I recently read an article by Jeremy Vaughn, claiming that “we shouldn’t invest in music NFT’s for royalties” and I have to say I disagree. But not entirely.
But, before I start, I want to say that although I disagree, I respect and appreciate Jeremy and his work.
He is building an awesome project called Rimark, a really cool project that allows users to benefit from social capital. By purchasing Rimark’s native currency, $RIK, one can trade it, receive passive income by staking it, or use it to invest in other creators on the platform based on their progress. I’m looking forward to seeing how it stacks up against projects like Rally and Crowdpad, an awesome project by my good friend Joel Alexander, who was in my cohort at On Deck.
Without further ado, let’s dive into why you should invest in music NFT’s for royalties.
My thesis: As an early investor, I don’t see much of a difference between investing in startups and artists.
^ This might be your face right now. But if not, then hopefully it will be when you finish this article.
I would argue that the average person that isn’t in the music industry is missing out on an amazing opportunity to invest in something that can be huge.
Similar to an angel investor startup you are playing a game of bets. You are looking at a project of which the odds are completely against. In the startup game, there is about a 95%-98% chance that a startup fails (Israel has the highest success rate at about 5%).
So as an investor you are basically giving your money away with no choice but to be comfortable with the fact that you may never see it again.
The same goes for artists. The odds are completely against them.
But, if the one you choose does succeed, your investment made it big and so did your impact on society (more on that later).
Now let’s look at the points that were brought up in Jeremy’s article and break them down:
- “61% of 2020’s $23.1B revenue was from streaming ($14B). Apple made $274.3B or $22.9B a month in 2020 which means that the entire recorded music biz only grossed $0.2 billion more than Apple made in a month or about 8.3% of what Apple made that year.”
- “If 100k fans invested in a fund that held the rights to music similar to Hipgnosis Song Fund with 1820 artists, and all the artists made $1M in a year, your return wouldn’t be that great (according to his example it would be less than 1%)”
- “The only way you might get a decent yield on a song investment is if you invested in a song like “Shape of You” by Ed Sheeran which hit 3B streams, making $11.88B, where the artist sells at least 30% of the royalties, at 100$ per NFT, especially if you collect from all the streaming platforms and not just one.”
- “You won’t become a millionaire buying 1 NFT. In order to get big, you must invest big.”
- “Flipping NFT’s is part of the greater fool theory — basically hot potato. If you buy to flip, you might get stuck. That’s true with literally anything that you can buy whether a stock or sneakers.”
- “The underlying asset (the royalties) have nothing to do with the success of the NFT and so it is misleading. You would have to have a couple of billions of streams to match a market cap of a few million of NFT’s, and it is extremely hard to get there.”
- “If the goal is to buy an asset that generates meaningful passive income and earn royalties as artists do, this is not an effective model as many times there are too many parties with whom the relatively small amount of income must be split (aka labels, managers, etc). However, if the idea is to simply trade on cultural value or clout of the brand of an artist/creator, and use the NFT itself to generate a return on the secondary market, then what’s the benefit of tokenizing the royalties to begin with?”
What Jeremy is saying isn’t wrong. I agree with a lot of it.
But that’s if you look at it from one specific angle. Music NFT’s have more dimensions than that.
Here is what I noticed in the article:
- The article assumes you are investing in an “already made” artist.
- The article portrays NFTs in a static manner, and does not take into consideration the next generation of NFTs which are dynamic
- The article does not take into consideration the innovation in Web3
- The article does not take into account what type of royalties + perks you get and what type of self-funding the artist will do, or DAO’s or if an artist funds royalties for life.
- The article does not take into consideration Web3’s biggest asset: community with skin in the game.
I will now expand on Jeremy’s points and show why investing in artists is actually worth your time.
I will also explain why you should invest in music NFT’s and artists because like I said, they are similar to startups in the way that so many will not make it, yet if you hit the right one, it could be beneficial for you on a few fronts.
I’ll be using the points in Jeremy’s article as the titles.
Point 1: “61% of 2020’s $23.1B revenue was from streaming ($14B). Apple made $274.3B or $22.9B a month in 2020 which means that the entire recorded music biz only grossed $0.2 billion more than Apple made in a month or about 8.3% of what Apple made that year.”
This is correct. But I feel that it is important to note the following:
“Ash, what is this random chart you have stuck into your article to look smart?”
This is a chart showing streaming revenues from DSP’s (digital streaming platforms) for the past 10 years.
From 2014, revenue from streaming has grown at an average rate of 43.9% YOY and become the primary revenue source for most music labels. So isn’t it safe to assume it got bigger in 2021 will continue this trend as the creator economy gets larger and larger for years to come?
As more and more people continue making video content (which is what basically runs the internet now), more and more music will be discovered, downloaded, used, and streamed.
Why? Because every video needs music. Music makes content. Simple as that. Any video without music is just plain boring.
Go ahead. Check any video. I guarantee it has music in it.
My point is: I believe this growth will only continue and will actually increase due to the increase in content from the creator economy as well as the number of new places you are able to get music from.
One example is Tik Tok’s relatively new music commercial library. Many other platforms I am sure will jump on this trend.
And I didn’t even mention the Web3 platforms like Audius that are paying artists at least 50% of their streaming revenues instead of using the same .003 per stream that Web2 platforms like Spotify do.
This means more money in streaming revenues and more money to give back to investors who bought into music NFT’s.
Point 2: “If 100k fans invested in a fund that held the rights to music similar to Hipgnosis Song Fund with 1820 artists, and all the artists made $1M in a year and each sold 10 NFT’s each for around 1000 USD, your return wouldn’t be that great (according to his example it would be less than 1%)“
This example assumes that you invested in an artist that already had some traction and hence they sold each NFT for $1000 USD and on top of it, that investors bought in bulk like a fund instead of the example of an individual investing in an individual (which is most cases today).
Let’s change the scenario to one that fits us (one that I almost took part in if it hadn’t sold out), where an individual invests in an individual artist.
“Again with the charts? Dude…”
Yea I know. I like data.
Anyways, above is a real sale that happened on Royal.io where Nas sold 50% of his royalties for his song “Ultra Black”.
He sold 760 NFT’s for 50% of the royalties of the song at the following prices:
Let’s say you bought one Gold (the lowest tier worth $50), you would own .0143%.
Let’s use Jeremy’s example of the artist making $1M.
But first a fun fact:
Only, 3.97% (this number is extremely similar to my point of startups vs artists) of artists on Spotify made over $1k from the platform and they are broken down into 3 tiers:
- Artists that make between $1,000-$500k
- Artists that make between $500k-$1M
- Artists that make $1m+
Back to the example:
That would mean that the artists had about 333M streams based on Spotify’s payout of .003 per stream.
So as an investor you made $143. You almost tripled your original investment.
Yes, I know what you are thinking. Keep reading. There’s more.
Let’s play it safe and say the song had a million streams on Spotify.
That would mean that the payout would be approx 1M (that’s 1M*$.003), based on Spotify’s payouts.
So you would get $0.43 (3000*.000143).
Let’s now assume you got paid by the other 13 large platforms out there and not just Spotify.
- Amazon Music
- Apple Music
- Google Play
Jeremy notes this in his article and triples the amount to take all the platforms into consideration. So for argument’s sake, let’s do the same.
You’d have $1.29. Okay not great.
But, now let’s take into consideration a Web3 platform like Audius that pays artists about 90% of the payouts ending up in about $0.35 per stream.
Audius to Artist: 1M streams * 0.35 = $350k.
Artist to you : 350k * .000143 (your owned royalties) = $50.05
Now you’re at $51.34 USD.
But the best part: because we are talking about things in a token economy, we think of royalties as a sort of yield or interest you’d receive in addition to the value of the NFT itself.
So that $51.34 is actually your paid-out interest.
In conclusion, instead of making about %2.6 yield as an ROI , you actually made over 100% yield.
I bolded and italicized that one for extra spice. I’ve been sitting on this article for hours. It’s been a long night.
I’d say that’s a pretty good deal.
Oh right, our first example with the 333M streams. How could I forget?
Now with Audius in the mix, there is an extra $116.5M in the mix because of their .35 cents per stream.
Your .0143% is now worth $16,666!!!
In total, you made about $16,800 (after adding the Web2 payouts which were $143)
That’s about a %33,600 yield from the $50 USD you invested.
For the average prices that you would usually pay for an NFT, you could probably snag a few more, increasing your income even further.
Now let’s take a look at my example of comparing an indie artist to a startup.
Let’s say that instead of Nas (who is a very established artist), a promising new indie (independent) named Jane gave that same deal for %0.0143.
But instead of the floor price being $50 USD, it was $20, since she does not have as much traction as Nas.
Let’s also assume once again that the song got viral and hit 1M streams.
Let’s run through the numbers again:
Spotify (1M streams * .003) = $3000
Your share (3000*.000143) = $0.43
Your share from Web 2 DSP’s (3*0.43) = $1.29 (a 6.45% interest)
Now add Web3 Audius : 1M streams*$0.35 (per stream)= $350,000 to the artist
Your stake is 0.0143%= $350,000*0.000143= $50.05
The total money you made from Web2 and Web3 is now: $1.29 + $50.05 = $51.34
You just made about 150% on yield alone.
Let’s say she kills it and makes a milli ($1M) just with Spotify.
Spotify (333M streams * .003) = $1M
Your share ($1M*.000143) = $143
Your share from all Web 2 DSP’s (remember that we tripled the number for argument’s sake like Jeremy) so we would do:
3*143 = $429
Now add Web3 Audius.
At this point, I don’t want to do the math for you anymore.
The point is: You killed it.
On top of that, the sky’s the limit with the NFT alone because it is a brand new artist!
As that artist grows, so will the value of his NFT’s!
Let’s tie it all together now.
In the startup world, angel investors can invest anywhere from 5k and up. So imagine instead of investing $20 USD, you put in $5k…
Prep the whiskey and cigar my friend.
But now let’s say we don’t have the “web3 boost”. Angel investors look to make at least 10x. Let’s see if we can get it for them.
Let’s go back to Jeremy’s next 2 points:
Point 3 + 4: “The only way you might be a decent yield on a song investment is if you invested in a song like “Shape of You” by Ed Sheeran that hit 3B streams, making $11.88B, where the artist sells at least 30% of the royalties, at 100$ per NFT, especially if you collect from all the streaming platforms and not just one…..You won’t become a millionaire buying 1 NFT. In order to get big, you must invest big.”
- We proved you can make money without being “Ed Sheeran big”
- We proved you can make money with lower floor prices
- We showed that you can make money from Web3 and not just Web2 platforms
- You probably won’t become an NFT millionaire from buying 1 NFT majority of the time (only a handful of cases occurred)
- Proved how beneficial this can be specifically because we are in a token economy.
Now let’s see if we can prove that you might have a shot at making 10x on your money as an angel investor in indie artists.
New example: An indie artist needs an investor to help him put out his first album. He doesn’t want to deal with record labels.
You see potential.
Instead of giving him 100k for 50% or more of all his royalties and shares like any other record label, you take 20%.
This guy ends up being the next Drake.
According to sources Drake has made $430 million in his career with $52.5 M off streaming alone.
You just took $100k and turned it into $10.5M.
Let’s say the artist wanted to crowdfund for a strategic “go-to-market” strategy which would get him more attention and more people with skin in the game and he raised 100k for 20% of his royalties and created 1000 NFT’s at $100 USD each.
The $10.5M would be split between 1000 token holders.
Each person made $10,500.
I think my point is made.
On to the next point in the article
Point 5: “Flipping NFT’s is part of the greater fool theory”
The greater fool theory is basically a game of “hot potato”. If you buy to flip, you might get stuck.”But that’s true with literally anything that you can buy, from stocks to sneakers. No matter what you do, no matter what market, there will always be a greater fool theory.
But in the case of NFT’s, I would argue that Music NFTs are different from art NFTs because I think there is a different artist-fan dynamic, especially with early-stage artists.
Similar to sports, when you follow a team or a player for so long, you build a true relationship with them, and the things you collected which are a representation of that are thereby extremely sentimental. So, if you own a piece of your favorite song, one that expresses exactly how you felt at a certain time in your life or one you feel expresses you the best, I’d bet you wouldn’t sell it for anything
Think about how many of us still have our original CDs or Vinyls or t-shirts from our favorite bands.
Both the art market and the music market are valued at about $50B, but with different demographics.
Art is mostly an upper-class thing.
Music is for everyone because it’s something with which most people interact and eventually, there will be less flipping.
At this point, we all see where I’m going so let’s wrap up by bunching up the last few points in Jeremy’s article (I really have to learn how to shorten my articles. I know I have a problem. I’m working on it with my therapist–it’s bad).
Points 6+7: “The underlying asset (the royalties) has nothing to do with the success of the NFT and so it is misleading. You would have to have a couple of billions of streams to match a market cap of a few million NFT’s, and it is extremely hard to get there.”
“If the goal is to buy an asset that generates substantial passive income and earns royalties like artists do, this is not an effective model as in many cases there are too many parties with whom the relatively small amount of income must be split (aka labels, managers, etc). However, if the idea is to simply trade on cultural value or clout of the brand of an artist/creator, and use the NFT itself to generate a return on the secondary market, then what’s the benefit of tokenizing the royalties to begin with?”
As Web3 communities grow, platforms like Audius continue with more fair pay, more people have skin in the game, and more people will be incentivized to promote the artist. Because of that more artists will choose the independent route and hence the “splits” taken from all the middlemen will cease to exist.
It’s one thing to love an artist and want to share their music with the world. It’s another to also have skin in the game.
In addition to that people will know what metrics to look for.
When all of this happens, I am sure that NFT market caps and royalty payouts will be more balanced.
I’ll add another point: right now, platforms like Royal are basically only supporting the ability to buy Streaming Royalties.
Just wait until the next wave of adoption of blockchain technology and our lawyer friends and tv shows and movies actually start using the tech to track all the aspects of Public Performance royalties. Things like Openlaw will open up a load of revenues for NFT investors.
Then things will get Schwiftyyyyy.
The future of Music NFT’s is very very bright and, like crowdfunding for startups, they open the doors to a deal flow that until now has not been easy to find for most of us.
For years deals worth millions of dollars have only been given to the biggest corporations in the world and now, they are finally starting to be easier for any of us to be an Angel investor in artists. Because of that the path to stay an independent artist will be much easier, and it’s also good for investors as there won’t be any middlemen touching their ROI.
Expect to see music syndicates, funds, and launchpads, similar to Musicfund, all in the form of DAO’s, scouting for new artists and using the power of their communities to help them grow– the same way the Bored Ape Yacht Club community is pushing forward.
We might even see deals that include other perks of being an angel investor /early adopter including dynamic and not static NFTs, that funnel all sales of the artist’s NFTs including tickets, merch, and more through a smart contract into the investor’s wallets, and get updated as artists sign more deals!
Sidenote: that’s freakin awesome 🔥
Expect to see new influencers coming out, modern-day Simon Cowells, that are simply amazing at scouting out new talent, and are able to make successful careers out of it, whether it be as an individual investor or being hired to do so in one of the DAO’s.
As of now, A&R (Artists and repertoire), AKA talent search, is what makes up a massive chunk of record labels’ billion-dollar budgets.
There is no reason that any of us shouldn’t be able to jump into that.
Besides for all that, I think there is a very important aspect here besides the potential gains of investing in indie artists like an angel would invest in a startup.
I think all of us would love to make great ROIs, and impact the world.
What’s the impact you ask?
Helping the little guy.
Indie artists, like startups, have it hard with all the odds against them, and like startups, their “tech” aka their music, has the power to impact the world.
Music has helped me express myself, and communicate with the world. Artists like Machine Gun Kelly, Kota the Friend, Mac Miller, Luke Christopher, Kid Quill and so many more, have gotten me through all the shit I have eaten in my own life.
Music has gotten me through some pretty hard times.
So if you ask me, I’ll be investing in Music NFT’s, both for the gains, and the impact of how these indie artists can help the world.
And I think you should too.
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For reference here is Jeremy’s article.