongly recommend”.

We like to share some of the conversations in this story which inspired the discussion about why for instance Singapore’s Creative Technology (CREAF SP, MV $74m) did not scale up to become the Apple of Singapore/Asia, collapsing from over a billion dollar in market value at its peak to $74 million today, as well as the deeper thought-provoking insights to understand and identify the hidden Asian innovators that include Loen Entertainment (016170 KS, MV $1.09bn) which had more than tripled since we last highlighted them in Aug 2013 in “Berkshire Hathaway Embracing Media? An Asian Perspective”.

“C” did not have the straight-As profile (H2: AABD, H1: AC) and even had a “poor” General Paper score, which was strange given her vivid and heart-stirring writing in the application form describing herself and the various activities she does that contributed to helping others during her time at Hwa Chong Junior College. The first impression she would definitely give to others would be that of a stereotypical shy, self-conscious and introverted person. A checklist approach and mindset will definitely strike “C” out.

I sense that there is brilliance beneath her shyness as some of my probing questions and observations revealed that she is an introspective, self-reflective and intellectually curious thinker and tinkerer capable of something rare that eludes the straight-As and well-rounded-CV students – to produce original thoughts and ideas. “C” is the only candidate that I have come across in these years to have applied for both the Accountancy and Information Systems degree programs. With her interests in the Science Students’ Research Council where she was in the International Science Youth Forum Nobel Forum Committee, it seems that she has a yearning to do and make something with her hands and brains, that she is a tinkerer, and a tinkerer who is keen to explore further her interest and confidence in “numbers” – and to peer into the “framework” behind the “numbers”.

“C, I see that you are capable of deep thoughts. I think your General Paper score was because you are too self-conscious in your thoughts about how you come across to others, that you are afraid of being misunderstood in the eyes of others and that affected your writing in that time constraint and pressure in the exam setting. Are you able to share what is the proudest piece of work that you have done up, beyond all these society-imposed resume criteria to fill the CCAs/Community Service silos?” This is akin to asking what does a person do if he or she is not measured by the KPIs or observed by others – to understand their true character and authenticity as a leader and innovator.

And “C” shared about her “The Physics and Science of Music” piece of project work and prototype that I find very interesting and aligned to her deep-thinker personality and untapped hidden potential as an innovator, a Maker who has the capacity and capability to engage in creative work and systems design, work which requires deep thoughts, tenacity and sacrifices to bear through the uncertainty, anguish and passions. The usual self-entitled Taker with straight-As will hardly bother with such meaningless pursuits that do not have deterministic and measurable outcomes. Under all those society-imposed boxes, “C” could not mention or write about this at all in the form.

Instead, “C” said wistfully, “But this is probably not worth mentioning. There is no value to this. It probably cannot be commercialized.”

Inspired by her sharing, I said, “Why not? Imagine if Creative Technology had focused on your idea and organizing vision in the science of music, the science of audio and sound, they probably would not have languished.”

I explained very briefly to “C” that Creative Technology had brought to the world in 1989 the Sound Blaster, a stereo soundboard inserted into the computers to give the computer a voice to play music. And this technology was made widely available to the general consumer, bringing what was previously accessible only to the privileged and wealthy to the masses to enjoy. Creative became the first Singapore firm to be listed on the NASDAQ stock exchange and Sim Wong Hoo, the harmonica-playing founder of Creative, became the youngest self-made billionaire in Singapore at the age of 45.

********

When Creative’s founder Sim Wong Hoo was said to seek some government financial assistance at the NCB (National Computer Board, now known as IDA) to market the product at Comdex trade show in US, they ridiculed him, saying that no one would ever want to hear a sound from the PC. They rubbed salt in by mentioning that he was just a poly diploma holder and that he needs to develop something for the local market for which NCB would give him assistance. Later, funded by a venture capitalist, Sim showcased Sound Blaster in the exhibition in America and, according to some photos, even Michael Jackson visited his booth. Sim later said about his vision, “I looked at the PC and said it was dumb. I said computers should talk. Computers should play music. I believe in sound. I believe in music.”

Creative dominated the PC audio market as the de facto standard for a decade and had sold 100 million units by 2000. The all-time high was in March 2000 at $64 per share; now Creative is $. By the 2000s, OEM PCs began to be built with sound boards integrated directly onto the motherboard and the Sound Blaster found itself reduced to a niche product. Creative went on to launch other less successful businesses and products that include the CD-ROM business in which they were forced to write off $100 million in inventory when the market collapsed due to a flood of cheaper alternative, Nomad Jukebox and ZEN series of portable media players (before Apple launched iPods), Prodikeys (a keyboard with piano keys), reportedly burning a billion dollar in R&D in developing both the Zii stem-cell-like processor with supercomputing power launched in 2009 and the HanZpad computer tablet launched in late 2011.

After sharing the Creative story to “C”, I was thinking that Creative could well have been the innovator in Guitar Hero, the billion-dollar gaming franchise that rekindle music education in children and has found use in health and treatment of recovering patients. Creative could also possibly ride the rising popularity and profitability of podcast network and audio storytelling phenomenon (podcast subscriptions have passed over one billion in 2013 and monthly podcast listeners have more than tripled to over 75 million per month from 25 million before the onset of the 2007 crisis). Creative could possibly beat Pandora Media (P US, MV $3.4bn)/Spotify/Deezer/Beats Music (acquired by Apple); the Pandora music-streaming app are embedded by GM into the dashboards of most Chevrolets, Buicks and Cadillacs.

Taiwan’s KKBox, started in late 2005 as a PC application, now has over 2 million paying subscribers paying a monthly fee of around $5 for unlimited access to its catalogue of more than 10 million Asian songs and value-added content and services and is valued at over a billion dollar, attracting a $105m investment from Singapore’s GIC in 2014. KKBox has a dominant position in Taiwan in knowing where the music listeners are and what songs and artists they like and now offers a mixture of music, entertainment news, and even organizes its own concerts that are broadcast across the countries they are operating in.

Loen Entertainment (016170 KS, market cap $1.09bn) operates Korea’s largest online music retail platform MelOn with a 60% market share. Loen was founded in 1961 by former English-language-daily journalist Min Young-bin as YBM Sisa English, a language-learning tape creator. In the 1960s when Korea was an impoverished nation just out of war, the medium of studying English was limited to printed publications including magazines, books and dictionaries. YB Min launched the country’s first magazine for English learners in 1961 and “A Handbook of Business English” in 1967 in response to policies designed to drive exports. The next decade marked the use of audio and sound in language education. In 1970, supported by the U.S. government, YBM brought out English 900, a set of six books with 60 cassette tapes on 900 English sentence structures. YBM later expanded into a major K-Pop music record label which debuted hallyu celebrity Rain. SK Telecom bought a 60% stake in the music record firm in 2005, renaming it Loen to be put in charge of operating SK’s online music distribution service MelOn in 2009. With the cataloguing know-how developed over the years, MelOn grew to become the most used online music sales in Korea. SK later sold its 52.6% stake in Loen to a foreign PE firm for $239m in Jul 2013.

Organized by the science of music, an idea larger than oneself, the possibilities from business model innovation are more scalable and sustainable, instead of jumping around in chasing trends and themes like Creative did in repeating familiar hardware-based business models that had worked successfully for a while in the past but failed subsequently to remain sustainable.

********

Because I sense that her community service work is based on a genuine heart, which is rare, I asked “C” gently whether that was shaped by some personal or family experience and she said something moving and aspirational, which was not discernible at all in her opening introduction and write-up.

People like “C” will always be misunderstood, and misunderstood badly, because the harsh and pretentious world look solely at the superficial skin, the poise, the posturing and never the inner worth and potential. “C” is the potential innovator and authentic caring leader who can contribute to improving the world and the people around her and she has far bigger potential that she realizes and that hidden potential needs to be unlocked with an opportunity.

In our years of interacting and observing entrepreneurs and managers in Asia, we find that there seemed to be two kinds: some who would look for flaws in ideas and people, and then pounce to kill them; and others who started from a place of seeking and promoting good, new and original ideas and people. When the “idea and people promoter” saw flaws, they pointed them out gently, in the spirit of improving them – not eviscerating them. The “idea and people killer” were not aware that they were serving some other agenda, which was often to show others how high their standards are. The innovators understand the difficult, ephemeral process of developing the new. The innovators understand that looking beyond the pretty and rigorous checklist for something original, authentic, something surprising and unproven, are necessary for genuine value creation – and must be a conscious effort.

We also want to observe that the corporate culture are NOT infested with the kind of people that populated Disney in the late 1970s as remarked by Pixar’s founder Ed Catmull in his inspiring and thought-provoking book Creativity, Inc.: Overcoming the Unseen Forces That Stand in the Way of True Inspiration:

“Unbeknownst to me, soon after our meeting at Lucasfilm, John Lasseter would lose his job at Disney. Apparently, his supervisors felt that The Brave Little Toaster was – like him – a little too avant-garde. They listened to his pitch and, immediately afterward, fired him. What John hadn’t realized when he joined Disney Animation, however, was that the studio was going through a rough, fallow period. The animation there had plateaued much earlier – no significant technical advances had been made since 1961’s 101 Dalmatians, and many of its young, talented animators had left the studio, reacting in part to an increasingly hierarchical culture that didn’t value their ideas. When John arrived in 1979, Frank Thomas, Ollie Johnston, and the rest of the Nine Old Men were getting up in years – the youngest was 65 – and had stepped away from day-to-day business of moviemaking, leaving the studio in the hands of a group of lesser artists who had been waiting in the wings for decades. These men felt in was their turn to be in charge but were so insecure about their standing within the company that they clung to their newfound status by stifling – not encouraging – younger talents. Not only were they not interested in the ideas of their fledgling animators, they exercised a sort of punitive power. They were seemingly determined that those beneath them not rise in the ranks any faster than they already had.”

We think this lesson from Disney is poignant for Asia which is at a critical transition phase in succession risk (and opportunity) with the patriarchs and matriarchs handing over the reins of their business empires to the right capital allocators, whether to their heirs or professional managers. Many of the Asian successors are like Disney’s highly experienced and well-qualified men-in-charge in the late 1970s.

Above all, we think a corporate culture focused on KPIs is downright unhealthy as it results in gaming of the performance measurement system and distances people from creating an idea larger than oneself that can involve co-creators in the value creation process. What is this “idea larger than oneself” which we emphasized in many of our writings? Take the case of Hemant Amin, founder, chairman and CEO of Asiamin Capital, a low-profile, successful multi-million single family office, and our guest speaker for the Singapore Management University students in the course ACCT004 Accounting Fraud in Asia with the presentation topic “A Family Office Investment Journey and Understanding the DNA of Fraudulent Promoters”. We mentioned in a thank you note to Hemant that this idea larger than oneself is also about practicing and living out the values of Buffett-Munger:

Hi Hemant,

Thanks much – a recurring theme in the Compounders is that they are obsessed with creating an idea larger than themselves, whether it is Buffett-Munger with their philosophy manifested in their creation of Berkshire Hathaway or yourself in practicing and living out the values of a true value investor to educate and inspire the next generation of leaders! 🙂

Take the case of Lee Bakunin, a very early Berkshire Hathaway value investor whom we respect and admire greatly. A lawyer by training, Lee is the author of the upcoming book “How to Negotiate Like Warren Buffett”. The book’s vision is an idea larger than oneself. With the book, Lee has transcended beyond material wealth. He can remove himself from the equation and the ideas in the book will profoundly influence and impact positively the readers. Those who practice the philosophy in the book will become the idea itself. We hope to be able to have the opportunity in the future to invite Lee to address the SMU students taking the course Accounting Fraud in Asia and to inspire them with his wisdom and values.

Hence, value investors should simply ask, can the Asian entrepreneur-emperor remove himself or herself from the business equation and the business can still compound in value? Only if he or she has created an idea larger than oneself. This is the true and only KPI that should matter in identifying the wide-moat compounder and Bamboo Innovator in Asia.

And “C”s question to me at the end of the interview was also simple and brilliant, again reflecting her deep-introspective character. Having done admission interviews before, this was the first time I was asked such a question.

“C, you are very good, don’t let anyone tell you anything otherwise,” I told her at the end. I think she cried softly two times during the interview because she felt she was understood, that her inner self was understood, that what she was trying to achieve at an emotional level was understood.

“C” would still need to go through the admissions office’s elimination process based on the number of available places and we hope that she can get into SMU and the program(s) of her choice. We wish her all the best in creating the music of accounting for the business community and society in the years ahead.

Warm regards,

KB

The Moat Report Asia

www.moatreport.com

http://accountancy.smu.edu.sg/faculty/profile/108141/KEE-Koon-Boon

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About bambooinnovator
KB Kee is the Managing Editor of the Moat Report Asia (www.moatreport.com), a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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