The (Audio) Revolution Will Be Tokenized
By Derek Edws and Stephen McKeon
By 2010, the recording music industry was in big trouble.
Napster had debuted a decade earlier, giving an entire generation of fans the ability to swipe their favorite songs and albums off the internet. Revenue from U.S. music sales plunged 60%. Digital piracy was rampant.
Limewire. uTorrent. Demonoid. Pirate Bay. Well-funded incumbents tried to shut down a number of peer-to-peer file sharing sites, but found themselves playing an expensive game of legal whack-a-mole. Spend the resources to hammer one down and another would immediately spawn.
Looking to upgrade the existing paid model, pioneer services like Apple iTunes launched distribution platforms that facilitated paid downloads of digital music, either as singles or as albums. But in 2010, Forrester Research reported that only 44% of U.S. internet users believed that downloading digital music was worth paying for.
While music distribution was in the throes of massive disruption, so too was another notable area of the industry: music production.
Independent artists armed themselves with YouTube tutorial videos, pirated versions of ProTools, and inexpensive dynamic condenser mics. Advancements across recording, mixing, and mastering music were manifesting through moderately priced recording gear and feature-rich software. By the end of 2010, the gap between expert sound engineer and home studio had narrowed substantially.
A tsunami of bedroom digital creatives began to swell.
In early 2011, following a 10-day suspension from high school, 17-year old Chancelor Bennett from Chicago started working on his first full length music project — a mixtape aptly titled “10 Day.” He released it as a free digital download on a streaming site called DatPiff where it was downloaded and streamed thousands of times.
A year later, Bennett released his second mixtape as another free digital download. Acid Rap was a game changer that found its way to multiple “Best Albums of the Year” lists, including Rolling Stone, Pitchfork, Complex, and NPR.
Chance The Rapper, one of the hottest rising stars in music, had sold zero records. The independent music revolution had arrived.
The Incumbents Strike Back
The record industry found itself in unfamiliar territory. Technology now allowed users to create and share perfect copies of audio files over private and open networks, bypassing copyright laws and a legal layer that had been optimized for a physical world. Their business model had to find a novel way to adapt to digital environments — or risk death by a thousand free downloads.
Under the legacy model, record labels would advance cash to new artists to complete studio recording, mixing, and mastering. In exchange for these loans, the record label would acquire the copyright to the studio recordings and masters.
Simply put, the artist relied on the record label for financing and distribution. The record label relied on the artist for the content.
How did labels recoup their investment? By monetizing the copyrights. In the decades prior to the digital download crisis, this meant printing a physical copy of twelve recorded songs, bundled with paper art, sold in plastic wrap to consumers at Circuit City or Tower Records. The physical format adapted to new technology through the years, from vinyl records to cassette tapes to compact discs (CDs), but the business model did not change.
In other words, the model revolved largely around distribution of the physical album, of which the record company could expect to see 30% of total album sales and gross profits up to 60% after recouping recording advances and promotional costs.
But without a way to monetize their services in a digital age, the decline of CD sales from 2000–2010 was inducing the fall of the record labels in real time. With the rise of inexpensive creator tools like GarageBand, and online platforms that enabled direct distribution like SoundCloud, things weren’t looking good for the record label value proposition.
Their business model was breaking.
As distribution revenue began to falter, the labels increasingly sought to grab a piece of all the other revenue streams from the artist, known as 360 deals. Record labels also began to take their bags of copyrights and shop them around, eventually converging around unique partnership agreements with internet radio stations like Pandora and Spotify. Under these new models, users could stream an unlimited amount of ad-supported licensed music for free, or pay monthly for an ad-free listening experience.
No mp3 downloads required.
By 2014, an estimated 41 million people worldwide were paying for a music subscription service. For the first time in a long time, music sales started to climb again.
The reason was simple — it was a better user experience. Pirating music was hard work and downloads were annoying. It was easier to pay for unlimited streaming access and just be able to listen to anything, anywhere, anytime, on any device.
With fans aggregating on their platform, firms like Spotify were now the first in line to get paid for digital music sales, of which they would keep 30% of total revenues. After taking their cut, Spotify would pay the remaining 70% of revenue as royalties to rights holders (typically, the record labels) on a per stream basis. Next, record labels would take their cut. Finally, the record labels would pay the artists and musicians based on their individual contract agreements.
So what’s left for the artist? As it turns out, not much. According to recent estimates, a whopping one million streams on Spotify translates to roughly $3,500 — $4,000 for individual artists. Less than one half of one cent per stream.
As more listeners flocked to these streaming services, new artists, and even established artists with tremendous leverage, were forced to take raw deals to satisfy the consumptive preferences of their fans.
Record labels learned to love this model too, squeezing fresh dollars out of their most valuable copyrights and continuing to target new musicians who needed cash upfront and marketing help, in exchange for the rights in their recorded masters.
By 2017, streaming overtook physical sales for the first time as the largest source of global recorded music revenue. That year, the music industry generated $43 billion in revenue, but only 12% of that made its way to the artists. To put that number in perspective relative to other performers, professional basketball players capture roughly 50% of revenue generated by the NBA.
Even though the internet enabled artists and fans to communicate and exchange files peer-to-peer, the heavily intermediated value flows constructed a century earlier around physical album distribution found a way to persist in the digital age because the record labels and streaming services owned the payment channels.
The independent music revolution had failed.
That is at least, until now.
Meet Audius
Audius is a community-owned audio streaming platform that gives anyone the freedom to distribute, and more importantly monetize, their own creative audio content. The project is a call to arms to the world’s musicians, podcasters, and content creators to opt-out of the models plagued by rent-extraction, opacity, and powerful incumbents. It’s a signal to legacy intermediaries that the exchange of value between two parties should not be gated unnecessarily.
Bitcoin illustrated that digital scarcity is possible in the realm of money. Ethereum extended the concept of digital scarcity beyond commodity money, enabling any digital good (3D objects, music, files, GIFs, memes) to enjoy programmatic scarcity by its creator.
Verifiable scarcity is a game changer for digital content, which for the last three decades could be readily duplicated without reference or attribution to its creator. Outside of enforcement by a legal layer, there’s been no great way to track property ownership that travels alongside natively digital content.
For goods like recorded music and crypto art, programmatic scarcity is an important primitive. The ability to verify a digital work’s edition size is the first building block by which to recognize and transfer the property rights associated with that creative work. Audius’ tech stack leverages these digital property rights to power new models of value exchange directly between artist and fan. The era of blockchain-enabled liquid IP is just beginning.
Internet-native, mission-driven communities aim to be more transparent, democratic, and governed by the collective mindshare of its contributors. For Audius, this means its music streaming protocol will be owned and operated by its artists, fans, node operators, developers, curators, and tastemakers.
Audius’ governance token $AUDIO, went live last week spurring a tidal wave of new content. The streaming catalog has grown by 33,000 tracks in four days. The network dashboard, which reports various metrics in real time, indicates that Audius is tracking towards nearly a million unique users this month.
Importantly, the power of this audio platform is now in the hands of its users, allowing stakeholders to remedy a number of problems faced by digital music creatives today:
Misaligned Incentives. Today’s audio streaming model suffers from misalignment across recorded music stakeholders, including streaming services, recording labels, studio artists, and songwriters — eventually resulting in rent seeking by the system’s most powerful participants. The fractured incentive structure also results in significant time delays for things like artist payments, effectively resulting zero-interest loans to streaming platforms and labels by the system’s most powerless participant — the artist.
Alternatively, Audius is owned, operated, and governed by all of its users, aligned around the $AUDIO token. The future of Audius is one of community ownership, resulting in a more equitable network across the ecosystem.
Data Opacity. No incentive exists for industry incumbents to make various types of data public if that information can be tightly controlled and used to their advantage. Today, there exists little transparency around the origins of artist payouts for streaming, including a track’s number of plays, location, original gross payment before fees, and other pieces of data that should be made available to artists of creative works.
Alternatively, activity for Audius artists are wholly transparent. All files, earnings, and other information distributed through the protocol are publicly available and independently verifiable.
Content Censoring. Today, services like Spotify and Apple Music actively censor content available through their products, leaving the future of artist monetization at the whim of centralized decision makers. In addition, remixes, covers, and other derivative content are largely censored due to frequent rights management issues.
Alternatively, individual Audius artists, working together with a mission-aligned community at large, are in total control over the future of these recorded creative works. Original artists can generate immutable and timestamped records for audio that persists indefinitely, bypassing a number of rights management issues that plague the siloed centralized streaming model.
The Future of Audio
This month, Spotify launched Anchor — a new effort allowing DJs, podcasters, and producers to integrate any Spotify track into their episodes or recordings, compensating its artists like it does any other stream on their platform. However, Anchor breaks RSS and requires Spotify-based distribution, which has the effect of building even higher walls around the Spotify garden, further trapping artists inside its monetization playground.
On a free and open internet, the incumbent stranglehold on creative audio works continues to squeeze tighter.
Digital goods require a new kind of digital ownership — one where the rights surrounding creative work can always travel with the artist, guided by their sole discretion, free from the influence and interests of third-party intermediaries. As the value proposition of artistic sovereignty becomes clear to the mainstream, a new generation of creatives will opt to own their digital work from the very start.
As a result, we believe this next generation of creatives will be able to seamlessly exchange value peer-to-peer with a global fanbase. They will do things like crowdfund the creation of new digital works by fractionalizing revenue streams, drop unique artist tokens to incentivize fan engagement through exclusive access, and distribute their art on networks like Audius. Thereby harnessing a channel owned and operated by the creators and consumers of music, rather than those that stand between them.
If the last twenty years have taught us anything, the transition won’t be easy. The recorded music incumbents will fight back. But the future we collectively aspire to build is worth the fight.
Technology will always continue its inexorable march towards efficiency. People get fed up. On a long enough timeline, the rent-extractors and middlemen are eventually bypassed.
The early internet enabled early forms of value exchange between artist and fan, sparking the independent music revolution. Audius allows this independent music revolution to continue, allowing anyone to earn ownership in the digital streaming stack. Their tagline is pitch perfect: “Don’t just own the masters, own the platform.”
A community-owned audio platform, for sovereign digital works.
We’ll see you on the other side.
A special thanks to Forrest Browning, Jake Brukhman, Priyanka Desai, Brian Flynn, Roneil Rumburg, Kyle Samani, Cooper Turley, Paul Veradittakit, and Aaron Wright for their feedback and insights during the construction of this piece.
Disclosure: At the time of publication, Collab+Currency owns some of the assets described in this piece, including BTC, ETH, and AUDIO.
You can find more thoughts from our team on Twitter: @Collab_Currency
