Music Goes Web3
The music industry is seriously messed up. The big labels find young talent and sign them to a record deal. They pay for the cost of getting the artist’s music out and give the artist some upfront cash, but they get ownership of the master recording and control the economics of that music forever. They play a game much like a venture capitalist does. They make bets on lots of artists, hope one makes it big, and takes the zero on the bulk of them. However, the VC community might own 20–40% of a company when it goes public, and the music label typically owns 80% of the master royalties in perpetuity.
Here is a great article by Rex Woodbury that breaks it down. He shows that for every dollar on a music streaming service, only 8 cents gets to the artist and 10 cents goes to the songwriter. The rest go to the label, the streaming service, and other parties. This is a business ripe for disruption. The music industry is starting to see new business models emerge powered by web3 technology. Companies are working on new streaming services, new ways to fund music production, and new ways to engage and monetize fans.
The first company to make a splash in the web3 music space was Audius. This new streaming platform went live back in 2018 and can be best compared to Soundcloud. Musicians can upload their music to Audius and fans can stream it for free. They utilize the $AUDIO token to compensate musicians for their listens. The company has a mission statement to “give everyone the freedom to distribute, monetize, and stream any audio content.” Artists can choose to have their music streamed for free, can charge listeners a one-time payment to unlock all content, or sell their songs as NFTs. Like most web3 companies, Audius has a low take rate. 90% of the revenue is distributed to the artists and 10% goes to the platform node operators.
Audius raised its early seed money from leading musicians (Katy Perry, The Chainsmokers, Lil Nas X, more) and top Crypto venture firms (Coinbase, Pantera, Multicoin). Their $AUDIO token has been on a wild ride with the rest of the Crypto market. It peaked at a market cap around $3Bn late last year, but it is now valued closer to $300MM.
When it went live, the music industry tried to say it would be full of copyright infringing material since anyone can upload anything and the platform doesn’t censor these uploads. More recently, the CEO of the National Music Publishers’ Association said, “It is increasingly clear that Audius is facilitating piracy to its financial benefit.” This is the good and bad of decentralized platforms, it is much harder to control content and protect intellectual property.
Audius says they have over 5MM listeners on their platform. I’ve spent time on there over the last few weeks. The music artists are mostly smaller independents like you would find on Soundcloud. None of the big stars who invested in the company are posting their music on Audius. I did find some likely unauthorized versions of Lil Nas X songs, but they only have a few thousand streams. He probably gets that in an hour on Apple Music or Spotify. The trending songs on Audius show 5–15K plays. On Soundcloud, top songs see millions of streams.
My conclusion is that Audius is a great concept, but they have a long way to go to change the music industry in any meaningful way. I’ve seen pitch decks from a few others that are trying to improve upon blockchain streaming, but nothing has seen any serious traction yet. No one has pitched me on a blockchain version of Spotify, where the platform would do deals with serious record labels to get the top musicians on the platform. However, watch this space, more is coming here.
The second big area of web3 innovation in music is connecting the artists directly to their fans to fund their music. Platforms are being created to allow musicians to sell a portion of their royalties to their listeners. This is like how the TV and film industry is trying to allow fans to invest in their projects instead of getting funding from Netflix or Disney. The concept is that an artist could do a much better deal with their fans and maybe give up only 20 or 30% of their royalties, instead of 80% under the existing model.
Royalty sales are being done today through NFTs tied to specific songs. Royal is the leader in this space. The company is started by a popular EDM DJ called 3LAU, and they have raise $70MM from leading VCs (A16Z, Founders Fund, Coinbase, Paradigm, and more) and musicians (Nas, The Chainsmokers, DJ Kigo). So far, Royal has worked with artists to sell only a portion of their piece of existing tracks that are subject to regular deals with the record labels. This is just a small part of the artists 20% share of a song, not the whole song. They have done a handful of drops and nothing significant in terms of money yet, but they have gotten their big-name musician investors active already. They have sold royalty NFTs from The Chainsmokers, 3LAU, Nas, Big Boi, Diplo, and many more. A few smaller competitors have emerged to Royal, and more are popping up now. Decent went through Y Combinator last year and has had a few sales of smaller artists.
None of the music royalty companies have delivered on the bigger promise of end running the music labels altogether and letting fans fully fund a new artist. This would work by an unsigned musician building a following likely on social media or Soundcloud, then selling $100K-$1MM of NFTs to fans to pay for a new album in exchange for say 20% of the royalties. This artist might still need to work with a label ala carte for some services like distribution and royalty collection, but they wouldn’t have to give up 80% of their upside. There is precedence for this from some artists staying independent after hitting it big on Soundcloud. It will be interesting to see when musicians begin experimenting with these models.
One overhang on music royalty NFTs is the question of whether these are securities under U.S. laws. There have been securitizations of music royalties for decades, and all have either been registered as public securities or have been offered to accredited investors as exempt securities. There is an argument that royalty NFTs could be considered securities, and I generally shake out on the side that this is risky behavior. Hopefully we will get some clarity from the SEC or some movement on a Crypto bill in Congress to open this market up further.
The third way the music business is changing via web3 is through collectibles. Music artists like Snoop Dogg, Kings of Leon, and Steve Aoki have made millions selling NFT collectibles to their fans. These have mostly been traditional mints on big platforms like OpenSea or Nifty Gateway. A few music specific NFT platforms have launched to provide more focus on the music sector. A startup called Sound has worked with dozens of musicians and sold a few million dollars of NFTs for mostly smaller artists. Sound raised $5MM from A16Z, DJ Drama, and a slew of popular smaller funds and angels. Fanaply is another platform with a focus on music NFTs. Fanaply has minted NFTs for the Goo Goo Dolls, Death Row Records, and more. Most of these platforms talk about how a fan can use an NFT to prove that they were an early believer in a musician. Think of this of a digital equivalent of “I saw Bruce Springsteen in a tiny NJ bar before anyone else”.
While some musicians have attached individual utility to their collectible NFTs, there isn’t a large platform yet that makes this easy. I wrote recently about four different categories of NFT utility. I see an opportunity for a platform that helps artists communicate directly with their NFT holders in digital fan clubs. This could be pre-releases of music, listening parties, fan polls, first shot at concert tickets, exclusive merch, and much more. I’m working with a company that is still in stealth on this concept, but it could be big if done right.
OK, this post got super long, so I’ll wrap it up here. I’ll definitely have more to say about the ways web3 is disrupting the music industry. Stay tuned.
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