How to Forecast and Value Music NFTs
A culture driven asset-class in web3
Digital streaming platforms are more popular than ever and music rights holders are reaping the rewards. This is why private equity firms and hedge funds are betting billions on music catalogs and future royalties.
But the music industry is going through a monumental transformation. NFTs and web3 have opened up the playing field, allowing retail investors and fans to invest in music and its future royalties too. This is an entirely new asset class for retail investors and the returns on their investments are linked to the popularity of the music they own.
But music popularity is incredibly hard to predict. In this article, we’re going to walk through a framework for forecasting and valuing music before making an investment. Here’s what you’ll find in this article:
- Understanding the life-cycle of a song
- Genres matter
- Past song performance
- Virality — the golden ticket for rights holders
- Risk — similarities between music and equities
- Growth of the industry
- Price matters
Understanding the life-cycle of a song
A good place to start is to get a lay of the land. How do songs typically behave and what’s the general life-cycle of a song?
With established artists we usually see a song’s streaming numbers peak right around the time of release. This is when the artist, their team, and their label are promoting it heavily. From there, the songs streaming numbers tend to decay steadily.
This chart is a representation of that concept but not a particularly accurate view of the life-cycle of a song. Depending on the artist, the first two years of release are often the most unpredictable and can go up or down violently. There are many variables at play and it’s difficult to determine the song’s future outlook. After 2 years have passed, streaming behavior tends to normalize and returns become more predictable as the song settles with its audience.
When we’re evaluating new and emerging artists, the picture looks quite different and the uncertainty is much higher. Depending on the stage of the artist’s career, the song could lay dormant for a long time before it peaks, if it ever does. Buying music NFTs from emerging artists is where investors will find potentially outsized returns but will incur much higher risk.
Genres matter
Understanding genre is important. Different genres have different demographics of listeners and different communities and cultures surrounding the music. This will have an impact on a song’s peak and decay over time as well.
For example, rap tends to have a higher peak at release and decay quicker due to its young audience demographic. Country, on the other hand, is a bit more stable and doesn’t peak as heavily at release due to a more varied audience. The tradeoff is that rap amasses much higher streaming numbers than country music. Getting to grips with the breakdown across genres before you invest is a good idea.
If you’re just in it as an investor, you need to understand what genre you’re investing in. The more sophisticated music investor would create a healthy spread of genres in their portfolio based on their risk appetite, similar to if they were invested in equities. Of course, most of us investing in music are also fans and will prioritize the music we like over the streaming numbers.
Past song performance
As all investors know, past performance is not necessarily indicative of future results. However, it can help guide us and shape our understanding of a song’s lifecycle. In the case of modern streaming services, some technical knowledge is required to extract this data. Spotify, for example, has an open API that we can use to pull massive amounts of data on song’s, playlists, and trends. To extract data from Spotify’s API requires knowledge of API’s and Python.
The good news is, most companies that facilitate music NFT sales will do this work for you. You will usually find a summary of a song’s past performance on its minting page along with predicted returns. Remember, this isn’t fool proof data and returns are not guaranteed.
If you want to take it a step further, you could factor in a potential virality event by figuring out the probability of this happening and the average upside of such an event. This is all unprecedented stuff though and there’s no playbook for investing in music at retail level. When trying to make any form of prediction on musical assets, caution is key.
Virality — the golden ticket for rights holders
With social media platforms like TikTok featuring lots of different music, all artists are in the running for a viral hit. Not only that, but if a song is featured on a popular show or in a big movie, it can change the game for the song’s future performance, and therefor the financial returns for rights holders. A great example is Rihanna’s song “Bitch Better Have My Money”. It went viral during Rihanna’s SuperBowl performance in conjunction with the song dropping as an NFT. This led to the song’s streaming numbers shooting up 9000%!
On the opposite end of the spectrum, “Running Up That Hill” by Kate Bush got featured in one episode of Stranger Things. Originally released in 1985, the song was close to the end of its life-cycle. Following the Stranger Things episode, however, the song’s streaming numbers exploded. Kate Bush owns the rights to the song and made over $2 million in the span of just 2 months.
During its recent Stream On event, Spotify announced a big push towards “music discovery” on their platform. The TL:DR is that the platform is making strides to help listeners discover more music through new features and a revamped interface on their platform. This gives artists more opportunities to catch that golden ticket and go viral “overnight”.
Risk — similarities between music and equities
If you’re an equities investor, you’ll note the similarities between music as an asset class and equities. Emerging artists have a higher upside than established ones, but the risk is considerably higher. This is similar to index funds tracking emerging markets versus established western markets. Emerging market funds are further out on the risk curve and experience higher volatility.
In music, you just don’t know if people will like a new and emerging artist. Will they continue to expand their catalog? What direction are they heading in? Without intimate access to the artist in question, it’s very difficult to make this assessment. Understanding this risk and factoring it in to an investment is important.
Furthermore, investing in emerging artists brings an additional risk component into question. You’re inadvertently investing into one creative person. That’s a single point of faillure. If you take that person out of the equation, the assets could devalue rapidly and the future outlook is grey. This is different from a business, which tends to depend on technology and processes more than individual people. Keeping this risk in mind is a good idea before picking out a music investment.
Growth of the industry
By exploring the popularity and growth of Digital Streaming Platforms we can see that the future looks bright for music as an asset. Private equity and hedge funds all over the world are paying attention to the growth of the recorded music businesses, which has led them to acquire music catalogs for hefty sums of money in recent years. However, there’s a big debate around the future growth of music streaming services and some experts think we’ve seen the hayday of these platforms.
Regardless of whether that’s true or not, investors in music buy the rights to the master recording. This means they have the rights to all royalties paid to the song. So long as people listen to music (which isn’t changing anytime soon), there will be money to be made on music. Whether that money comes from CDs, vinyl, Spotify, or Audius shoudln’t matter to the investor.
Price matters
Finally, for those reading this article for help in evaluating the potential of a piece of music, remember one thing. Price matters.
No matter how much research you have done or how promising a song or catalog seems to be, the price you pay has a massive impact on your returns. This is obvious to seasoned investors, but the current state of web3 music ownership doesn’t make this clear to newcomers. It’s easy to forget if you’re picking up the rights to a song through an NFT on OpenSea for example. You need to know what the mint price of the song was and the percentage ownership of each NFT to understand the valuation of a piece of music. From there, you can evaluate if you think it’s a good investment. Let’s look at an example.
In August 2022, AnotherBlock dropped “Weekend on a Tuesday” by R3HAB and Laidback Luke. The drop consisted of 250 NFTs, each representing 0.02% ownership rights in the song. Each token sold for roughly $87. That’s a total of 5% ownership in the song with a valuation of $435,000.
With that number in mind, you as an investor could evaluate the artists involved, their past performance, and the quality of the song and figure out if you think it’s a fair valuation for you to make a purchase.
Summary
Understand that predicting the growth of music is hard. This article is more of a guide than a framework. It’s far from an exact science. If you were hoping for a more scientific model with a higher hit rate, I’m afraid that it doesn’t exist. There are too many variables at stake.
Don’t believe me? A team of data analysts at CapTech Consulting tried predicting music popularity 4 years ago and failed. They concluded that there are too many variables involved to be able to make an accurate prediction based on data.
That doesn’t mean you shouldn’t consider the factors in this article though. It’s important to know what you’re getting into before investing in any asset.
Most of us involved in the web3 music space, however, are music fans and crypto enthusiasts driven by a combination of culture and money. This is an exciting journey to take part in, regardless of the financial returns you see from it! I would love to hear your questions or opinions on this new wave of music ownership. Feel free to leave me a comment!
Remember this isn’t investment advice. Information and education purposes only! 😊
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