Should You Invest in Music?
The rising tide of streaming and music as an asset class
Whether you’re an avid investor or just thinking about how best to save your hard-earned money, chances are you’ve considered different asset classes. Perhaps you’ve thought about placing your money in an S&P 500 index tracker with Vanguard or into a Real Estate Investment Trust (REIT). Maybe you’ve considered allocating a proportion to an aggressive robo advisor. But have you ever thought about allocating part of your portfolio to music?
Most likely not, as ownership in commercial music rights has traditionally been guarded by record labels, publishers, and private equity firms. It’s been a walled garden that mere mortals cannot enter. But those days are behind us.
In this article, we’ll look at:
- The rising tide of streaming 📈
- The decentralization of music 🌐
- What it means to own a piece of music 💿
- How you collect royalties 💰
- Why adding music to your asset allocation is a good idea 💼
The rising tide of streaming
In 2021, global music revenue reached $26 billion, the highest it’s been since the 1. After a 2 downward trend, music revenue has risen from the ashes and is showing no signs of slowing down. According to a forecast by Goldman Sachs, worldwide music revenue will double by 2030 and this growth will be driven predominantly by on-demand streaming.
Forecasts of this sort have caught the attention of many private equity firms, leading to billions of dollars in music catalog acquisitions in recent years.
The pandemic saw one of the largest surges in streaming worldwide, with new streaming platform subscribers growing by 26.4%. In the US, 84% of commercial music revenue comes from streaming with 82 million Americans being paid subscribers to on-demand music streaming services. With the rapid advancement in technology, and more importantly, increasing access, uptake in on-demand music streaming is predicted to skyrocket in markets around the world.
You’re probably thinking “skyrocketing growth is all well and good until the trend dies out” right? How could you possibly predict how long it will continue?
While that is normally true, The key difference is that music is neither a fad nor a trend. People have enjoyed listening to music for thousands of years. That’s not going to change anytime soon. Increasing access to music means increased consumption. Plain and simple.
In the words of Hans Zimmer:
“When all is said and done, and we’ve filled the highest high-rises, we’ve built the fastest machines, there’s still going to be room for somebody to tell you a story or somebody to write you a piece of music”
Decentralization of Music
The music business has been a walled garden for as long as modern economies have existed. Closely guarded by record companies and private equity funds, music ownership has been out of reach for individual music lovers like you and me. This has implications for both investors and artists alike. Let’s briefly break that down.
Investors
Centralization of power and wealth is rarely a good idea. But in the music business, it’s the norm with a few major record labels owning 85% of the global market. This is a so-called oligopoly.
Unless you’re lucky enough to be a director of a music label or run a private equity firm, this massive industry has remained out of reach for you. In contrast, iPhone users can buy Apple stock and benefit from the brand’s future value. That doesn’t seem fair.
What impact does this have on artists though?
Artists
Labels play a crucial role in an artist’s career, offering financial security, marketing, connections, and resources. However, getting a record deal is notoriously difficult and often depends on the label’s perception of an artist as a good investment, leaving many talented artists, and their creative work, unheard. This is a sad loss for artists, music lovers, and investors.
This may all change with the help of blockchain technology. Decentralization of music ownership is simply cutting out labels and allowing artists to go direct to consumers with their music. By selling fractions of their songs or albums as NFTs, fans get the opportunity to join the artist’s journey and share in their rewards.
There is of course another side to the decentralization of music which is the rise of decentralized streaming platforms. I’ll cover this in an upcoming article.
Owning a Piece of Music
What’s the real financial reward of owning music? We all know that streaming doesn’t make artists any money right?
This is both true and false. Mainstream media have led us to believe that with the downfall of CD and Vinyl sales, music is no longer profitable for artists. There’s a reason for this. The media places the lens on the profitability of the artist alone.
It’s true that artists make very little money off streaming today. But this is down to the fact that they usually don’t own their own music. When artists sign a record deal, they sign away large chunks, if not all, of the rights to their own music in exchange for upfront money from the label. This money is often life-changing for up-and-coming artists so you can hardly blame them.
As a result, record labels take home around 80% of the streaming royalties from a song while the artist shares the remaining 20% with their producers, managers, audio engineers, etc.
What you have to remember is, record labels wouldn’t be as big as they are and continue signing new artists if they didn’t make any money from music consumption. Below is another graph I borrowed from Royal showcasing royalties for music rights holders across platforms.
With decentralized music ownership, artists can bypass the label and go straight to their fanbase. Instead of signing away most of their ownership rights, they can allocate a portion to individual investors and fans. Investors purchase a percentage of their song as an NFT, often represented by some unique artwork, and share in the rewards with the artist.
For established songs and artists, your returns can be very attractive ranging between 7% annual returns to as high as 40%.
But what about if on-demand streaming services disappear?
When you buy a piece of a song or an album, you own the percentage right to the “master recording”. In simple terms, this means that you have the right to that percentage of money brought in by the song. That includes all streaming platforms, all purchased downloads, vinyl sales, movie royalties, and anything else that pays a royalty to the song. Even a service that might one day disrupt streaming as we know it.
How you collect royalties
Royalties are connected to tokens that represent a percentage ownership in a song. Each token is held by a crypto wallet and backed up by a legal contract of ownership. As streaming royalties accrue over time, royalties are paid out to the wallets that hold the tokens.
Ownership rights are stored on a decentralized blockchain such as Ethereum and royalty payouts execute automatically via a smart contract. You never have to track down what you’re owed. It’s automatically executed and openly verifiable on the underlying blockchain ledger.
With the rise of oracle networks, this transparency will only continue to grow.
Should You Add Music to Your Portfolio?
Let’s start with the disclaimer. This isn’t financial advice. Entertainment purposes only. Good, we’ve got that out of the way!
The answer to this question depends. Are you a music lover? Are you an avid investor? Are you looking for increased diversification? Do you love pioneering new industries? Do you know how to spot breakout songs?
All of these questions play a part in deciding whether you should invest in music or not. Many of the companies that help facilitate sales of music ownership have opted to focus on catalog sales of already established artists. This provides investors with a smoother entrance to the space as there is already data to support the profitability and popularity of the songs they’re investing in.
Examples of these include AnotherBlock, a Swedish firm who have offered ownership rights to songs from the likes of The Weeknd and Alan Walker. Another example is the US company Royal which has collaborated with artists like The Chainsmokers and Diplo.
NFTs in this space typically fall in the $100-$200 price range, although this can differ from song to song, making it highly accessible and inclusive for everyone to participate. This also allows you to test the waters before you decide whether you should allocate any significant portion of your money to the asset class.
If you’re a heavy-weight investor looking to allocate more money, just buy more tokens. However, I suspect there are institutional solutions in the works as well 👀
Furthermore, these companies work hard to build strong communities around their investors and fans. Long-term owners of these assets can expect to receive extra bonuses along the way to further sweeten the deal (and returns!).
If anything in this article resonates with you or piques your interest, the answer to the question is yes. Investing in music is a great way to diversify your portfolio and share the rewards with your favorite artists. Dip your toes in the water with a $100 investment to begin, join the Discord channels, take part in community events, and watch your royalties grow. It’s easier than ever to start investing in music and evaluate if it’s the right asset class for you.
To get started, you will need a crypto wallet and some ETH tokens. You can find out more here.
Final Thoughts
This is an exciting time for music-loving investors who are looking for exposure to a new asset class (with a proven track record) and for up-and-coming artists to make a living off their creative work. Music streaming is on the rise and blockchain technology is perfectly placed to help us all own a part of this rising industry.
Hit me up with any thoughts and questions around music as an asset class. I’m always keen to hear other's take on this space!
