music is unbundling again

July 2022

Jim Barksdale, CEO of Netscape, once quipped “there are only two ways to make money in business: bundling and unbundling.” Bundling is one of those recurring macro business themes. Music, specifically, has gone through cycles of bundling, unbundling, and rebundling. With web3, we’re entering the next phase.

We started with single-side vinyl records (one song on the front, one on the back), then we moved to bundled LPs, tapes, and CDs, which grouped tracks. As the internet went mainstream, music unbundled again to individual MP3s on iTunes and illicit pirate sites. And over the last few years, streaming platforms like Spotify and Apple Music have rebundled music through all-access subscriptions and playlists.

Technology drives the shifts. The state of the underlying technology dictates whether a bundled or unbundled service is right for providers and consumers. Before the internet, when distribution was physical, it made sense to batch tracks together and ship them to retail stores. But once music moved online, and songs could be downloaded individually, it unbundled. As streaming platforms sought to aggregate the supply of music in one place and package it into a single user experience, it rebundled.

Now, blockchain technology is forcing unbundling again: listeners can own music, micropayments are viable, and songs can be fractionalised.

Let’s explore each one.

The first is unbundling streaming subscriptions by giving listeners ownership of tracks. Bundling is offering single access to multiple products or services for an all-in price. This is what Spotify and Apple Music do: all music for a few dollars a month. Bundling is pitched at casual fans. Casual fans, as Shishir Mehrotra says, value a product when they have access to it, but won’t pay the retail price for the product à la carte and lack the activation energy to purchase it proactively. So, the bundling model of streaming enables artists to monetise casual fans. Casual fans of an artist will buy a streaming subscription even though they wouldn’t have bought an artist’s music independently, and the artist can benefit from those streams. Bundling also increases the consumer surplus because they get more value for their money.

Streaming services have been a boon for listeners but not so great for artists. Previously, listeners could choose between paying $0.99 for a song on iTunes or downloading it free from a janky pirate website with the risk of imploding their computer. With streaming, listeners pay a single monthly price for access to all the music in the world. Spotify and Apple Music beat piracy by aggregating supply in one place, offering a smooth user experience, and adding a curation layer of playlists. They won by making music so convenient that listeners preferred to pay (or listen to ads in the case of Spotify’s ad-supported model) over getting it for free through pirate sites.

Music NFTs unbundle the streaming model by making individual albums and tracks ownable, making music more artist-centric. As I wrote in NFTs and the coming music renaissance, “Blockchains enable genuine digital scarcity. And NFTs are an instrument for digital property rights, so now we can own music and trade that ownership with others.” This happens at the artist level - they tokenise their albums and songs, and listeners purchase ownership. While streaming gives wholesale access to all music and treats it as a collective product, music NFTs productise individual artists.

Streaming platforms have commoditised music through bundling. We’re at a place now where many people just “listen to music” without any awareness of the artist behind it. This is a by-product of the streaming platform model. As wannabe aggregators, they seek to own the demand side of the market (listeners) and modularise supply (artists), so they can impose terms and capture as much of the economics as possible because artists depend on them for discovery and distribution.

One of the main ways this commoditisation shows up is in the streaming economic model. Spotify and Apple Music pay all artists roughly the same fixed sum per stream ($0.003-$0.01). Every listener’s subscription fee gets distributed across all artists, rather than only going to the artists they listen to. The whole streaming experience is homogenous end-to-end: all music is accessed through the same interface, listened to the same way, and artificially priced the same.

As Ben Thompson, the king of aggregation theory, says: differentiation is the only way for suppliers to retain power against an aggregator. Here’s the opportunity music NFTs give artists. They can bypass streaming platforms and own a direct relationship with their listeners by offering NFTs which give holders ownership (and other rights) in their music. Artists have complete autonomy to set the mint price of their NFTs, and the secondary market price is a function of supply and demand for owning that audio. Part of the price will reflect the artist, but each song or album that the NFT represents will also have a unique value depending on its cultural significance and popularity.

The trading price of each NFT is determined by the collectable value of the music underlying it and any royalty cash flows the holder is entitled to from that music. The nutshell version of this is that every piece of tokenised music has a financial value, determined by artists and listeners, rather than subsuming the value of all music on the planet into a single monthly subscription fee. Artists can also use NFTs to form networks with their fans without being intermediated by the streaming platforms.

The second way web3 could unbundle the current streaming subscription model is through crypto micropayments. Micropayments are tiny transactions for digital goods. They’re impossible in the legacy payment infrastructure presided over by centralised companies because the fees are too large to justify transactions below a certain value. With decentralised blockchains, free of trusted, rent-seeking third parties, and new internet-native money, they’re feasible. We’re just waiting on the scalability infrastructure.

Micropayments could unravel streaming subscriptions as listeners would pay a minuscule amount for every stream rather than a fixed monthly fee. Instead of listeners paying the aggregators like Spotify and Apple Music, they’d pay nominal amounts in real-time to artists’ wallets for each stream. Listeners would win because they’d only pay the artists they listen to, creating stronger patronage, and for exactly how much they listen to. Artists would get paid directly by their fans, rather than all subscription revenue going to the same pot. There’s some friction here: listeners are used to paying for a single subscription and getting unlimited music. Their willingness to switch to micropayments will come down to the cost per stream. We’ve got used to music as massively undervalued so it will require some education.

I don’t think micropayments will be the main way we access music. The beauty of NFTs is they provide an alternative monetisation mechanism for artists, so streaming doesn’t need to serve that purpose anymore. Artists want to maximise the number of ears their music reaches - it's not about the money, it’s the recognition.

Free is the best way to maximise distribution. That’s why I think we’ll move to a model where anyone can listen to music and revenue will be generated through the tokens associated with it. Cooper Turley frames this as “free to listen, buyable to own.” The two are not in conflict. The more renowned the music, the more cultural significance it gathers, making the token more valuable. Perhaps some artists will use micro-payments for a small slice of their music, but overall they’re incentivised to make it as accessible as possible.

Free streaming, supplemented with NFTs, will give artists the best of both worlds: massive reach by making their music a public good, while monetising superfans. For a sense of how powerful this could be, look at free-to-play gaming - anyone can play the game and players are monetised through in-game economies and ads - which has overtaken traditional paid games.

The third way music is getting unbundled is by fractionalising songs. Until now, songs have been the smallest atomic unit of music. But NFTs enable a song to be broken down into its building blocks (a beat, sample, stems, vocals etc.), and each can be financialised, tracked on the blockchain, and used throughout the web3 music ecosystem.

Each component can be an NFT, have a financial value attached to it, and be used by other people with attribution and a fee going back to the original creator.

What does this mean? An artist could mint an NFT for their song or album, then mint the building blocks of each song as their own NFTs. Listeners could own those building blocks, and other creators could use them in their work, but the original artist would get credit and payment for it. This would all be automated and trustlessly verified on the blockchain.

To wrap up, web3 has catalysed the latest evolution of unbundling in music. This is a very half-baked thesis. I’m sure I’ve missed other areas of unbundling (and perhaps aspects of rebundling). Drop me a DM if you’re up for chatting about this.