During a postprandial conversation last Christmas, one of my nieces brought up Taylor Swift’s drama with Carlyle over the sale of her back catalog.
Somewhat embarrassingly, in retrospect, I grabbed an unused dessert plate, retrieved a dry-erase marker, and began to diagram two stylistic visions of the world on the flatware.
Something like this:
A crude oversimplification, to be sure.
But in my egg nog-fueled enthusiasm, I wanted to inspire my niece with the prospects for a world where:
- Artists would be able to retain the rights to their IP while making a living
- Fans would be able to build direct relationships with artists, and potentially participate in economic upside
- Rent-seeking middlemen would be kicked to the curb … where they belong
The pace of development — particularly by the team at Sound — has been astonishing.
It’s still very early days, but I’m finding that music NFTs are the epicenter of crypto-enabled business model innovation.
In a landscape burgeoning with scams and vaporware, music NFTs are the first instantiation of web3 I’ve encountered that leverages crypto rails for disruptive innovation in the real world.
This is not why I collect them — I think music NFTs are intrinsically valuable.
That said, music NFTs illuminate multiple vectors for entrepreneurs to build disruptive companies in other verticals.
I’d like to highlight five for non-crypto natives, particularly those managing or investing in private markets funds.
1 / Disintermediation via Protocol
Web3 blows up conventional conceptions of competition.
As noted in Portico’s recent research on the four trends shaping global private markets, large incumbents are rapidly developing their crypto capabilities.
Beyond using web3 as a source of deal flow, they’re seeking to harness blockchain technology to offer an incrementally better service or gain access to a larger customer base (see, for example, Hamilton Lane and KKR tokenizing access to select funds).
But this incrementalism misses the real potential of protocols, which can obviate the need for fund managers entirely.
For example, Sound has created an open, permissionless protocol that enables artists anywhere on earth to create (smart) song contracts for free.
The Sound SDK enables artists to build storefronts on their own webpages (see, for example, Reo Cragun’s Frameworks — listen to Terra Lago — and Daniel Allan’s Glass House Remixes — listen to the msft Remix). (Disclosure: I own NFTs of both songs).
All an artist needs is an audience that is willing to pay for their NFTs.
Admittedly, this is no small feat. However, building a crop of supporters is probably easier than securing a decent deal from a label.
In addition, Sound opened its API so that third parties can build apps over the top. Free music streaming apps, such as Spinamp and Future Tape, are already available for people to discover the latest web3 releases (you can listen to some of my favorites on Spinamp here).
Distribution has been open sourced.
Businesses that rely on black boxes of expertise, “proprietary” relationships / distribution capabilities, or closed ecosystems are under threat.
With respect to private markets in the broader emerging-market complex, I’ve previously shared my thoughts on NFTs and the future of African startup funding, and a high-level concept for a tokenized investment vehicle.
2 / Working Capital and Financing
A few months ago, artists relayed that it would take 1 million streams on, say, Spotify, to generate a payout of ~ $3,500. Their fates were tied to algorithms over which they have little to no control.
Today, an artist can release a single on Sound.xyz’s curated platform (distinct from the permissionless protocol) and hit that revenue figure with just 25 collectors.
And unlike time-lagged royalty payments, music NFTs’ smart contracts enable instant payouts — not only for primary releases, but also for cuts of secondary sales.
Going direct improves artists’ working capital position. This enables earlier investments in their own branding / capabilities / distribution, and faster experimentation.
In addition, artists can leverage their supporters to crowdfund a project. Daniel Allan pioneered this with his Overstimulatedand Malibu raises, which flip the script on the role of intermediaries providing upfront financing with extractive terms.
“Crowdfunding isn’t new,” you may say.
And you would be correct.
However, the fundraises I’ve participated in have transparent treasuries and token-gated voting on the use of funds. There is much to be explored here.
3 / Displacing Consumption with Participation
Music NFTs encapsulate Jesse Walden’s thesis on the ownership economy.
Compared to purchasing a vinyl or streaming a digital file, as spinz808.eth has written, owning a music NFT just hits different.
In part, this is a function of economic alignment of interests — you’re vested in the artist’s success, as value should accrue to the NFT over time.
It’s also a function of utility — ownership unlocks access to token-gated experiences, such as free concerts, artist portals (such as RAC’s), and Discord / Telegram channels where you can interact with the artist.
But in an economy organized around debt-fueled consumption, there’s also an intangible quality to participating in the artist’s journey.
4 / Top-down vs. Emergent Origination
To hear Billboard tell it, the music industry faces a problem with pipeline.
Spotify’s algorithms no longer make sense, there is a deluge of content, and TikTok is splintering the vestiges of mass culture.
There’s an old saw about riches in niches, but the article above suggests labels confront an existential crisis. The fragmentation of consumer preferences is obliterating their ability to identify (scalable) talent, and the labels’ historical influence / control over distribution has evaporated.
Social media is fostering an emergent culture, and incumbents appear ill-equipped to harness or capitalize upon emergent phenomena. While legacy intermediaries seem stuck in the starting blocks, the infrastructure in web3 is capable of capitalizing on emergent trends in near-real time.
For instance, in May, Salem Ilese’s TikTok video Crypto Boy went viral. Within 10 days, she listed it on Sound.xyz and raised 86.4 ETH (~ $170,000 on drop day), which she donated to The Center for Reproductive Rights. Since then, it has done ~16 ETH in secondary sales.
As the half-life of a track’s popularity declines and the cadence of production accelerates, the need for speed grows in importance.
5 / Institution- vs. Community-driven Growth Model
There’s another angle to the disappearance of incumbents’ secret sauce that’s worth marinating on — the shift from institution-driven to community-driven growth.
Individual human capacities, rather than the capacity to aggregate financial capital, become the economic core of our information and cultural production. Some of that human capacity is currently, and will continue to be, traded through markets in creative labor. However, its liberation from the constraints of physical capital leaves creative human beings much freer to engage in a wide range of information and cultural production practices than those they could afford to participate in when, in addition to creativity, experience, cultural awareness and time, one needed a few million dollars to engage in information production. From our friendships to our communities we live life and exchange ideas, insights, and expressions in many more diverse relations than those mediated by the market. In the physical economy, these relationships were largely relegated to spaces outside of our economic production system. The promise of the networked information economy is to bring this rich diversity of social life smack into the middle of our economy and our productive lives.
Music NFTs enable you to experience this first-hand. Crypto rails provide the value capture / exchange that had largely been missing.
It’s all a bit nascent and inchoate, but there is an ethos of the cooperative in the music NFT community. Artists are supporting artists. Collectors continue to show up for new artists.
There’s a sense that the community is pulling in the same direction to manifest a different economy — one that gives artists a chance to live off their creativity and talents.
I wonder what Dee Hock would think.
One great feature of open, permissionless communities is that anyone can join.
Why don’t you join me as a collector?
Sound just launched a marketplace for music NFTs at market.sound.xyz. Why not peruse the site for an artist whose vibe resonates?
Or, keep your eyes peeled for a free, curated mint on sound.xyz.
Experiment and discover for yourself how a different world is possible — indeed, it’s being built every day.
Apart from the intellectual edification, I am confident that if you go in with an open mind, you will uncover insights germane to the future of your own business, and have fun along the way.
See you there.
Aleem Remtula on Investing in Refugees & Displaced Communities
In the latest episode of the Portico Podcast, I speak with Aleem Remtula, a Partner on the private equity team at Developing World Markets.
DWM is an impact investing firm that has invested debt and equity in over 200 companies across 70 countries over the last two decades.
While this experience provides a broad canvas for discussion topics, the focus of my conversation with Aleem is DWM’s investments amongst refugees and displaced communities — a population that now exceeds 100 million people worldwide.
In our discussion, Aleem shares some astonishing statistics and details that upend the conventional wisdom on what constitutes a displaced community.
He discusses the roles that investment can play in assisting these communities, the unique challenges they face with respect to financial inclusion, the role of gender equity in DWM’s Displaced Communities Fund, and much more.
- McKinsey on web3 — Maybe you still think web3 and NFTs are bunk. Well, McKinsey has put together a thoughtful primer for you.
- But also … — Walt Bogdanich and Michael Forsythe’s When McKinsey Comes to Town shares some jaw-dropping revelations about the firm’s work.
- BII (fka CDC) on investing in low-growth countries — some surprising candor on the role of DFIs.
- ATP says PE may become a pyramid scheme — on secondaries and continuation vehicles.
- Matt Levine on the only crypto story you need — 40,000 words; also appreciate the Adam Curtis-inspired graphics.
- Closing the funding gap — UNPRI on ESG and sustainability outcomes in emerging markets (Portico interviewed for project).
From the Bookshelf
As the network of relations affecting men’s lives each year became more tangled and more distended, Americans in a basic sense no longer knew who or where they were. The setting had altered beyond their power to understand it, and within an alien context they had lost themselves. In a democratic society who was master and servant? In a land of opportunity what was success? In a Christian nation what were the rules and who kept them The apparent leaders were as much adrift as their followers. For lack of anything that made better sense of their world, people everywhere weighed, counted, and measured it.Robert H. Wiebe, The Search for Order: 1877–1920 (Hill and Wang: 1968)
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