Rebundling The Audio Value Chain

Until the advent of Napster, the record label bundle consisted of three things:

1. Risk-sharing — Record labels were VCs that invested in artists. The substantial majority of those investments were not profitable. A small minority were profitable, and produced the vast majority of returns. Record labels actually funded the development of the vast majority of music, even though the vast majority of music was unprofitable. Artists traded most of their economic upside for near term income certainty.
2. Marketing — In the pre-Internet world in which large scale advertising and physical distribution were tightly coupled, record labels played an instrumental role in promoting artists via a limited inventory of broadcast channels (radio, tv, posters, billboards, etc). Before the Internet, small-scale, self-serve, targeted marketing didn’t exist.
3. Distribution — Record labels had distribution relationships with retailers.

Of those three services, the most important was #3. Without distribution, there is no business at all. But then the Internet disrupted distribution.

Over the last 20 years, the relationship between artists and record labels has grown increasingly antagonistic as artists have slowly realized record labels are capturing too much of the total music industry revenue (pages 11-13) 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 via live shows and merchandise.

There is a fundamental misalignment here. Artists are optimizing for revenue streams that record labels don’t participate in. Meanwhile record labels are capturing the lion’s share of the revenue from streaming. Labels are investing in artists for streaming revenues, meanwhile artists are increasingly optimizing for non-streaming revenues. We can see this increasing misalignment between artists and labels in both positive and negative frames:

Positive frame:

1. Artists like The Chainsmokers, 3LAU, and RAC are investing in new music monetization models (most of which have something to do with crypto).
2. Bands like Kings of Leon are using NFTs for novel fan engagement and vinyl distribution campaigns.
3. DJs like Steve Aoki are building NFTs into the fan culture of their shows and are issuing collections in collaborations with other artists.

Negative frame:

1. Taylor Swift’s public fight over master recordings copyrights with Big Machine Records, ultimately caused her to re-record her entire back-catalog to attempt to reclaim ownership of her work.
2. Kanye West’s fight with the music industry — as a proof point, his new album, “Donda 2,” is only available through a proprietary device. When making this announcement he said, “Today artists get just 12% of the money the industry makes. It’s time to free music from this oppressive system. It’s time to take control and build our own.”

Crypto can impact all three services:

1. Crypto naturally democratizes risk-sharing. Instead of seeking a record label to underwrite them, an artist can raise funds in exchange for Music NFTs (or social tokens) from their true fans – thereby providing better economics to themselves and their true fans. This is a classic example of the disintermediation of middle-men, a recurring theme in crypto.
2. Just owning Music NFTs (or social tokens) in itself opens up a vast design space between artist-fan engagement that is largely unexplored – private shows, meet and greet, dinners, collaborative creation, etc. We expect novel artist-fan, artist-artist, and fan-fan behaviors to emerge as the industry layers in natively programmable and composable digital assets with financial value.
3. As Web3-native platforms for streaming, licensing, and record purchasing emerge, on-chain transactions representing these events will allow for transparent, royalty-fee administration. Once these new standards around composition and sound recording royalties gain broad adoption, the inherent composability of decentralized applications creates novel forms of consumption. For example, if user-driven curation and signaling become tightly embedded into music platforms, we expect bottom-up discovery driven by collectives and DAOs instead of top-down discovery led by marketing arms of record labels.

In the last 9 months, the term “music NFT” has risen in prominence among the crypto crowd. At least 1-2 dozen startups have 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 to the three categories above fairly cleanly:

1. Risk-sharing—e.g., Royal, Opulous, and Decent
2. Fan Engagement— e.g., Catalog, ENCORE, and Highlight
3. Distribution—e.g., Audius, Sound, NINA, and Releap

I posit that the end-state for all of these services is what we like to refer to internally as Music VC DAO. A Music VC DAO naturally bundles all three parts of the value chain, but layers in decentralization throughout the stack.

1. Risk sharing — Being a traditional VC is hard. The world evolves in unpredictable ways. The best investments—the tails—are typically the most unintuitive in the earliest stages. But this is not the case with music. Music is good only if the masses believe that it’s good. This creates the perfect opportunity to enable retail investors to invest in what they genuinely enjoy and appreciate.The explosion of NFTs over the last 12 months can be reframed as “people want to invest in culture.” Music is by far the most culturally significant creative medium, and the least monetized. Music fans take pride in discovering artists before they hit it big, and soon they will be able to invest in that. The next generation of music curators will not be executives who work at record labels, but passionate fans (many likely anon) who have an on-chain track record of their music investments. The exact mechanisms through which these investments will work are still unclear (NFTs, social tokens, etc.), but they will be figured out. The desire from fans to invest is too great, the desire from artists to discover new risk-sharing models is too high, and the outstanding entrepreneurs building in this space virtually guarantee that new risk-sharing models will emerge over the next few years. These risk sharing models will provide the foundation to create next-generation Music VC DAOs.
2. Fan engagement — Earlier in this essay, I referred to the second service that labels offer as marketing. In the 1950s-2000s, the musician-fan relationship was almost exclusively uni-directional because pre-internet communication channels were uni-directional. The Internet has changed that. The future of musician marketing is extremely sophisticated, bi-directional, targeted, and personalized. Record labels, as 50+ year old institutions, are not very tech-forward in this sense, and because so much 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 require superb product leadership to understand the nuances of the market across genre (electronic vs. rap vs. country) and musician stage (up-and-coming vs. Taylor Swift). Coupled with the need to integrate with novel risk-sharing mechanisms, this design space is vast. We can’t wait to see NFT marketplaces embedded in Discord-like chat apps, or social tokens embedded into Twitter-like apps, coupled with personalized outreach based on on-chain listening actions.
3. Distribution — Spotify, Apple, and YouTube dominate music distribution. They are regularly in conflict with existing labels, and that tension has grown worse in recent years as both fight over a fixed amount of top line revenue. This creates a unique opportunity to build a new distribution service that can intelligently integrate the risk-sharing and fan engagement tools.

As noted above, a bunch of crypto startups are trying to unbundle the record labels. They are each starting with a very narrow slice of the bundle, and slowly expanding. I don’t think many of them think of themselves as trying to build a next-generation, full-stack record label, but I think that the natural end point for most of them is to become a full-stack record label.

The record label bundle reflects the optimal market structure for a pre-internet, pre-ownership economy era. When the core ownership model changes, that naturally changes the marketing and distribution toolset. This happened in the transition from physical CDs to iTunes singles, and again in the transition from iTunes singles to all-you-can-eat streaming bundles pioneered by Spotify. In a few years time, we expect the best-in-class product suite here to be a tightly integrated bundle that integrates not only the listening experience, but a full suite of risk sharing and fan engagement services spanning each of the three areas above. Each of these layers of the stack requires tight product integration with the others to capitalize on the opportunity at hand.

We cannot wait to see how this market develops, and will be investing aggressively at the venture stage this year. Please reach out via email or Twitter if you’re building in this space. Let’s chat.

Thanks to Jesse Walden, Fred Wilson, and Shayon Sengupta for providing feedback on drafts of this post.