How the emerging Web3 WILL and WON’T disrupt music streaming
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January 18th, 2022

The largest obstacle to understanding the developments in the web3 space is the belief that it’s there to replace everything we know. Innovation doesn’t work that way. Innovation lives side by side with past innovations. Napster and Torrent technology brought peer-to-peer network technology to the innovations of sound recordings a century earlier. These innovations paved the way for the modern music streaming service and the web3.

First published on Jan 4 in the MUSIC x newsletter.

From CD to streaming landscape

Peer-to-peer filesharing felt like a revolution, but was only temporarily disruptive. The legacy of filesharing is a new ruleset for recorded music; a playbook for how recorded music thrives in the age of networks. The recorded music industry, and its major labels, still operate based on paradigms of the age of mass consumerism & recorded music: build catalogues & leverage them to get maximum exposure and ‘sales’ (aka streams).

Filesharing added new rules to that game, such as that consumers shouldn’t be forced to buy entire albums just because they’re into one song. It also made it easier for everyone to get their music out there, which has led to the reality of over 60k songs per day being added to the likes of Spotify today. Abundance x convenience has led to the need for algorithms and curators to carefully surface relevant music to end users. The need to sell subscriptions while competing with free has led streaming services to position music not just as something aesthetic, but as something with utility: workout playlists, coffee playlists, music for cleaning the house, etc. Music for every moment. The soundtrack to your life.

Meanwhile, portable music players took hold, which has culminated in the mobile device as the primary music player. Again, all the above trends converge perfectly.

Terms are still set by labels however - for artists, but also for streaming services. It’s about maximizing catalogue value and a lot of the economics involved can be traced back to before anyone had ever heard about Napster. These economics are designed for the role of consumers as listeners and the role of artists as creators of catalogue entries. Profit comes from maximizing those roles. That’s the incentive for major labels, that’s the incentive for the streaming services that license from them (whether they like it or not). Optimizing for listener-catalogue is a different game than fan-artist, which is where the higher margins are for artists.

(For a longer read on how modern music service interfaces can be traced back to the earlier days of digital music piracy, I recommend my 2016 article “How Piracy Changed Music Discovery & Licensed Services Pushed It Forward”. To go deeper into how music got free - read the book by that name.)

The game you can’t win

While streaming services follow a one-size-fits-all model, with most apps offering similar catalogues, similar features and similar interfaces, the economic model of streaming is far from one-size-fits-all. Streaming benefits specific types of creators who can deploy strategies that exploit the attention economy of release cycles and recommendation engines well. For everyone else, what streaming has accomplished is that music is easily available to fans in a legal way. When they listen, there’s payment, there’s data - both things that went missing when music consumption went underground in pirate networks.

The economics of streaming services are harsh. I say this as someone who has led product at two different music streaming services. There’s very little margin for anyone. There’s close to 0 margin for the streaming service if it chooses to price according to market standards ($10 / month) and utilizes Apple or Google’s in-app subscriptions for which the tech giants take sizeable cuts (30% per subscription per month, if you’re grossing over $1 million per year).

The streaming services do all it takes to get people to subscribe and stay subscribed. That means getting people into strongly discounted trials. That means pushing music through algorithms, so people experience themselves using the app all throughout the day. Music for every moment keeps people subscribed. These are dynamics of catalogue exploitation, but they don’t serve to deepen the connection between artists and fans. High margin transactions between artists and fans carry low engagement: how many times per month do you use artists’ Shopify pages?

Furthermore, services that are highly successful in user engagement will have lower per-stream royalty rates than less successful services. This is due to the fact that when people listen more, their revenue gets spread out more thinly. This is why some of the highest grossing services, who contribute the largest total amount of money to the music industry, seem to have lower per-stream rates than other services. (with the exception of YouTube, which has lower rates for other reasons I won’t go into in this week’s piece. #valuegap)

To me, it’s frustrating to see all the blame for low royalties pinned on Spotify. It’s even more frustrating to see people pulling their catalogue from Spotify, but not from the tech giants’ services.

The tech giants can afford music as a loss leader, while keeping price points artificially low, forcing the entire market to adopt the same price point. Meanwhile they put pressure on the market by taking a 30% cut every month, for facilitating a transaction. Do we want a music landscape dominated by Apple, Google and Amazon?

The model is clearly not functioning right for most artists. When it started, it was designed to compete with piracy. To create payments and data around music consumption. To compete with free. The internet has changed a lot since then. For one, it’s mobile-first. Secondly, we’ve gotten way more used to making payments online, including for digital goods. I cannot emphasize that last point enough. This was absolutely abnormal for the majority of people 15 years ago. Now that it’s normal and it feels easier to unlock higher margin revenue online, the pennies from streaming services feel like… well, pennies.

I personally don’t think most artists should be pulling their catalogues from streaming services, but I do see a scenario unfolding where it just starts to feel irrelevant to bother with uploading music to the incumbent landscape.

The most likely way in which the web3 will disrupt music streaming

Over the next 5 years, I think there is one disruption music streaming services should be worried about from the web3. It won’t happen through direct competition with web3 services. Rather, it’s about competition for artists’ priority. Where will they place emphasis? Which profiles will they promote? What will be their ‘link in bio’?

Web3 is a game of its own. It’s highly community-driven. Its revenue models to date are, often, high margin. Even though it’s very early, you can witness on a daily basis musicians getting offers on their new music NFTs that far exceed the revenue they’d see from streaming services for that song or even across their catalogue. That’s not an assumption: that’s what they’ll literally tweet or be talking about in Discord Stages and Twitter Spaces.

What happens when these communities grow? When sizeable audiences can be reached through these dynamics? When artists realize how much more they can do on their own terms through this? My feeling is that the landscape that came before will slowly become an afterthought. I recently tuned into the Twitter space of Songcamp founder Matthew Chaim’s Sound.xyz NFT drop, which sold out instantly. He was in the car and blown away by it, mentioning how when he’d do a release in the past he’d have to do all this work, message folks, set posts live on all channels, keep pushing for days, etc. In this case, he made more revenue immediately upon release (which can grow via sales in secondary market) than he’d likely see in months of streaming revenue.

Who’s going to bother with all the work it takes to make a track successful on streaming services, if you can net more revenue faster through much more pleasant dynamics on your own terms?

This is the big threat the web3 currently poses to streaming services. When Facebook and SoundCloud came around, MySpace didn’t disappear. It faded into obscurity, as people found less and less reason to go back and update their profile. If streaming services don’t find a way to create significant revenue for more artists, they’ll start to feel irrelevant as artists find new ways to connect with their audiences at higher margins.

The writing was on the wall. Now that moment has come.

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