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The Crypto Music Industry
A framework to understand what a Crypto Music Industry could look like and how it could evolve.
A new music industry is emerging on the horizon.
A new world is being uncovered by pioneers. Buoyed and rekt by waves of innovation, hype, imitation, disillusionment; they must navigate the rocks, whirlpools, and sirens luring them in. Many will be crushed or suffer irreparable damage from these well known dangers. But for every fallen vessel there are countless many following in their stead. Eventually the path through will become clear, it will just take some time.
This journey has been years in the making. Since the birth and growth of the digital music industry, the promise of a more equal playing field in which to create and live has become increasingly harder to picture. The incoming generation of builders, thinkers, and collaborators has seen banks saved through financial crisis while disparity between the elite and the rest only grows. Platform economics have underlined profit extraction by digital behemoths through the expansion of the internet. The result is a growing cohort of “crypto native” activists who will naturally look to bring a new way of assigning and distributing value to the worlds that they are passionate about. The marriage of Crypto and Music is inevitable.
However, we are early. We have had one wave of innovation (the "hodl years", 2015-19), which fell short of the institutional change that was hoped. Despite this, lessons were learned and the infrastructure underpinning Crypto has progressed greatly since. We find ourselves now in a resurgence, albeit it's impossible to say at which point in the arc until after the fact.
This second wave (the "wagmi year(s)") is different to the first. Where we aimed to engage with legacy industry entities to build bridges to the old and new, innovators now are focussed more on experimentation with parties bought in to the overall vision from the start. The foundation on which to do this is more defined than it was before, but we are still just proving concepts. Product-market fit is the objective, or more accurately products-industry fit. But to get there we need validation.
Concepts need proof points. Proof points build confidence around an idea. Confidence drives engagement. Engagement provides validation. Validation delivers stepping stones towards a vision.
This piece presents a framework on which to analyse the emerging Crypto Music industry, leading to a suggestion around the most effective areas to place bets; of time, effort, or investment; on its success. It’s my attempt to try to position what is happening now in a longer term view, and while you may be skeptical around where it is all heading, and whether Crypto Music is a good idea at all, hopefully it will provide some useful guidelines on intent, direction, and progress.
What this new industry looks like.
The emerging Crypto Music industry is something different to what we've seen in the past.
The move from analogue to digital fundamentally changed how people interact and engage with content; the Recording, Publishing and Live industries are linked but distinct. Similarly, Crypto Music will exist as a standalone industry and also create new models of interaction between actors in the market.
There are three specific themes that define Crypto Music and set it apart:
Financial Independence: If Crypto's mission is to provide an alternative to the traditional financial system, then Crypto Music utilises this framework to build an alternative system for generating value for creators. I've written previously to make the case against royalties as a mechanism for creators to earn from their work in the future, and Crypto appears to offer a solution space. There is an opportunity to create new financial rails on which participants can operate, free from the market pressures that currently depress value and force creators into aggregating control of their work into the largest gatekeepers. Financial independence for a creator can come in a variety of forms, direct-to-fan monetisation, open pricing structures, establishing and managing an economy that underpins their work; there is an open design space, and while many options may not end up being better than the current situation, there is an opportunity to bottom out some significant ideas.
Coordination: Blockchains as state machines and tokens as units of value provide a means to build incentives for more effective coordination between distinct parties. This could be utilised to find solutions to some of the greatest challenges that the music industries face, such as accurate and reliable attribution across the many contributors within the value chain underpinning music creation and distribution. The growth of social tokens and DAOs in this past year highlights the interest that there is in discovering new modes of operation for internet-native organisations through building on the foundation of Open Source Software development methodology. Coordination challenges are significantly more difficult to resolve in an online marketplace, where a lack of face-to-face meetings necessitates greater trust. Successful roll-out of systems and processes that facilitate confidence in working with people that an entity does not previously know could provide a large unlock for a wide variety of use cases in the music industries.
Composability: Counter to the winner takes all effect of platform economics, Crypto is built on open protocols that enable building on top of each other and forking. Rent seeking through the abuse of position granted through aggregation theory dynamics has created a swell of moral backlash, creating a narrative for open infrastructure for business. The music industries are currently siloed in terms of data and technology integration, where a more composable approach could offer significant advantages.
This is the toolbox, and what we'll see over the coming years is experimentation around what can be built with it. The crux of where this new industry ends up will be decided based on developments in two areas: monetisation and growth, and copyright and ownership.
Monetisation and growth
The current market for music is pales in comparison to other forms of entertainment. The means to pay contributors is extremely complicated. A well functioning Crypto Music industry will attack both of these points as a core focus.
One theme that will continue to be key is whether new models can be built to better monetise the demand curve of fans. While creating products that are marketed to "superfans" is not a new thing, or restricted to a Crypto Music industry, there will be opportunities to deepen the connection between artist and fan through shared skin in the game. Where this occurs there will be blending of the definition of fan and investor, with actors fitting somewhere on a gradient of in it for the art or in it for the return; consistent with wider trends in investment and finance where the line between "professional" and "amateur" actor is increasingly blurred.
However, it is unlikely that deeper monetisation of the current demand curve alone will result in the step change in market value that we are seeking. And so, successful innovators in the emerging Crypto Music industry will pursue development further. One indication we can get for this is the direction that Games companies have taken, specifically Riot Games, who is very much leading the way in defining what a gaming universe means. Riot is expanding its fan-base through a world of media based across its intellectual property, and bringing in countless new fans along the way.
An emergent theme over the past few years is the "Creator Economy", i.e. a mantra that creators will build and monetise their own audience of 100-1000 fans. Current implementation has its challenges with burnout, something that web3 is unlikely to offer significant solution to, though could aid with issues around platform dependency. Twitch shows an emergent world of direct to fan monetisation, though as the leaked earnings numbers display, music artists are nascent at best when compared to other streamers.
One thing I feel certain about is that royalties are unlikely to be the primary means of monetisation for the next generation of creator. Or, if they are, then they will take a very different form.
There are currently three specific areas of experimentation on-going that are worth diving in to on this subject, each taking this solution space and iterating around different ideas. As these experiments develop we will have a better understanding of how "NFT"s (a unit of trade in Crypto Music) may be monetised in the future:
Catalog is built on top of the Zora protocol and a fantastic example of the power of composability. It facilitates artists to release a "one of one" NFT alongside a release. The common narrative is to equate this to owning the master recording, however, I feel like that misses the point slightly. Instead, Catalog is providing fans and investors an opportunity to pay an advance to a creator, with implicit shared future value free from the restrictions of the handover of rights that underpins current deals. However, with Catalog, and other NFT marketplace initiatives, there is a bet in play that NFTs will find sustainable value, and that value is driven through future speculation (vs. productive assets, where there are relative guarantees around future value generation).
Sound is building a novel approach to the "listening party" aspect of a song's release. Creators can sell a limited number of NFTs associated with a record, with the intention that early fans & investors can support their work from the start and gain skin in the game of their career. This is separate to the distribution of the music to traditional digital platforms, which runs in parallel, highlighting the multiple business models that a creator can pursue.
Royal has defined its NFTs as providing partial share to future royalties. At the time of writing this piece the platform hasn't enabled selling the NFTs, rather gifting them with pricing action being on secondary market. Presumably this is due to the "Security" investment contract challenges that structuring an NFT around this use case faces.
In the future there is bound to be further testing of Crypto Music and NFT monetisation, leading to convergence once dominant models emerge. Right now, experimentation provides proof of concept that some people are willing to spend more money on a creator's work, albeit time will tell as to its scalability and sustainability.
Copyright and ownership
The system by which creators are attributed and have protection to earn money from their work has been in a relatively fixed state, despite technical advancement of engagement over the years.
There has been recent interest in pushing NFTs towards a Creative Commons (CC0) licensing style as issues around applying traditional copyright rules increasingly come to the fore. The attraction towards CC0 comes from the perceived freedom of use and commercial opportunities that buyers would gain. However, it strikes at one of the core frictions between vision and roll-out of Crypto Media, namely where the line is drawn between value, Intellectual Property, and ownership.
As the world continues its march towards an interconnected "metaverse", there will only be increased competition for attention. Intellectual Property is the keystone for platforms seeking to command the interest of users. However, copyright mechanisms are reliant on enforcement; if something cannot be enforced then it effectively doesn't exist.
Web3 is built across decentralised protocols and historically decentralisation has been most effectively used to provide defence for technology against laws that would otherwise inhibit its progress. There are points of focus, sure, the bridges between the "Real" and the "Crypto" worlds, which is where legal entities can effectively target. And this will work while there is a need for users to pull money out of any emergent system to pay their bills.
With this said, there is an opportunity to redesign how copyright works for this new industry. Crypto is built on rights and permissions and while fuzzy bridges between it and traditional copyright may be insufficient, new models may be designed that are more effective.
Fundamentally, Crypto is in itself a network of rights and ownership. While an NFT may not carry legal weight in itself, it has other rights hardcoded into it. Thinking past skeuomorphic design of bringing current copyright rules into Crypto, or ignoring it completely, and building new systems that make sense and bring value to operators will be a critical development in the rise of this new industry.
As a final point on this, an area that will demand far more attention than it is currently gaining is the attribution of many contributors to a work. In current experimentation, the roles of songwriters, producers, multiple creators, additional performers, are somewhat overlooked and excluded from the discussion. There are key challenges here that exist in the current value chain and will persist through any redesign. Specifically, the data underpinning these relationships is complex, often unavailable, and subject to change over time. It is essentially an unsolved problem in the music industries and only made more complex by moving to a Crypto setup; as our CTO at JAAK said once, "these are people problems, not technology problems".
How this new industry will formulate.
Despite the popularity of the Gartner Hype Cycle, I feel like development within web3 occurs more in waves across an overall momentum. Hype drives attention and investment when Crypto enters a bull market, and while a percentage of that will flow back out as things turn bearish once again, there remains an increase in the underlying foundation.
Therefore, rather than purely focussing on where things are at the peak of a wave, it's equally important to analyse where the baseline has shifted when Crypto winter hits.
Aside from purely financial metrics for comparison, there are important social, regulatory and market driven factors that define where a wave of innovation may end up in the grand scheme of industry development. To this end, Carlota Perez’s Technological revolutions and techno-economic paradigms provides a much wider view as to how technological revolutions occur:
“Indeed, the space of the technologically possible is much greater than that of the economically profitable and socially acceptable. It is with profit in mind that entrepreneurs and managers are constantly turning inventions into innovations; technical possibilities and discoveries into economic realities. In turn, through their investment and funding decisions, they can also steer the research effort in particular directions.
Those decision processes are not random. They are shaped by the context, including relative prices, regulatory and other institutional factors and obviously, their perceived market potential.
They are also path-dependent, because market potential often depends on what the market has already accepted and because the incorporation of technical change requires the coming together of several pre-existing explicit and tacit knowledge bases and various sources of practical experience.
Thus, the meaningful space where technical change needs to be studied is that of innovation, at the convergence of technology, the economy and the socio-institutional context. That space is essentially dynamic and, in it, the basic concept is that of a trajectory or paradigm, which represents the rhythm and the direction of change in a given technology.”
I see the roadmap of the Crypto Music industry evolving through three phases:
With a function of Engagement, Funding, and available Infrastructure providing the metric on how far the industry has developed.
We are currently still very much in the first, initiation, stage. If we describe 2015-19 as the first wave, and 2021+ the second wave, then let's look at some fairly rough key indicators.
First, the number of artists actively engaging in Crypto Music has risen from around 20-30 in the first wave to somewhere between 300-600 in the second wave (to date). Significantly, some leading artists that were part of the first wave (e.g. RAC, 3LAU) have stayed in the space and are now figureheads of projects with the most active backing. However, numbers are still low and will need to grow by orders of magnitude before Crypto Music breaks from initiation and into later phases.
The level of funding raised is also another significant indicator to analyse. In the first wave, those projects that decided to not go down the ICO route typically raised at the Seed to low Series A level. In the second wave this has been increased somewhat in some instances, for example Royal's recent $55m round, however, that is on the whole an exception. Once investors begin to build confidence that product-market fit is closer then we can expect funding round amounts to rise accordingly, to support projects positioning towards scale; a key marker that we are entering the co-existence phase.
Finally, the state of underlying infrastructure is vitally important in terms of providing the foundation for a new industry. In the first wave aspects such as wallet management and liquidity were significantly more basic than they are in this second wave, which is, in turn, forcing abstraction around other areas of complexity.
There is likely a third wave in this initiation phase, where teams look to scale engagement by building platforms and processes that subvert the boring and complicated stuff that acts as a barrier to all but the most Crypto savvy creators and users. For example, the user experience around key management and support is a long way away from being suitable for most potential users. This is a state of available infrastructure point, and likely the key aspect to open the door to further scaling of engagement. Within this expected third wave I'd expect the theme to be around next generation of labels and artist management options.
Assuming that the Crypto Music industry can exit the initiation phase without failing, it is likely that the next phase of its development will be one where it exists in parallel to the traditional digital and analogue music industries.
At this point the scale of Crypto-native creators that are active in the space will likely number 5-20k, large enough to support the scaling of an industry, but still very small relative to the traditional industry routes. And thus there will remain dependence on digital distribution for the reach to fans that creators require.
How traditional music entities react to this evolving situation will be fascinating to watch, providing an indication as to where the power will reside once we exit this liminal period. On the one hand, the history tells us that the largest rightsholders will use their position in digital and analogue markets to bend creators and the emergent industry towards a similar arrangement to the ones they currently enjoy. However, on the other-hand this will risk missing out on influence with the future generation of Crypto-native creator. I expect that the dominant model for forward-looking rightsholders will be to roll out agreements with creators for representation across digital and analogue exploitation, with allowance for more freedom within Crypto Music.
The moment that Crypto Music moves from co-existence and becomes an independent, standalone, industry will be marked by a significant user-base choosing to operate within Crypto-only platforms. This is likely a number of years away, and an incredible amount of work needs to be done before it is in any way realistic.
How you can successfully bet on its outcome.
Now that we have a framework to understand how the Crypto Music industry may evolve we can use this to assess where to place bets, be they financial or time and effort.
An industry that is built on the back of waves and troughs, with likely reduced platform lock-in by design, can be tricky to navigate effectively. However, there are some emerging guidelines:
Ideas that persist through cycles and become more valuable through learned experience and feedback testing will be well positioned as the dominant models evolve. Specifically those that provide tools to assist with the key questions noted above; namely monetisation and growth, and copyright and ownership.
Platforms and artists that work hard to catalyse engagement and on-board users, creators, fans, and investors, will be well positioned when the industry enters its scaling phase.
Scaling will come when the underlying infrastructure is in place to enable the right level of abstraction of complexity and cost without sacrificing fundamentals (financial independence, coordination, composability). Projects that are providing solutions to this end are likely good bets as things grow.
Finally, and probably most importantly, the winning projects will be those that actively grow the market for music. Because, ultimately money talks, and the Crypto Music industry is most likely to succeed if it becomes financially rewarding for enough users (artists, fans, and investors).
Thanks to Vaughn McKenzie, Maarten Walraven, and Yung Spielburg for their feedback and input when pulling this piece together.