Web3 Music Track: Market Background, Business Value, Explosion Path and Investment Opportunities
Research institute: Mint Ventures
Researcher: Xu Xiaopeng
Co-author: Huang Minqiang
Last update time: 2022.3.1 17:38
This research report is part of the #TrackInsight series of Mint Ventures. Compared with the #DepthResearch series with comprehensive analysis for individual projects and the #TrackScan series that analyzes and compares the key projects in the track, the #TrackInsight series articles focus on analyzing the underlying business logic and development trends of the track. This series also tries to establish a thinking and analysis framework for the new track and deduces the development path, as a starting point for analyzing the projects in the track.
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Summary
· Music is a global market with an annual revenue of US$20 billion, and the industry’s dominance is gradually shifting from copyright-holding record companies to online music platforms.
· Web3 and music NFTs still cannot solve the overall problem of low income of musicians in the short and medium term. Its significance lies in providing innovative solutions for the value distribution of the music industry and preparing for the subsequent upgrading of the music industry in terms of technology, business and concept.
· The Web3 music industry does not have the explosive conditions similar to DeFi for the time being. It needs to expect mature user base and community concept, but the technical preparation is relatively mature.
· It is difficult for music NFTs to reproduce the popularity of avatar NFTs. The explosion path of Web3 music projects can refer to the business flywheel model of DeFi.
Enter the text below.
This track insight article focuses on the Web3 music track.
Since the explosion of the DeFi track in 2020, the crypto business has gained its first group of users other than investors: financial customers. With the popularity of the NFT concept in 2021, the wave of Web3 applications began to spread to fields other than finance, and the boom of NFT collectibles and the summer of chain games took place one after another. With the “commercialization proof” of DeFi applications and the expansion of NFT collections and chain games to crypto population, the “creator economy” has steadily launched a new wave of Web3 narratives at the end of 2021.
Web3 music is a subdivision track of the “creator economy”. In addition, as an important category of NFT collections, music can also be classified as a key category under the NFT tide.
From the perspective of Web3 business, the music track has a huge two-sided market: creators & consumers; from the technical perspective, technological applications such as NFT, L1+ blockchain data storage (Arweave, Filecoin) are gradually mature; from the narrative perspective, the music track has the dual blessing of NFT collection + creator economy.
2021 can be said to be the first year of the Web3 music track. Will 2022 be its year of opportunity?
In this article, we think about and try to answer the following questions:
· What is the background of the music market corresponding to the Web3 music track?
· How to define a Web3 music project? What problems does it and music NFTs solve for the existing music industry?
· What are the prerequisites for the explosion of Web3 music projects?
· In what way will the Web3 music track explode?
· How to capture investment opportunities?
1. Current situation and business model of the music industry
1.1 Participants in the music industry and industry changes
Music is a huge industry, with IP parties and user groups as large as social media and games. This market has relatively clear supply and demand ends. On the supply side, there are musicians or record companies, entertainment or brokerage groups that have signed a large number of musicians; on the demand side, there are consumers of music, including ordinary music lovers and also fanatical fans.
Music has a long history of business development. Its delivery medium ranges from live band performances, phonographs, radio, television, digital media such as vinyl records, tapes, CDs, and MP3s, to the current streaming music platforms. Every change in the music communication media will bring about changes in the industrial form.
In the past, record companies were the most powerful party in the industry, controlling the discovery and packaging of singers, the production and promotion of music, the release of records and the operation of concerts, etc. They also accounted for the majority of royalty income. In addition, record companies also hold a large number of high-quality music rights. However, with the advent of the Internet, the advantages of music production and publicity that were once firmly controlled by record companies are no longer obvious, and music promotion channels have shifted from centralized media to social media. The maturity of digital technology has reduced the cost of music creation, and more and more people have embarked on the road of music creation. They produce and release their own music with a faster rhythm and shorter path.
Online music platforms have become a new intermediary between listeners and musicians. They are not only responsible for music promotion, distribution, recommendation and revenue settlement, but are also vigorously developing upstream, focusing on cultivating new musicians and original music. Therefore, the number of musicians signing up with music platforms is rising. The explosion of new original music, on the one hand, satisfies the ever-changing music tastes and desire for new content of music consumers in the Z era, and on the other hand it also provides online music platforms with a bargaining chip to compete with traditional record companies in copyright.
After sorting out the current music industry environment, we still need to think about an important question before we start the specific market analysis: what kind of commodity is music in this era? All business logic is based on this question, and all industrial structures are spread out based on this question too.
Zhong Wen, the author of the public account “Pinwan”, once had a classic description of this:
“…no matter what setting or form, the core attributes of music will not change — music is a way for us to empathize with the world, a language that transcends time, space and culture.
This is perhaps the “sexiest” thing of the music industry. In any era or civilization, we all need music and are moved by similar rhythms.”
— — Pinwan: Online Music Paying Users Over 71 Million, TME Pushes the Flywheel of Music Industry
As a spiritual consumer product that “empathizes with the world”, music has a stronger attribute of repeated consumption than books, movies, and drama series. Even the most new-loving listeners will have treasured music in their players that has been played hundreds of times. Once people find a favorite song, its stickiness is dozens of times that of other content products.
Regarding the music industry, we can make a preliminary summary:
· Major players in the music industry include musicians (songwriters, singers, etc.), record companies, music platforms and music consumers.
· Internet music platforms have replaced traditional record companies as the new giant in this industry. They have mastered the core links of music promotion, distribution, and settlement, and are expanding to the upstream of content, directly cultivating musicians and producing original music.
· The commercial nature of music is to provide listeners with a way to empathize with the world, and it is also the content product with the highest repeated consumption rate and stickiness.
1.2 Market size of music track
Next, we will observe the current size of the music market from three dimensions: market revenue, consumers and musicians.
1.2.1 Income scale
According to the annual report released by the International Federation of the Phonographic Industry (IFPI) in 2021, the total revenue of the global recorded music market in 2020 is US$21.6 billion. It has been growing for six consecutive years since reaching the bottom in 2014 (US$14 billion), but it has yet not exceeded the peak in 2001.
The United States, Japan, the United Kingdom, Germany, and France rank among the top five music consumers, and China ranks 7th, just behind South Korea. Although China has the highest internet population in the world, its share of paying subscribers for music is much lower than in the West. According to the 2021 Q3 financial report disclosed by Tencent Music Entertainment Group (TME), which has the highest number of users and revenue in China, its online music paying users reached 71.2 million, accounting for 11.2%. The user Arpu value (monthly average revenue per user) in the first three quarters of 2021 is 8.9 yuan (RMB).
According to the 2021 Q2 report released by Spotify, an overseas giant of online music, its monthly active users are 365 million, while the number of paid subscribers is 165 million, accounting for 45.2%. The user payment rate is about 4 times that of Tencent Music, while its Arpu value is $5.02.
In terms of music revenue sources, revenue from online music accounts for 62% of the total global music revenue, which increases by as much as 19.9% year-on-year. On the other hand, other sources include physical sales (physical albums, etc.), downloads, other digital revenue, performance, related copyrights, and music licensing revenues, all of which fell month-on-month in 2020 (affected by the pandemic).
According to the above data, we can find that music is a global market of US$20 billion. The online music platforms represented by Spotify and Tencent Music (whose products include QQ Music, Kugou Music, Kuwo Music) have promoted the recovery of the music market that has been in a slump since 2001. “Online music platform pays musicians according to the number of plays” has become the most mainstream music business model, namely “streaming media music platform model”.
1.2.2 Scale of paying users
According to data released by research institute MIDiA Research, the total number of subscribers to streaming music reached 523.9 million in the second quarter of 2021, an increase of 26.4% over the same period in 2020. Spotify is still the platform with the largest number of subscribers.
Of course, music users are not limited to paying users of online music platforms, but also include physical record consumers, concert audiences, consumers around musicians, music licensing buyers (such as advertisers), and so on. However, most of these users also overlap with streaming music users.
1.2.3 Scale of musicians
At the “Stream On” investor conference held by Spotify, its CEO Daniel Ek said 8 million musicians had joined Spotify by the end of 2020, and it is expected that this number will reach 50 million by 2025. In the Chinese market, the two largest online music platforms, Tencent Music and NetEase Cloud Music, both recently disclosed their musician data. Both platforms have more than 300,000 musicians. Combining the above data, we can conservatively estimate that the current total number of musicians in the world should be more than 10 million.
However, although the number of musicians is growing, their music income is not ideal, and only a very small number of musicians can make a living from music. As of 2020, only 184,500 creators have made over US$1,000 through Spotify, according to a Loud & Clear report. Looking at the Chinese music market, according to the Chinese Musicians Report released by the Communication University of China in 2021, 51% of the musicians have a monthly income of less than 4,999 RMB, while only 9% earn more than 10,000 RMB per month. This data has been greatly improved from the previous year. In 2019, the report showed that 49% of musicians earned between 1 and 1,999 RMB, which is not enough to support their living expenses.
1.3 Business logic of the music market
Copyright is the core business logic of the music market. The complete rights of a song can usually be divided into four parts: the copyright of the lyrics/songs, the recording copyright, and the singer’s performance right. The above four parties enjoy the royalties (i.e., charge for copyright use) after the release of the song, while other personnel such as producers, arrangers and musicians, enjoy one-time settlement.
Historically, major record companies have been at the heart of the production of music, discovering singers, songwriters and professional teams. They also have the strongest right to speak, owning the performance rights and recording copyrights of singers (master tapes), as well as acting for the copyrights of lyrics and songs by their copyright companies. As small record companies are acquired by big record companies, music rights are concentrated in the hands of a few large companies. Their revenue also accounts for the bulk of the industry’s revenue. For example, the copyright revenue of Vivendi, the parent company of Universal Music, reached 1.186 billion euros in 2020, and it is still growing.
However, with the rise of online music platforms, the number of original singers with relatively free identity is also increasing, powerful IP artists have built their own studios, and musicians are gradually getting rid of the control of record companies.
Online music platforms are one of the core copyright revenue sources for both original musicians and record companies.
On the other hand, online music platforms usually settle with copyright owners based on the number of songs played. Take Spotify as an example:
Spotify makes money mainly in two ways: Spotify’s paid subscription revenue and advertising on the free version of Spotify. About two-thirds of that money goes to music copyright owners. Spotify divides the royalty pool based on each copyright owner’s “share of traffic” on Spotify, rather than paying a flat fee for “per stream”.
That’s because paid subscribers don’t pay per stream rather pay a fixed membership fee.
In each country it launches, Spotify adds up the number of music streams from copyright owners each month and divides it by the total number of streams in that market to obtain the traffic share to allocate the music revenue in the region.
For example, if the total number of streams in Mexico is 1,000, and a musician has 1 stream in the region, then his revenue will be 1/1,000 of the entire royalty pool in Mexico. Total royalty pool per country is based on user paid subscription revenue and advertising revenue in that market.
This means that each musician’s income from an online music platform is affected by three core factors: the total revenue of the platform, streams of that artist’s works and streams of other musicians’ works.
Of course, in addition to the stream revenue from streaming media platforms, musicians’ income sources also include: offline\online performances, direct sales or downloads of digital albums, music licensing fees (movies, ad, variety shows, etc.) and other peripherals sales. However, the income proportion from these parts is either not high or gradually decreasing.
1.4 Summary
Based on this chapter, we can make the following conclusions about the current music industry:
· The business nature of music is to provide listeners with a way to empathize with the world, and it is also the content product with the highest repeated consumption rate and stickiness.
· Music is a US$20 billion+ market, of which the largest and the fastest growing revenue is online music platforms.
· Online music platforms are replacing traditional record companies as the core players in this game, and their control is penetrating into all links.
· The core business model of this industry is copyright. At present, the overall income of musicians is not high, which is determined by the increasingly fierce market competition and the industrial structure dominated by Internet platforms.
The above is also the market background faced by the Web3 music track. It is also this environment that breeds its value and business logic.
2. The value of Web3 music projects
2.1 Define the Web3 music track
The so-called Web3 music track refers to the overall music industry chain constructed based on the Web3 paradigm. Its features mainly include:
· Its core service protocol is built and run on the blockchain.
· Digital music assets are distributed and circulated based on blockchain and decentralized storage technology.
· It has the characteristics of disintermediation and transparency in value distribution.
· Music consumers are gradually shifting to community users, who may enjoy greater rights and co-construction possibilities, and even directly share the value of IP itself.
So, what problems and new opportunities can Web3 music projects and music NFTs with the above characteristics solve?
2.2 Problems that Web3 music projects try to solve
2.2.1 Web3 can’t solve the overall income problem of musicians in the short term
When it comes to the Web3 music track or the value of music NFTs, we often hear that musicians can use NFTs as music carriers to sell directly to their fans, avoiding exploitation by record companies and online music platforms, so as to increase the income of musicians.
However, the author believes that the Web3 music wave does not mean that the income of musicians as a whole can be improved in the short term. In the short term, it just provides them with more transparent and diverse channels and value distribution tools.
Like other commodities, music is also affected by the law of supply and demand. Although the marginal cost of digital music is close to zero, the reality is that consumers’ attention is limited, and the “total time of content consumption” of the world population is limited.
That is to say, on the supply side: due to the rapid reduction in the cost of music production in the digital age, ordinary people can also create and distribute music, thus the number of new musical works has increased rapidly; on the demand side: the amount of time the whole population spends on content has an obvious ceiling, and this part of the time also faces competition from cross-sector competitors such as video games, online video, and social tools.
Under such circumstances, the unlimited supply of music works faces the increasingly scarce entertainment time and attention, thus most of music works become “zombie works” with few clicks and no attention. This is an inevitable fate under the cruel market competition. The NFTization of Web3 and music media cannot change this fact, just as DeFi can create a more equal, open and innovative financial environment but it cannot make all users rich.
2.2.2 The Value of Web music and NFTs: Reshaping value distribution and infrastructure for future music services
So what are the positive changes brought to the music industry by the introduction of Web3 and NFT?
In the author’s opinion, there are mailing the following two items:
· Based on blockchain and smart contracts, it can provide musicians, users and other industry parties with a more transparent, automated and efficient value distribution system
· Compared with traditional digital music with only “listening value”, music works released based on NFT have new attributes of programmability, traceability, composability, and tradability, which can derive new music service modes and scenes unimaginable at present.
To put it simply: it reshapes the value distribution of the music industry, endows music with a new value connotation “beyond listening to songs”, and prepares for the next upgrade of the music industry in terms of technology, business and concept.
A. Reshape the value distribution
The so-called “reshaping value distribution” mainly refers to:
i. Improve the transparency and convenience of income distribution and improve the symmetry of information
ii. Provide musicians with a music distribution channel with fewer intermediaries and shorter links and a new transaction-based royalty scheme
iii. Include users in the value distribution system
Specifically:
i. Improve the transparency and convenience of income distribution
In the existing recording industry, online copyright proceeds from a song go in multiple directions. In an article of Ten years of the copyright war: Has music gotten better as its price has risen nearly a thousand times? published by a well-known Chinese media Southern Weekend in 2021, the lyricist Wu Xiangfei said:
“In the music streaming platforms, 42% of the song revenue is distributed to record companies, about 30% is distributed to the operating system (such as Android, iOS, etc.), and about 20% is distributed to the Internet streaming platforms, and 8% goes to lyrics and song writers. Most singers are settled by their record companies. Usually, Internet platforms provide detailed song streaming data to copyright companies, which in turn provide songwriters with their individual streaming data details and royalty reports. However, songwriters are difficult to verify these data reports. Because “the cost of rights protection is high and the voice of musicians is low, they can only bear it silently.”
Wu Xiangfei also said:
“Different copyright companies have different quotations to creators, and the pricing power is in the hands of these companies… There is a 195 times difference in copyright royalties between two copyright agencies for a same song in the same year.”
It is difficult for relatively disadvantaged musicians to peer into and examine the actual revenue of their music when faced with large and centralized record companies, music platforms and copyright agents. The music industry running on the blockchain can greatly improve the transparency of the entire value distribution process. Based on smart contracts, the settlement and distribution of music revenue can also be automated, efficient and transparent. The transparency and efficiency of the entire industry reduce the rent-seeking ability of intermediaries. In the long run, it is beneficial to musicians and users, and institutions in between have to transfer more interests.
2. Provide distribution channels with fewer intermediaries and shorter links, as well as new royalty scheme
Catalog, Sound.xyz, Nina and other music NFT display and sale platforms provide musicians with a new distribution channel for their works. Musicians can make their own music works into NFT through these platforms, and sell them directly to single or multiple music collectors through auction or direct sales. In addition, musicians can also set the transfer royalties on NFTs, and each time the NFT is resold thereafter, they can get a certain percentage of the resale amount.
3. Include users in the value distribution network
Traditional digital music copy and audio stream can only be used for playback, which belongs to a right of use. NFT form of music represents a kind of ownership, which can even be directly linked to the copyright of the music, allowing NFT buyers to participate and obtain copyright benefits. Royal, the Web3 music platform, is designed in such a way that when users buys a musician’s NFT, they have a share of the music’s streaming revenue.
Combining the above points, we can regard Web3 music as an innovation of “relations of production”, and NFT is its technical carrier.
B. Activation of new music services and scenarios
In addition to the key role in value distribution, through NFT music’s new attributes of programmability, traceability, composability, and tradability the longer-term role of Web3 music and NFT may be to open up new service categories and new scenarios that do not exist yet, stimulate product and service innovation at a broader level, and directly improve the output value of the entire industry.
For example, the music event organization Live Nation recently announced the launch of the Live Stubs program, which will give fans a free concert NFT with a unique number by purchasing their concert tickets. Michael Rapino, CEO of Live Nation, explained: “Our Live Stubs product evokes nostalgia of the days when fans collected concert ticket stubs, while also giving musicians a new tool to deepen their relationship with their fans. We can’t wait to see the creativity and future prospects of this community.”
Although Live Nation has not disclosed the specific use of the concert’s “ticket stub NFT”, it is reasonable to image that the NFT can be used for:
· Exclusive pass to access the official fan club or DAO
· Access special backstage footage of the concert
· Accept airdrops of fan tokens issued by singers as fan credentials
· Used as a blind box, it can extract other benefits provided by the singer, such as front-row seats for the next concert, backstage access, etc.
· Become a fan’s identity tag, which will be placed in the identity display column on the chain
· …
In addition, based on the programmability of NFTs, musicians can open the use and mixing rights of their music NFTs, and other musicians can purchase the copyright of the original music to remix and cast it into new music. For example, async.art is providing the above services.
We have to admit that the above imagination is still scarce and limited, and the truly huge innovations are often beyond our current cognition. Just as music fans who sat in a concert hall and indulged in the live performance of classical bands a hundred years ago couldn’t imagine that we can now pay to participate in the singer’s online live concert, or even come to Justin Bieber’s music festival in the Metaverse with a virtual ID. Now we can’t accurately predict what new services will be launched in the Web3 music industry.
But we can be sure that:
i. The type of music service based on Web3 must be more abundant, diverse and wonderful than the current Web2 music service.
ii. In a blockchain-based metaverse, NFTs may be the dominant format for music.
By then, NFT-based music will not only be used for streaming but will also have various functions such as “collection”, “identity tag”, “production material”, “ticket”, “financial equity certificate”, etc., becoming a “key” for users to unlock rich music services.
To sum up, Web3 music project can provide a new value distribution scheme in the short term, making the value distribution of the music industry more transparent and fairer, and gradually transforming consumers into rights holders. In the long run, the new paradigm of Web3 can activate a new type of music service, and NFT may also be the mainstream music carrier in the future.
However, there are still many prerequisites for Web3 music applications to be really popular.
3. The premise of the rise of Web3 music track
3.1 User scale: User challenges for Web3 music, social, and game Projects
Although the Web3 music track has a bright future in the long run, we need to realize that Web3 music, social and game applications are very different from DeFi, and we cannot simply replicate the success of DeFi business in these areas.
Blockchain and Bitcoin were financial applications at the beginning of their establishment. The original intention of Satoshi Nakamoto’s design of Bitcoin was to provide a decentralized payment system. Even in the earliest days of Bitcoin and blockchain, behind every public chain addresses are financially motivated users, whether they come because they endorse the idea of decentralized finance or purely for speculative purposes.
That’s why the promotion and development of DeFi applications based on Ethereum smart contracts has been so fast, because they fit the financial needs of users.
We can also glimpse the reality that “user needs in the crypto world are dominated by financial needs” from the development history of the chain game field.
In 2018–2019, we once witnessed a wave of chain games. At that time, the concept was “to make games based on blockchain”. In the end, the life cycle of this wave was very short, and it receded in a hurry. The only impressive thing is the large number of gambling apps and speculative projects like FOMO3D (in line with the speculative nature of financial users).
In 2021, the wave of chain games is back, and this round of wave is far bigger than 2018–19 in terms of user magnitude, participating institutions and duration. There are naturally many other reasons for this, such as higher total crypto population in 2021, DeFi and NFT cultivating user application habits, the market as a whole is in a bull market cycle, etc. However, the author believes that the core reason why the chain game project in 2021 is more successful than the earlier one is that it is deeply embedded in financial design, or it can be said that the essence of this wave of chain games is not a game, but a gamified financial Ponzi.
In short, in the crypto world dominated by financial users, only financial applications are easy to succeed at present, while simple music, social networking, and games are far more difficult than DeFi to find their user groups here.
However, compared to games and social networking, music Web3 projects also have their own unique advantages, that is, musicians have a very high ability to mobilize their fan groups. When musicians can find a good combination of IP and crypto projects, the growth of non-crypto users can achieve a breakthrough. A good example is the NBA TOP SHOT digital star card, co-created by the NBA as a non-crypto traditional sports IP in cooperation with Flow.
NBA TOP SHOT has been tested since 2020, and it became popular in 2021. According to DappRadar data, it has made more than 14 million transactions to date, cumulatively totaling more than US$860 million and more than 520,000 users. It is worth noting that the transaction volume of NBA TOP SHOT was also influenced by significant IP celebrity effects. For example, its transaction volume increased by 72% month-on-month in December 2021, mainly due to its cooperation with well-known star Kevin Durant and the corresponding marketing plan.
Web3 music projects also need strong IP promotion, and there have been many music celebrities involved. For example, the well-known rapper Snoop Dogg, pop star Whitney Houston and other celebrities have released NFT-based digital music. Hu Yanbin, a well-known Chinese singer, also released a digital music collection album titled “The Monk” with Tencent Music.
In addition to music celebrities, traditional record companies have also begun their NFT field debut. In November 2021, Universal Music announced the launch of the Bored Ape band Kingship.
The user base is the biggest challenge for Web3 music products at present. In addition to waiting for the further growth of the population in the crypto world and ushering in a richer user group in addition to financial investment, the active promotion of music celebrities or institutions may be the main source of the rapid increase in the number of users.
3.2 Technical preparation: L1 public chain and distributed storage
Compared with the user scale, the technical preparation of Web3 music is relatively mature. The size of a song is basically 5–6 M (Megabyte), which Layer1 public chain + distributed storage AR and IPFS/FIL can fully support now. In terms of user experience, there is no obvious difference between it and Web2 apps in playing and listening, and most of its payment links only support the payment of crypto assets. However, with the rapid promotion of cryptocurrency payment, there are more and more payment intermediaries between crypto assets and fiat currencies. In the future, there will be no problem for listeners to directly purchase NFT songs with fiat currency in the future.
3.3 Community concept: DAO experiment of fan community and redistribution of value
In Zero to One, Peter Thiel, a well-known entrepreneur and investor, said that to allow users to cross the two thresholds of habit and trust and choose a new product, the experience of the new product needs to be “10 times better” than that of original products. While there are strong incentives for musicians to experiment with Web3 music, for most users, they are unlikely to change their usage habits unless Web3 music products offer features that current Web2 products do not have and are difficult to replicate.
In the short term, only in the experience of listening to songs, Web2 products have done well enough in terms of rich music library, audio quality and fast connection. Thus, it is difficult for Web3 products to catch up with the Web2 music platform in these experiences for the time being.
So, do music users care about obtaining the “ownership” of songs and changing music from the listening mode of streaming media to the collection mode of NFT? Maybe not.
According to a report by the International Federation of the Phonographic Industry (IFPI), among music revenue in 2020, music payments from online listening increased by 19.9% year-on-year. However, revenue from paid downloads fell by 15.7% year-on-year, a steeper decline than performance revenue which has been hit hard by the pandemic. It is an inevitable trend that users’ music consumption habits will shift from the “owning mode” of downloading to the device to the “accessing mode” mainly promoted by music platforms. Of course, unless the music NFT itself can provide added value beyond “listening”, for example, the American rock band Kings of Leon released a new NFT album called “When You See Yourself” on March 5 2020, which is also the first band to release an album in NFT. The music NFT it releases has a “golden ticket”. This NFT is equivalent to a lifetime VIP treatment. Its owners will have the right to ensure four front-row seats of any Kings of Leon concert for life. It also provides various rights, including private driver, performance concierge, private pre-show meeting with the band, access to an exclusive lounge, and a merchandise booth at each show, etc. But as you can image, this kind of customized service is not a service with zero marginal cost like streaming music, which cannot be provided to most people.
In the author’s opinion, for users of music NFT, the real value of upgrading services may start from the redistribution of “community\DAO authority” and music value.
As a new organizational form of distribution, co-construction and sharing, DAO is naturally suitable for musicians’ fan groups. In fact, the fan groups of many artists have been operating in the form of DAO because the emphasis on contribution and “generating power with love” also coincides with some concepts of DAO. However, problems such as fundraising management, information opacity, distribution confusion of responsibilities and rights, and organization downtime caused by core personnel leaving the fan group have occurred from time to time. The introduction of NFT, smart contracts and DAO governance tools can effectively improve the above problems.
More importantly, owning a specific music NFT may become an exclusive certificate for fans to enter a certain musician’s DAO. The accumulation, combination and use of music NFTs have a wide range of scenarios in the DAO organization.
For Generation Z, who has a high acceptance of new things and a strong pursuit of belonging and self-identity, joining, participating in and co-building a DAO organization for their favorite idols will surely provide much greater satisfaction than “collecting the idol’s song” or “going to the idol’s concert”. For a DAO organization, the introduction of NFT will also improve the efficiency of verification and management. As long as the introduction and co-construction rules of a DAO community are well established, the participation and activity of more new users will also inspire unimaginable new vitality, which may breed new music services.
In addition, if music NFT can directly link the distribution of royalty income to music consumers, and even introduce a recommendation mechanism of purchase and streaming traffic, it will further improve the social marketing degree of songs and the participation degree of users, also providing users with richer value.
Therefore, in the next one to two years, whether there will be an organization of musicians and fans based on the Web3 paradigm, and whether there will be new ways to mobilize a large number of users in the value distribution of music NFTs will be important events to observe whether the gale of Web3 music industry is coming.
In conclusion, Web3 music track may need to meet a series of preconditions to usher in a similar wind to the summer of DeFi in 2020, including sufficient number of users, technical preparation, and the full practice of the DAO concept in the music industry. All of them are the key elements we need to observe in the future.
4. The explosion path of Web3 music track
Look back at all tracks that have been relatively successful in the field of crypto business in recent years, with a certain user scale and a long-life cycle. One is DeFi, which began to rise in 2020, and the other is the avatar NFT that began to become popular in 2021. If the Web3 music track bursts, which of the above paths will it take?
PS: In the previous article, the author has already analyzed the chain game project which was also very popular in 2021. At present, its financial attribute is far greater than game attribute. It is essentially a gamified variant of Ponzi finance and still belongs to the category of DeFi.
4.1 DeFi path
DeFi project has existed for a long time before 2020, but its real first year is 2020. A very important reason is the emergence of the “liquidity mining” model, which has solved the two mountains that were previously in front of DeFi:
· How to find initial users and funds to complete the cold start of the project
· The cost of listing on a centralized large-scale exchange is expensive. The project token has no liquidity if it is not listed
The novel mode of liquidity mining solved the above two problems at that time and formed a strong and lasting market narrative of “decentralized finance swallowing the world”, allowing many DeFi projects to enter a positive business flywheel: token price rises → liquidity mining APR rises further → core business indicators rise → token price rises.
Coupled with the natural financial needs of crypto users, DeFi has actually accumulated a large number of real users, and at present its commercial value has been verified.
Of course, liquidity mining also has a Ponzi color of “the left foot stepping on the right foot to go to heaven”. When the narrative trend of the entire market turns and the inflow of funds into projects is insufficient, the above-mentioned positive business flywheel will be interrupted, and most projects will enter the death spiral: token price drops → APR falls → capital outflows lead to deterioration of core indicators → token price falls further.
In the end, the ones that survive are those DeFi projects that still have user needs without subsidies.
4.2 Avatar NFT path
If DeFi projects take the road of “liquidity mining drives fundamentals”, then avatar NFTs take a completely different path, the core of which is Meme culture + social currency.
Meme culture
One of the most important value sources of avatar NFTs is Meme. The so-called Meme refers to a popular Internet cultural gene that is copied and spread in a derivative way. The content with Meme genes often comes from grassroots or is created by anonymous people. With simple and distinct style, it is very easy to be re-created, and it gains new vitality and spreads rapidly in the secondary creation of the public.
A typical Meme sample is Pepe the Frog.
This meme originated from the 2005 comic book series “Boy’s Club” by cartoonist Matt Furie. Among the several characters in the comics is Pepe, a happy frog who pulls his pants down to his ankles while peeing. When someone asked why it did this, it replied: “Because it feels good man.” On January 22, 2009, Pepe’s image was posted on the website 4chan by netizens. On the basis of the original Pepe, netizens made a secondary creation, adjusted its original upturned mouth in one direction, and then gave birth to the Sad Frog (Feels Bad Man) that became popular all over the world.
Among the well-known NFT avatars, whether it is the pixel-style CryptoPunk or the hippie-style BAYC (boring ape), its elements are all in line with those classic samples in the Meme culture: they are mostly created by grassroots or anonymous people, simple style easy for secondary creation and dissemination, and with a distinct subcultural temperament. Among them, BAYC’s derivative cooperation and secondary creation with other groups are particularly rich and active. Meme is not only a consensus, but also an Internet mass culture that will self-replicate and iteratively grow. It is the expectation of users and investors on the value of NFT avatar Meme that constitute the first layer of value connotation of avatar NFT.
Social currency
The special feature of avatar NFT is that its main scenario is to be displayed to the external social circle.
This gives it two huge advantages over other NFTs:
· Has the strongest and widest free dissemination effect. Everyone who wears the NFT avatar on his or her social media account has become a free, long-term billboard for the NFT series. The social circle they cover will see this “ad” every day. If the owner of the avatar is an influential person in a certain field (such as an artist, sports star, business tycoon), it will further trigger the imitation and following of those who recognize his identity, bringing buying for the NFT and forming scarcity.
· When the price of the NFT reaches a certain level, this NFT avatar will become a typical “Veblen good” with luxury characteristics similar to Hermes. The main utility of Veblen goods is to show off, and this show-off utility will rise further as its price increases. In the Internet age, the avatar is the most exposed personal logo, which makes the expensive NFT avatar the Hermes Birkin bag or the Ferrari limited edition sports car in the crypto world.
Due to the above characteristics, avatar NFTs inherently have powerful social currency attribute.
Meme + social currency has achieved the powerful wealth effect of avatar NFT, in which the social currency attribute plays a greater role.
4.3 The explosion path of Web3 music
At present, there are two main value carriers of Web3 music project: i. Music applications, such as the distribution and trading platform of music NFTs; ii. Music NFT itself.
So, what path will the Web3 music project take to explode? Is it to follow the business flywheel model like DeFi, or the Meme + social currency model of avatar NFT to promote music NFTs, and then promote the development of music platforms?
The author believes that the former is more likely.
It is quite difficult for music NFTs to see a burst of funds on the scale of avatar NFTs. Here is why:
· The current scenario of music NFT is mainly for listening and collection, with weak display scenario. In addition, its show-off effect is far less than that of avatar NFT, and the attribute of social currency is not strong.
· There are many meme samples in the music industry, such as the once-popular Korean song “Gangnam Style”, the electronic coffin dance music, the popular “Wild Wolf Disco” in China, etc. However, their life cycle is much shorter than that of picture memes, and the difficulty of secondary creation and dissemination is also greater.
Compared with the popularity of music NFTs reproducing avatar NFT, the rise of web music platforms is more likely because it has a relatively clear business growth path, such as:
· IP side: Web3 music platform can cooperate with world-renowned musicians and attract their users to join. Of course, musicians can also create their own platforms.
· Industry side: Web3 music platform can cooperate with well-known record companies and music platforms to acquire copyright and users. Similarly, record companies and Web2 music platforms can also make their own platforms.
· Product mechanism: It can introduce the Listen to Earn, or Create song to Earn mode, bind users and musicians through the incentives of project tokens, and quickly expand the bilateral music market.
Among them, the resources of musicians and industry parties are important, but whoever can design an appropriate economic mechanism and turn the business flywheel as soon as possible will be the game-changer of the Web3 music platform in the early stage.
Just like the highly concentrated online music market in the Web2 field and the highly concentrated NFT trading platform, the Web3 music platform does not need too many small and medium players in the long run. The one who can be first to grow rapidly is likely to siphon to most users and musicians, forming a competitive advantage that is difficult to surpass.
5. Capture investment opportunities in the Web3 music track
From the perspective of investment opportunities, the author believes that the following points should be paid attention to.
The technical conditions of Web3 music track are relatively mature, but it will take time for users and community concepts to mature.
On the one hand, investing heavily in this track too early may result in high capital costs; on the other hand, the earlier the industry is, the more difficult it is to pick the project that can run out in the end. When we find that a large number of well-known musicians, music institutions or music platforms enter the market, produce a good user introduction effect, DAO organization becomes an important form of music fan community, and the value distribution method of the industry is gradually innovated, it may be a good timing to invest heavily.
Give priority to projects with high-quality industrial resources and familiarity with crypto mechanism design
As mentioned in Chapter 4, the IP resources of the industry and musicians are very important, but what is more important is that the project party has excellent design capability for the token model and product mechanism of the crypto project, and is familiar with the gameplay of crypto business, rather than hard copying the Web2 model to the crypto world through the resources at hand. In addition, the project party must have enough funds and investment determination to quickly expand the bilateral music supply and demand market at the beginning and promote the rotation of the business flywheel as soon as possible. Gala, a well-known Web3 game platform project, recently announced its preliminary plan to enter the Web3 music market. In the few disclosed plan, it mentioned node bidding, “Listen to earn” and other gameplay methods, as well as an industry incentive budget of US$1 billion. In addition, it will invite major musicians such as Snoop Dogg to join in advance, which may become one of the samples of high-quality industrial resources + excellent crypto mechanism design.
Web3 music and DeFi have different ceilings, so the project valuation should be cautious
From the perspective of market size, there is a big gap between the US$20 billion music market and the trillion-level financial market. In addition, there is still a competition between music, games, social media and other tracks to compete for user time. The ceiling of Web3 music industry is far lower than DeFi. Judging from company valuation, Spotify, the global online music giant with the largest number of paying users, has a total market cap of around US$30 billion. Tencent Music, the top 1 in China, has a total market cap of about US$9 billion. Universal Music, which holds the largest volume of high-quality record rights, has a market cap of about US$41 billion (€36.5 billion). At present, Audius, the most representative Web3 music project with the highest valuation, has a total diluted valuation of nearly US$900 million. When the market and user scale are far from mature, the valuation of this project in the bear market is not low.
Web3 Music is one of the tracks that Mint Ventures has been paying attention to for a long time. The above views are only for reference and should not be used as investment advice. Welcome Web3 entrepreneurs to communicate and discuss with us.
Reference
Here’s How NFTs Could Define The Future Of Music
Communication University of China: Chinese Musicians Report 2021
Online music paying users exceed 71 million, TME pushes the flywheel of music industry
China Economic Weekly: Online music does not make money, why Internet giants still keep investing?
