Multicoin Capital: How NFTs Rebundle the On-Chain Value of Music

Original translation: Block unicorn

Original title: "Rebundling The Audio Value Chain》

Original translation: Block unicorn

Before Napster, record label bundles consisted of three things:

1. Risk sharing- Record labels are venture capital firms that invest in artists. The vast majority of these investments are unprofitable. A few profited and generated the vast majority of returns. Record labels actually fund 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 the certainty of near-term income.

2. Marketing– In the pre-Internet world, where mass advertising and physical distribution were closely integrated, record companies played a significant role in promoting artists through limited broadcast channels (radio, TV, posters, billboards, etc.). Small-scale, self-serve, targeted marketing didn't exist before the Internet.

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

Over the past 20 years, the relationship between artists and labels has become increasingly adversarial, 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 for brand discovery and attempt to monetize their music primarily through live performances and merchandise.

secondary title

Front frame:

1. Artists such as The Chainsmokers, 3LAU, and RAC are investing in new music monetization models (much of which involve cryptocurrencies).

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

3. secondary title

Negative frame:

1. Taylor Swift's public battle with Big Machine Records over master recording rights issues eventually led to her re-recording her entire back catalog in an attempt to reclaim ownership of her work.

2. secondary title

Encryption can affect all three services:

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

2. Just owning a music NFT (or social token) itself opens up a huge design space between artists and fans that is largely unexplored - private performances, meetups, dinners, collaborative creations wait. We expect novel artist-fan, artist-artist, and fan behavior to become an industry layer of natively 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 were tightly embedded in music platforms, we would expect bottom-up discovery driven by collectives and DAOs, rather than top-down discovery led by a record label's marketing department.

Over the past nine months, the term “music NFT” 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 effectively.

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

1. Risk Sharing - Examples: Royal, Opulous, Decent.

2. Fan Engagement - Ex: Catalog, ENCORE, Highlight.

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

I'm assuming the end state of all these services is what we like to call internally the Music VC DAO. A Music VC DAO naturally bundles the value of all three parts of the chain, but is scattered layer by layer throughout the stack.

1. Risk sharing

Being a traditional VC is hard, the world moves in unpredictable ways. The best investments - on the tail - are often the least intuitive in the early stages. But music is not like that. Music is only good if the public believes it is good. This creates a great opportunity for retail investors to invest in something they really like and appreciate. The explosive growth of NFT in 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. Fans take pride in discovering artists before they hit the big time, and soon they can invest in it. The next generation of music curators won't be executives working at record labels, but passionate fans (likely anonymously) with on-chain records of music investments. The exact mechanics of these investments are still unclear (NFTs, social tokens, etc.), but they will be figured out.

Fans have too much desire to invest, and artists have too much desire to discover new risk-sharing models. 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 basis for creating the next generation Music VC DAO. The desire for artists to discover new models of risk-sharing is too high, and the brilliant entrepreneurs established in this field almost guarantee that new models of risk-sharing will emerge in the next few years.

These risk sharing models will provide the basis for creating the next generation Music VC DAO. The desire for artists to discover new models of risk-sharing is too high, and the brilliant entrepreneurs established in this field almost guarantee that new models of risk-sharing will emerge in the next few years. These risk sharing models will provide the basis for creating the next generation Music VC DAO.

2. Fan Engagement

Earlier in this article, I referred to the second service provided by tags as marketing. From the 1950s to the 2000s, the relationship between musicians and fans was almost entirely one-way, because the communication channels before the Internet were one-way. The internet changed that. The future of marketing for musicians is incredibly complex, two-way, targeted and personalized.

Labels are not very technologically advanced in the sense that they are 50+ years old, and since most of their revenue is tied to a handful of mainstream artists, they have no incentive to help younger artists optimize fan engagement. The nature of these tools requires exceptional product leadership to understand the nuances of the market across genres (electronic, rap, and country) and artist arenas (up-and-coming vs. Taylor Swift). Coupled with the need to integrate with new risk sharing mechanisms, this design space is enormous.

We can’t wait to see NFT marketplaces embedded in Discord-like chat apps, or social tokens embedded in Twitter-like apps, with personalized outreach based on on-chain listening actions.

3. Issue

Spotify, Apple and YouTube dominate music distribution. They have often clashed with existing brands, and the tension has intensified in recent years as both sides compete for a fixed amount of top-line revenue. This creates a unique opportunity to build new distribution services that intelligently integrate risk sharing and fan engagement tools.

As mentioned above, some crypto startups are trying to spin off record labels. Each of them starts out as a very narrow piece of the bundle and slowly expands. I don't think many of them see themselves trying to build a next-generation full-stack label, but I think the natural end point for most of them is becoming a full-stack label.

Record label bundles reflect the best market structures of the pre-internet, pre-ownership economy era. When the core ownership model changes, this naturally changes the marketing and distribution toolset. This happened in the transition from physical CDs to iTunes singles, and from iTunes singles to the unlimited streaming bundles pioneered by Spotify.

In a few years, we expect the best-in-class product suite to become a tightly integrated bundle that integrates not only the listening experience, but also a full suite of risk-sharing and fan engagement services across the three areas mentioned above. Each layer of the stack requires tight product integration with the other layers to capitalize on the opportunity at hand.