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F2P, a new business model for music.
The start of a research project into a new way of doing things
Thanks to Shokunin and the DNS team for support in putting together this article. This is the first step in exploring a new business model for the music industry. A project that we at JUICE are very excited about kicking off with DNS and Block Science.
DNS brings with it founders that have shipped over 30 mobile titles and have 15 years of experience in game systems. Block Science is the leader in complex systems engineering.
JUICE is a collective of current and past music tech founders, artists, and investors who are working to disrupt the incumbents in the music industry.
I - We need to start thinking differently
Today’s writing builds on the thinking detailed in my previous pieces, The Case For A Post Royalties Music Industry, and its update, Revisiting “Post-Royalties”; Open Editions, and New Digital Rights. I suggest that you read the Post-Royalties article first before this one as it’s important to have the context.
It also borrows heavily from the JUICE handbook that we put out a couple of weeks ago.
Much of what I have written over the past couple of years has been focused on the challenges and issues with current business models in music. Today, I want to propose an alternative.
Reminder of the Post Royalties argument
The conclusion that I reach in The Case For A Post Royalties Music Industry is that the financial model underpinning the music industry is likely to be strained to the point of breaking in the not too distant future.
Source: Goldman Sachs, their napkin, my annotation
Sure, reading the headlines from Goldman Sachs (“a massive revival”), The Financial Times (“the incredible resilience of the music industry”), or seeing the near constant stream of catalogue buy-outs (Bieber sells his catalogue to Hipgnosis for $200m), one could reasonably come to the conclusion that things are going great.
But once you understand that: music royalties are a zero sum game, that the business model they have become reliant on is deep in stagnation, and that there is a massive shock incoming through AI assisted abundance of content; it is right to question the known truth that royalties are a dependable business model for music for the next 15 years. At least that’s the argument I make as part of the Post Royalties series.
Of course I am talking at a macro, industry-wide, level. From the viewpoint of an artist that finds success, has a good team to support them, and makes solid decisions along the way, things will probably remain ok. But this blog is about market level thinking rather than individual strategy.
The signs are there. This year has been characterised by major rightsholders jostling over iterations of streaming economic models in the face of incoming AI driven disruption and Hipgnosis being forced into proactive measures to shore up its share price. Yes, royalty funds keep getting launched but how much of that is driven by bullish projections like Goldman Sachs vs. the reality on the ground? And surely a c.20x annual royalty investment price point looks pretty different where inflation is above the 1-2% that drove catalogue price discovery.
I don’t think that “royalties are going to zero”, but I believe that there is a non-zero chance that they do. And so, what do we do? We could get our Michael Burry on and actively short these funds. Or we could build something that will become the new model.
Learning from games
Most of us are aware of the charts that show that the Games industry has exploded in terms of top-line revenue over the past decade and Music and Film industries have at best recovered from internet-driven disruption.
China is the largest market in the world in Games, larger even than the US, whereas it is the 5th largest market in Music (albeit the revenue per player in Games is nearly 4x less than in the States)
Outside of that difference the country breakdown is largely similar, with Music having relatively stronger markets in countries with traditionally robust copyright regimes (read: Western Europe)
Mobile as a standalone format is a significant contributor to Games industry revenue growth, it is essentially a different industry to PC and console markets, yet there is no such differentiation in Music
F2P (free to play) has become the dominant business model in Games, with Mobile expected to come in at $84bn and desktop $25bn in 2023 (compared to subscription revenue, which is expected to be $9bn in 2023)
This difference in offerings between Mobile and Desktop, the move towards F2P business models, and the resulting effect of building differentiated products for a global market feel key as core pillars on which the two industries have diverged.
Music’s reliance on Streaming is not a good thing
When assessing the dominant model for music consumption in 2023, it’s quite interesting really that there is no difference between the offering as a desktop or mobile user. Streaming is a catch-all experience that is simple enough to run in the background on your phone or on your PC.
Furthermore, Streaming survives on a subscription business model that made sense in 2008 but is outdated in 2023. For starters, prices haven’t kept up in line with inflation (you’re getting more music for 30% less cost). Seems like there’s an obvious remedy (raise prices), but when cost of revenue is c.75%, due to licensing deals, and growth and retention metrics are already looking bad, you can start to understand why Spotify premium is still $/£9.99 a month (note, they are starting to raise this by a £/$1 this year).
This rather precarious position goes a long way to explain why streaming as an experience looks very similar to how it did 10 years ago. Short of Spotify making a market breaking move and completely changing its model and format, business development for it rests on attempts to lower its cost of revenue (while keeping its rightsholder shareholders happy enough to keep signing licensing deals with them), and increasing subscribers while trying to mitigate ARPU decline.
All of this argument so far has focused on the DSP side of the equation, but things look even worse when considering the artist side of things.
I made the claim above that royalties are a “zero sum game”, to explain what I mean let’s quickly consider how royalties work. A DSP generates revenue (predominantly through subscriptions) and then pays that out based on usage occurred in that period. As an artist, you get paid more if your music is streamed more, and as a result, another artist gets paid less. Usage is not directly tied to revenue.
Now let’s consider the environment in which artists are competing in this zero sum game. If you release a track you are in direct competition for attention with all music that’s ever been released. There’s a reason that royalty investment funds focus on heritage rights over new music, “old music is killing new music”. And rightsholders are scrambling to re-write the royalty distribution rules to makes sure that AI music doesn’t “kill” both.
Streaming provides a lowest common denominator offering, with little opportunity for product development outside of tweaking the positioning of common available repertoire, and is based on a business model that breeds misaligned incentives. Incremental growth will not fix this situation, we need to change the status quo.
II - Designing games
Game design is, of course, not my area of specialisation. I’ve been an avid gamer since a kid, but for whatever reason ended up in the music industry rather than games.
That said, I’m fascinated about exploring the shared space where games, music, and crypto meet, especially in “multi-player mode”, and have done some initial thinking in pieces on this blog like Killing dragons and discovering new metas and arguably even A productive asset model for the Crypto Music industry.
We started talking because we have a shared feeling that there is a huge opportunity to explore F2P business models in music, that crypto & decentralised technologies allow creators to form their own economies in which these F2P models could proliferate, and that there’s probably a lot that can be learned from the two decades of testing and development that has occurred in the gaming industry.
That latter point is the focus of this second section; what makes a good F2P game, and how can we apply that thinking to building new business models for music creators.
The first assumption this section takes is that we are building around an individual creator as if they were a game. There’s likely another framing where we set that boundary at a group of creators, or at a platform level, but what follows below holds true regardless of the setting.
We are also making the assumption that music, as we have come to understand it within the streaming era, is effectively free (libre & gratis). As such, the goal is to design a model whereby a creator can create a system for monetisation within their product that builds on their free content. Ultimately they benefit from the network value that is built around them as a brand.
F2P game loop design
A F2P game succeeds when it is extremely easy to access and extremely easy to understand, can be satisfyingly played with the differing amounts of free time that different players have available and the different types of fun that they enjoy, and has strong player retention. This is achieved through good “game loop” design.
A key tool in this is through content cadence. If a player gets everything they want up front then they will burn out pretty quickly and not return. Similarly, if content is gated to the point where the player drops off then they probably wont return. After all, there are a lot of other F2P games in competition for that attention.
Switching the framing back to a creator, we see a similar effect, which has largely driven a change in release strategy in recent years. But unlike games, this usually translates into engagement, rather than tangible, immediate, financial, benefit to the creator. As there is no available stack on which to build, those already thinking this way have to do everything very manually.
The focus of game loop design for a creator should be pointed towards metrics that build engagement and convert it into higher value exchanges.
Probably the most explored within this for Music is the idea of fan club perks. Buy this limited edition thing and you’ll get access to this group chat type campaigns.
Quests and different types of fun
But, buying / collecting things is only fun for a sub-section of a creator’s fanbase. And hits a ceiling quickly.
Another core concept within game design is that of quests and progress. Good quest design provides an environment for players to engage in the content in whatever way they derive the most enjoyment and receive the benefit of the feeling of progressing through the game.
For a creator this means designing a progression model within their community that recognises participation and is flexible based on different types of fun. For context, in games, this can be largely summarised through the 4 Keys 2 Fun framework:
These types of fun could range from listening, collecting, curating, community building, creating, writing/reviewing, attending events… the list goes on. The correct way to design quests to cater for these behaviour types would be to analyse data and categorise into a types of fun chart similar to that above, but again, the stack isn’t there to allow for this, yet.
Once this flow of player progression is established then it leads towards the concept of a player levelling up, which provides two key reward mechanisms, the option for unlocking otherwise gated content, and social comparison.
In an open world game, like Elden Ring or World of Warcraft, your character needs to be a certain level to be able to access or beat certain content. In a game like Candy Crush, each level is gated by requiring completion of the previous one. In a game like League of Legends, progression is observed through a ladder-type ranking system, where opponents get stronger as you improve.
Each of those mechanics also carries the reward of social comparison, by progressing you are signalling your skill / determination to other players in the game, which creates a driving force in them to match you (alongside feelings that you must either be lucky or have more free time than they do!).
Social comparison mechanics can also be created through the utilisation of things like in-game items that allow for players to signal their progression, their interests, or just because they think it looks cool. Games like League of Legends’s business model is largely generated through in-game character skins, which can be attained through “grinding” the game (playing a lot) or buying through the in-game store.
Social comparison is also a core concept within Music, but poorly executed on the whole, for the wider ecosystem. We generally think of this in fairly shallow terms and usually based around provenance - “I wish I could prove that I was one of the first fans of this artist”, “I wish that I could prove that attended this gig”. There is likely validity in that approach for a subset of fans, but other fans want to enjoy the game in different ways, and should be able to signal their progression accordingly.
Obviously there’s a lot more to discuss about game loop design for Music, but let’s now switch focus to how these game loops can be monetised.
The common narrative is that the key to better monetise Music will be through “superfans”. And the framing of this article, learning from Games, leads that way as well, where the equivalent, “whales”, are generally understood to be the small minority of players that generated the vast majority of revenue for the game.
However, as ever, it is more nuanced than that. The outcome is probably similar, but the road to get there isn’t to solely focus on designing for the superfan. The game loop needs to cater for fan progression towards superfan status, a la our discussion about quests and levelling up.
Our starting point within Music is that the system makes it pretty difficult for fans to pay more than $10 a month (on all creators rather than their favourites). There are ways, but also there is significant friction.
Exceptions that prove the rule can be found in BTS and Taylor Swift. They and their teams are seen as innovators and shrewd business operators because they have built opportunities for fans to spend more. But this is only possible because they have the scale to make it possible, the underlying stack doesn’t exist for any creator to replicate this model.
A well designed F2P game loop for a creator would allow for fans to pay more if they want, would enable progression for fans to chose their own adventure within the game, and through this fans would level up to superfan status. Furthermore, a superfan should not only be defined by those that spend the most money, but those that participate within the game the most, and by doing so help it grow.
The final subject to cover in this section is the notion of player recruitment, and how a game can incentivise existing players to assist it. Often, an important part of a F2P game’s design is allowing players to progress quicker by bringing other players in to the game. A crude example being the early Candy Crush mechanism where a player could either wait behind a time gate to reach the next level, or skip it by getting some friends to download the game.
To this end, the game designers have forgone an opportunity to monetise an action in game and instead reduced their customer acquisition cost.
This is an area that feels more understood within Music, countless startups have built products for creators to reward fans for engaging in social marketing on their behalf. The problem is that, in isolation, that recruitment is sending new players into the traditional ecosystem where there is limited opportunity for engagement and fan progression.
So, what do we get when we sum up all of the above?
A creator-driven ecosystem of games that are designed to cater to a wide variety of fan types and their interests, that are easy to engage and that reward progression. A business model that enables creators to more accurately design models for revenue to match fan spending potential. And ultimately, an environment that moves the network value that is generated around a creator, to the creator, rather than being syphoned away from them.
III - Why this hasn’t been done before
This all sounds great, right. But wait!
This is hardly groundbreaking content in the wider context. F2P as a business model is at least 20 years old in some industries. Why hasn’t it been at least attempted in Music?
Rights, protectionism, and a lack of incentives to do something different, mostly.
Let’s be real here and state it very clearly. What we are proposing is to make the consumption of music free (and further arguing that it effectively already is), and instead build mechanisms that allow creators to capture the network of value that is generated around that content.
It is a significant break in logic to the modus operandi of the Music industry to date, where use of content is metered through licensing, even though payment to creators poorly reflects that fact. And thus, I expect, as a concept, moving to F2P business models will get extensive resistance until proven, as was the case 15-20 years ago in the Games industry.
If rumours are to be believed then one of our favourite music industry publications ran an April Fools piece some years ago stating that a F2P games developer was about to acquire a major label, which sparked an emergency exec all-hands at one of their competitors (before they realised it was a joke story).
However, as a model, it is absolutely inline with the set of guidelines that we recently published through JUICE to serve as a handbook for the next generation of artist, founders, and investors:
Changing the dynamics of the business model of the industry could be a good thing for incumbents if they lean proactively into it, but they are more incentivised to protect the status quo. The innovators dilemma.
Therefore, the only way this is going to work is to initially experiment with Artists and Rightsholders that hold all the relevant rights and so have flexibility to try new models; predominantly Indie creators.
IV - Moving forwards
If this article has piqued your interest then get in touch and let’s chat. We’re gonna be exploring this area over the coming months with DNS and Block Science and would love interested parties to get involved.
There is a world of opportunity to implement these ideas, and we need to test and experiment to work out what works and what doesn’t.
The Crypto & Music community feel best placed to proactive explore these ideas, so if you are a developer or artist that is interested then hit us up and let’s build.