Venture Capital Multicoin: How NFTs Rebundle the Value of the Music Industry Chain

Time:2022-03-02 Source: 1300 views NFT Copy share

Before Napster, record label bundles consisted of three things:

1. Risk sharing - record companies are venture capital firms that invest in artists. The vast majority of these investments are not profitable. A few profit and generate the vast majority of returns. Record companies actually finance the development of the vast majority of music, even though the vast majority of it is unprofitable. Artists trade most of their economic growth for certainty of near-term income.

2. Marketing – In the pre-Internet world, where mass advertising and physical distribution were tightly coupled, record labels played a major role in promoting artists through limited broadcast channels (radio, TV, posters, billboards, etc.). Before the Internet, there was no small-scale, self-help, targeted marketing.

3. Distribution - Record companies have distribution relationships with retailers. Of the three services, the most important is the third, without distribution, there is no business, but then the Internet disrupted distribution.

The relationship between artists and labels has become increasingly antagonistic over the past 20 years, as artists slowly realize that labels are capturing too much of the music industry's total revenue and providing too little value. Today, most artists use online streaming as a loss leader in brand discovery and try to monetize their music primarily through live performances and merchandise.

There's a fundamental misalignment here, where artists are optimizing revenue streams that record labels aren't involved in. At the same time, labels are taking the lion’s share of streaming revenue. Labels are investing in artists for streaming revenue, while artists are increasingly optimizing for non-streaming revenue. We can see a growing dislocation between artists and labels in positive and negative framing:



Front frame:



1. Artists like The Chainsmokers, 3LAU, and RAC are investing in new models of music monetization (most of which are cryptocurrency-related).

2. Bands like Kings of Leon are using NFTs for novel fan engagement and vinyl distribution.

3. DJs like Steve Aoki are incorporating NFTs into the fan culture of their shows and releasing series in collaboration with other artists.



Negative frame:



1. Taylor Swift's openly battled Big Machine Records over master recording copyright issues that eventually led her to re-record her entire back catalog in an attempt to take back ownership of her work.

2. Kanye West's struggles with the music industry - as a proof point, his new album "Donda 2" is only available via proprietary equipment. In announcing the news, he said: "Today, artists only get 12% of the industry's revenue. It's time to free music from this oppressive system. It's time to take control and build our own."



Encryption can affect all three services:



1. Encryption naturally democratizes risk sharing. Artists can raise money in exchange for music NFTs (or social tokens) from their true fans, rather than seeking a record label to vouch for them — thus providing better economics for themselves and their true fans. This is a classic example of man-in-the-middle disintermediation, a recurring theme in cryptocurrencies.

2. Merely owning a music NFT (or social token) opens up a vast design space between artists and fans that is largely unexplored — private shows, meetups, dinners, Collaborative creation, etc. We expect novel artist-fans, artist-artists, and fan-actions to become the industry layer for native programmable and composable digital assets with financial value.

3. With the advent of Web3-native platforms for streaming, licensing, and record buying, on-chain transactions representing these events will allow for transparent royalty management. Once these new standards for composition and recording royalties are widely adopted, the inherent composability of decentralized applications will create new forms of consumption. For example, if user-driven curation and signaling is tightly embedded into a music platform, we would expect bottom-up discovery driven by collectives and DAOs rather than top-down discovery led by the marketing department of a record label.

Over the past 9 months, the term “music NFTs” has grown in importance among the crypto crowd. At least 1-2 startups have been launched recently trying to figure out how to use NFTs (and to a lesser extent social tokens) to help musicians monetize more efficiently.

These music NFT startups map fairly cleanly to the above three categories of projects:

1. Risk sharing - eg: Royal, Opulous, Decent.

2. Fan engagement - for example: Catalog, ENCORE, Highlight.

3. Distribution - eg: Audius, Sound, NINA, Releap.

I assume the end state of all these services is what we like to call the Music VC DAO internally. A Music VC DAO naturally bundles all three parts of the chain's value, but is decentralized across the stack.

1. Risk sharing

Being a traditional VC is hard, and the world moves in unpredictable ways. The best investments -- in the tail -- are often the least intuitive in the early stages. But that's not the case with music, music is good only if the public believes it is good. This creates a great opportunity for retail investors to invest in something they truly love and appreciate. The explosion of NFTs over the past 12 months can be redefined as “people want to invest in culture”.

Music is by far the most culturally significant creative medium, and the least profitable. Music fans take pride in discovering artists before they hit big, and soon they can invest in it. The next generation of music curators won’t be executives working at record labels, but ardent fans (most likely anonymous) with an on-chain record of music investments. The exact mechanics of these investments are still unclear (NFTs, social tokens, etc.), but they will be figured out.

Fans' desire to invest is too great, and artists' desire to discover new risk-sharing models is too high. The outstanding entrepreneurs created in this field virtually guarantee that new risk-sharing models will emerge in the next few years. These risk sharing models will provide the foundation for creating the next generation of Music VC DAOs. The desire for artists to discover new risk-sharing models is far too high, and the brilliant entrepreneurs established in the field all but guarantee that new risk-sharing models will emerge in the years to come.

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