Long Take: Why Square bought Jay Z's music service Tidal for $300MM, and how the NFT-driven transformation of music royalties and ownership can explain this future
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Hi Fintech futurists --
This week, we look at:
Square acquiring Tidal and its 1-2 million of subscribers for $297 million, and the logic for what a payment processors has in common with the creative industry
How celebrities and creators like Mark Cuban, Gary Vaynerchuk, Grimes, 3LAU and others are generating millions in NFT sales
The impact on the economic model of the music industry, including a look at royalty structures, revenue pools, and financial vehicles when tokenized
The philosophical divide growing between a feudal platformed commons (e.g., YouTube) and a collectivist anarchist capitalism
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Long Take
By now, you should have heard of NFTs and the change they are driving in the art and music world.
See our most recent conversation with Tyler of Eulerbeats, and long take in response to the Hashmasks launch relative to the volumes in the traditional art market.
The space is moving very rapidly, and economic models for scarce digital media are emerging. Musician Grimes has sold her art print for $6 million, DJ 3LAU sold out a crypto-digital music album for $11.6 million, Beepl’s NFTs are currently in auction for $3.5 million at art-house Christie’s while Nifty Gateway had a single on of his pieces go for over $6 million. Even more interesting is the impact on royalty models and intellectual property ownership.
The Eulerbeats project has generated nearly $2 million in royalties paid to owners of the original musical collectible, separate and apart from the initial issuance. For a deeper accounting of recent developments, see this analysis by ConsenSys.
People who understand modern media, like Mark Cuban and Gary Vaynerchuk, are also both in.
We are not saying that we should just listen to influencers and blindly follow. For example, John McAfee was very … vocal … about promoting token offerings in 2017, and has not been charged with a $13 million fraud charge. But the core difference here is that McAfee was shilling projects for personal gain. What we have in today’s cycle is that industry participants are realizing the core change in market structure, and describing it to others. So let’s break down what that change really is.
Understanding the Economic Impact
We are over 20 years into the Internet revolution. What is clear is that there is not just one technological change, but multiple waves of transformation. Each carries with it a social and philosophical outcome.
We thought that open, endless access to the world’s media would be fantastic and freeing. That we would have an intellectual and scientific Renaissance as a result. And to some extent, that has indeed happened. But it has happened at deep cost.
First, let’s just describe the “it”.
Starting with the chart on the right above, picture the Supply and Demand of music. You can use the same shorthand for other information, like books and newspaper. This is supply and demand in the physical world at the aggregate level for the industry. So you might sell 1 million CDs for $12.99, but only 500,000 CDs for $15.99. Based on those slopes and elasticities, some aggregate amount of production and commerce occurs.
Now we introduce Napster. The price of an individual CD or song goes to $0 for those that know how to use peer-to-peer file sharing software. That averages out to non-$0 in the population, but we know a revenue pool collapse of 50% or more actually occurred. The shape of the supply curve is remade by “democratizing” technology. At the much lower price, we shift down the Demand curve to a much larger consumption of media. Today, that includes all of YouTube, TikTok, Spotify, and the long tail of services. There has been a massive demand side expansion along the curve from technology.
As a result, there has also been a collapse in artist revenue pools (i.e., quantity times price). We won’t belabor how little musicians earn from Spotify too much, but an illustration is provided below. You get $4 per 1,000 streams, and would need about half a million streams to make a living wage in the United State.
We also footnote that the Digital Rights Management efforts of the 2000s was an effort by the music labels and the publishers to take back control of p2p distribution. Despite Metallica’s best framing, it was *not* a grass roots effort by the artists that directly benefitted the creators. DRM was an attempt at preserving intermediation.
Now a lot of creators actually love the huge audiences they are able to access and are allergic to any sort of capitalist overlay for the remix culture of the Internet. Part of being techno-literate over the last 20 years has meant being pro-file sharing. It has meant supporting the destruction of walled gardens, going open source, and removing legal barriers, and even ending the concept of ownership.
Blockchain-based NFTs reintroduce the concept of property rights into digital media markets, and they do so through software-enforced capitalist logic. One can own art again. Is that good? Is that bad? That remains a philosophical question.
In revisiting our toy model, the core provision of endless music to the market has not changed. Instead, we add on a new market for ownership. It is one thing to experience a song by listening. It is another to own the original print and its underlying economic earning power. There is now a steeply expensive, very niche market of digital objects. There is also now a change in the demand curve, such that there are some collectors and purchasers that — all of a sudden — have the desire and capacity to participate in the new market. Many of these participants are crypto-rich, collecting status and binary options.
Conceptually, we are also bleeding into media’s financial markets, by literally joining creative output and its $10 billion-per-year financialization. In the traditional markets, this would be something like Hipgnosis Songs Fund.
Digital streaming services are growing over time and have fixed the publisher’s revenue problem. At scale (i.e., in a 4-player publisher oligopoly) there is sufficient income generation from owning the rights to songs, and the different type of royalties that they generate (e.g., mechanical, performance, and so on). See the report linked here from Shot Tower Capital and the below excerpts for the nuts and bolts of the industry.
You can see also the massive asymmetry between distribution and manufacturing. Today, most value is sitting with the storefronts. This is the thing that will potentially change. Much more value could be sitting with the artists, who increasingly have a direct relationship with their fans through social media.
Putting the royalty economics on-chain, and turning those into a liquid market connected into Decentralized Finance is a pretty large paradigm shift. You could own the royalty stream. You could collateralize it to take out a loan. You could stake it as an object that allows you some governance rights. You could create a portfolio or basket of various creative objects, and turn them into an index that generates dividends. You could lever up that index and buy downside protection. And so on.
As an example of this already, NFTX is a DeFi project that has bundled crypto punks into indexes, which can be purchased in a fractional manner. As crypto punks sell for millions of digital USD, they become inaccessible status symbols. But, if you want to diversify your portfolio with exposure to some original blockchain-based assets, PUNK-BASIC or PUNK-ZOMBIE stand in as derivative exposure backed by the NFTs.
In the medium to long term, we do think that there will be an oversupply of tokenized art. Creators are realizing that they have an asset they can sell directly to their audience, and this is still quite novel. Once all creators realize this, supply will go through the roof. Thereafter the novelty of collection will wear off, and it is likely that demand will also settle back down. Prices will reach some other equilibrium than the one we are seeing currently. Yet early adopters have the opportunity to grab rich share, and to innovate their way towards new platforms.
Key Takeaway
It is with this lens, for example, we should look at the acquisition of Tidal by Square from Jay Z. Tidal has 70 million songs and 250,000 videos, and is being majority-bought by the payments processor for $300 million. According to estimates from ARK Invest, Tidal runs around $170 million in revenue, and has 1 to 2 million subscribers paying $13 per month.
Why does a mobile wallet want to own this property? In part, the customer acquisition strategy for Cash App has been through influencers and the hip hop community, including by giving out Bitcoin to followers. This is a massive leverage growth hack.
Square is buying a unique go-to-market strategy. It is also getting a lot of artists as customers, who are in essence running small businesses. Being a small business banking alternative, Square is well positioned to (1) bank and monetize the creators, and (2) then use the voice of the creators to grow adoption of Square itself.
This is Jack Dorsey playing five-dimensional chess. As another example of the same insight, look at Twitter’s roadmap to add paid subscription (“super follow”) features of its own content creators. In building financialization into the social network, the company is taking economic share back from third party tools that aggregate and represent influencers. Instead of ad units disappearing into direct messages and talent agencies, the platform is both a creative and a financial platform.
Speaking of platforms, that discussion brings us back to the philosophy by which you live in the Internet.
The first attempt at a software-based world has given us massive, trillion-dollar-valuation walled gardens. Yes, what we do inside the gardens is amazing and largely “free”. You can think of them as a gigantic Commons for intellectual activity and creative exchange. But that Commons also ended up being platformed and oligarchic under aggregation theory. It is akin to a feudal Lord, like Jack or Elon, running a manorialism program in the digital realm. The fruit of memes and art is farmed.
Blockchain and crypto and NFTs are pointing to a different world. That world sits in opposition to the gap created by a lack of digital ownership. It has — so far — been primarily inhabited by investors, traders, and capitalists. It is now being targeted by people who “trade on attention”. And yet, this world is built on a shared, collectivist, open source architecture, anchored to a mutualization philosophy. That in turn runs for profit through mining on electricity, and soon enough on Capital itself through proof of stake.
So you have either a collectivist platform where people compete financially for asymmetrically distributed rewards, or a utopian commons of exchange feudally operated by mega-oligarchs.
We think this dichotomy will be the core struggle of the technology sector and its global politics over the next twenty years. Which side are you on?
For more analysis parsing 12 frontier technology developments every week, a podcast conversation on operating fintechs, and novel food-for-thought essays, become a Blueprint member below.
Once other media artists discover NFTs, you'll see the same explosion in video content, book and other textual content, photography and visual content (which is happening now, btw). These are exciting times.
Much appreciated and great read !