Decentralising the music industry

Ideas on equity financing, the creator economy, bitcoin

The music industry systematically oppresses artists and stops them from having any real chance of building great businesses. I outlined all of the ways it does this in my last article. Most importantly, musicians are denied any direct relationship with their customers, making it impossible for them to build beautiful businesses.

Anyone who works in the music industry will be familiar with the underlying sense of inequality. It can be hard to put your finger on exactly what's happening, which is by design. Artists and the people who work for them are playing a game rigged against them from the start - they don't understand the objectives, and they don't know what the rules are. The house always wins. 

All of this sounds pretty awful. If artists really knew what they were getting into, most of them would probably never start in the first place, and that would be absolutely tragic for all of us.

But there is hope. I feel that more than ever before, artists actually have a chance at reclaiming some of the power they have been denied. I want to outline some of the technological and cultural shifts that are cause for hope and present a few ideas on how these might help reshape the music industry.

Decentralisation

The music industry is full of middlemen - people and organisations standing between those creating the value (artists) and the people who are willing to exchange money for that value (fans/customers). 

The most prominent middlemen are Spotify and Apple. Behind them are the record labels. You've also got promoters, ticketing companies and social media networks.

All of these groups perform valuable services to artists - streaming services make music abundant and cheap. Labels help to create superstars. Social networks provide an easy way to interact with fans. These services are valuable, but they need not sit between Artist and the audience like they do. 

Everyone on earth benefits from having access to rich cultural experiences. Life is only worth living if we have art. The incentives for people to make art should be strong. Artists should strive to own the relationships with their audiences and to capture and distribute the value that is exchanged for their art. 

Now is the time to begin making these changes and to move towards a more decentralised music industry. There is a collision happening right now. It's exciting, and I believe we are on the cusp of a brand new creative world.

Creator Economy

Another name for the creator economy is the passion economy. The promise of the creator economy is impressive. Right now, people all over the world are making a living simply by harnessing their unique passions and their creativity. If you have a passion for anything, you can find an audience and make money from it.

There is an explosion in the number of platforms, tools and financing options being made built for creators. Artists are the original creators, and they can benefit from the tools being designed for creators and the cultural shift occurring in the business community.

New World / Old World

Substack is a platform that allows writers to publish articles, build an audience, and charge subscription fees. Substack is New World and made for the creator economy. On the other hand, a platform like Medium is Old World. Let me explain: When a writer earns money from a Subscription on Substack, the cash is going directly to the writer's bank account. It does not pass through an intermediary (well, technically, it does as the money has to be routed through a payment processor like stripe and then on to a bank account). Suppose you subscribe to a few Substacks and you look at your bank account. Two substack subscriptions will come from different people, with different phone numbers and in different states. From Ben Thompson's article "Sovereign Writers and Substack".

On Substack, the customer belongs to the writer.

On the other hand, Medium sells subscriptions and pays out a portion of these subscriptions to writers. If I subscribe to Medium, I am a customer of Mediums. My bank statement will show a fee paid to Medium, not the writer.

Medium owns the customer in the same way that Spotify of Apple own the customer.

It is currently next to impossible for an artist to build a business without going through Apple for Spotify. However, they can begin intentionally building direct relationships with their customers through platforms like Circle, Memberful, Substack, Ghost, and many more.

I'm excited about the creator economy because we are only just at the beginning of it. To learn more check out Signal Fires overview of the creator economy.

Early Stage Financing in the Creator Economy

Record Labels don't have a clue what they're doing at the moment. Back in the day, their value was clear. Artists had to sign record deals because record labels controlled distribution and sales. When CDs were sold in shops, Labels worked to get their records into stores and onto shelves. They also took care of radio, marketing and provided the financing needed to get a band off the ground.

They don't do sales or distribution anymore. Anyone with an internet connection can sign up to Distrokid and get their music on Apple for Spotify.

They still do radio, but the impact of this work isn't as significant as it once was

They still do marketing, but from what I hear, the traditional marketing channels they used are no longer effective. Once a record is released and on streaming, labels are lost for what to do.

What's left is early-stage financing, and this is why they're still relevant. Bands still need money to get off the ground - it's costs dollars to make a record, even if it is a lot cheaper than it used to be. When labels give you money, they ask you to transfer all the value held in your business over to them. This takes the form of a licensing deal or a record deal. There are some new world labels out there who only do distribution deals, which are a little better for artists. The Orchard is one example. 

This model of funding is old and, frankly, a little shocking. When I moved over to VC, I was introduced to equity financing. I'd never heard of it before, and I was blown away that you could get money from an investor, and they didn't want you to transfer all of the IP over to them. Bonkers!

It gets better, though - equity investors don't want your IP. In fact, if Blackbird meets a startup whose IP has been licensed to some other entity, we can not invest in them. We just want equity in what you're building, and if you're successful, that equity will increase in value. If the founders work hard enough and get lucky, their own equity will increase in value along with ours. The incentives are clear and strong on both sides. Everyone involved wants the startup to succeed.

If a band wants to succeed, they must sign with a record label because they need money to startup and expertise to navigate an opaque industry. Record labels are strongly incentivised to keep things opaque or lose some of their influence and power.

Artists typically sign record deals when they have no leverage. When they are brand new with a tiny business. Labels can pretty much demand what they want of the artists, and artists just have to agree.

If there were more early-stage financing options for artists, the power dynamic might shift.

New options for early-stage financing are being conceived in the creator economy. They look much more like venture deals than standard label deals. Like I said before, artists are the original creators, and I think we will start to see more musicians taking early-stage equity financing. Here are some of the options that have popped up:

Equity Financing

Slow Ventures

"We say 'you're a young creator. Maybe you have a couple of YouTube channels — you have a following. … We will buy 5% of everything you do for the next 10 to 30 years,"

Creative Juice

Set up by the biggest Youtube star on earth - MrBeast. They're investing up to $2m, with cheque sizes from 25k to 250k.

Atelier Ventures

Atelier is an early-stage venture firm investing in the Passion Economy. Founded by Li Jin

Read more about some of these options in this Axios article

Creative work at the centre

What if there was a way to invest in music as you would invest in a startup? Riffing on the solutions outlined above, what if you could invest in music, or any creative work, for equity? These are just my ideas, so stick with me, and I'd love you to poke holes in any of these. 

Imagine if a band formed a company for each new creative work produced (say, an album or any collection of songs). The creators of the work would be the founders and the initial shareholders. 

Now imagine instead of licensing those rights away, artists could sell chunks of equity to people and organisations who would then be incentivised to increase the value of that equity. A record label could buy shares in the album, and if they marketed the record well, those shares would increase in value.

An agent could be given equity, and if they put together a great tour, got the best support tours and land the festival slots, then the value of their shares should increase. Anyone who works in music might have the option to buy or be awarded shares and be incentivised to work hard and increase the value of those shares.

Some advantages of a model like this:

  • Liquidity in creative works. As it stands now, it's pretty hard to buy and sell the underlying assets in music. In an equity model, shares can be bought and sold wherever there is demand.

  • Incentive structures that make more sense. Everyone piles in on music they believe in and is incentivised to work hard to make those songs succeed.

  • Band members are not so locked in. Imagine a world where a guitarist could play in multiple bands and not pay the price of starting all over again with each new project. Their equity is held in the creative work, not the band, and it is liquid. This would mean more collaboration, more creativity, more diversity in art.

  • In a world where streaming is the norm and creative works can earn money as long as people listen to the work, I think equity financing makes way more sense than licensing works and locking up the ownership for eternity.

Now imagine you could create some kind of exchange where shares in creative works could be bought and sold. Artists obviously benefit from this but imagine the person who runs a PR agency and has worked with artists, doing an excellent job for a decade. Imagine this person has a portfolio of shares from all the different artists they've worked with. These could be bought and sold on an open market, building long term wealth for this person. My point is that every actor in the music industry who is good at their job would have a chance to build long-term wealth through ownership.

Now, what if fans could purchase shares of their favourite albums? Imagine if you owned 1% of the White Album? Imagine a product where a fan could show off their portfolio as if it were a record collection?

I could go on, but I will park this one here as just an idea to consider.

Bitcoin

What if we could completely dismantle the music industry and rebuild it from the ground up? The foundations of the industry we have now are 150 years old, and they were not built for the world we live in now.

If all the problems I've been describing result from mass centralisation, then Bitcoin might just be the answer.

Bitcoin is a decentralised cryptocurrency built for peer to peer transactions.

With Bitcoin, no middlemen are standing in between people who want to exchange value. If I want to send you some satoshis, no bank is sitting in-between us, the sats go straight to you.

Now imagine if the music industry could exist on the Bitcoin network? The connection between Artist and audience would be direct. Artist makes music, fan listens to it in exchange for value (sats). Those sats go directly to the artists. The music goes directly to the fan.

Well, this world is already being built. It's still early, and there is a lot of work to be done, but there are some promising technologies on the horizon.

Lightning Network

The Lighting Network sits on top of Bitcoin, and this is where all the magic we are concerned with will happen. On Lightning, it is possible to exchange tiny amounts of money, or micropayments, between peers. Imagine streaming a song and paying fractions of a cent directly to artists as you listen. On Spotify, you pay a monthly fee, and lord knows how that money is distributed to artists. It is nearly impossible to ascertain—conceptually, this is super important. On the Lightning Network, value is being exchanged for value. In the music industry we have now, artists create value, and fans want to give them value back, but they can not do it directly. Artist do not capture a fair amount of the value exchanged, and the entire system is intentionally opaque. Read this great article on a hypothetical streaming service on the Lightning Network.

I'm not aware of anyone building a music streaming service on the Lightning Network (I'm sure there is - if you know of it, hit me up in the comments), but the gaming industry has really taken to Lightning. If you want to learn more, check out this podcast from Tales From the Crypt

Of course, even if a decentralised, peer-to-peer streaming service is built on Lightning, it would have to have every song ever recorded on it to be valuable to music fans. This is no small thing. But it's possible!

Conclusion

Art is everything. It gives us purpose, creates meaning in our lives and gives us the language to understand and explain the world we live in. In the future, everyone will be in the creator economy and I hope that becoming an artist will become the most prestigious thing a person can do with their life. To get there, we need to put the right incentives in place and a more equitable way to distribute the value that is collected from the creation of art. Now is the time to begin this work.