On March 22, Katie Haun launched the biggest debut fund by a female Venture Capitalist. The venture focuses on helping founders deliver systemic change via Web3. With $1.5 billion in capital, Haun’s venture is setting high stakes for the still-nascent crypto space. Before announcing her surprise departure from a16z, she led Royal’s Series A.
Royal is an investment platform offering on-chain music rights and royalty revenue distribution. According to the founder, its model represents a new era in music rights ownership. One where the artist is independent of the legacy music rights framework. Its platform aims to demonstrate how an open market prices music rights ownership.
At first, Haun’s investment in Royal makes sense. But Royal is not solving fundamental issues built into the Music Industry. Rather, it’s ignoring them altogether. Founders and their venture contributors shouldn’t keep their hopes up. Without an understanding of music economics, platforms like Royal won’t deliver systemic change. They need to understand that the main issue of the Music Industry is the valuation of music itself.
Inefficient Markets in Music Rights
There has never been an efficient market for music rights. The price of music almost never equals its value and rarely covers its cost. Yet hundreds of millions of misappropriated royalties go unaccounted for yearly. The Music Industry has a massive accounting problem. Slipshod mechanisms for price discovery and rights attribution are at the root. But incumbent royalty collection societies have normalized this. All part of the game, as they say.
The advantages of an on-chain Music Industry (0xMusic) are clear. Transaction data and built-in property rights exist on a public and distributed ledger. It offers transparency in the attribution and day-to-day performance of any asset. But globally coordinated rights holder payments are not best interest initiatives for incumbents. Actually, it would put them out of business.
Startups that solve for both price discovery and rights attribution have tremendous value. Royal makes an attempt at price discovery but falls short of setting any kind of precedent. Let’s have a closer look.
Royalty Backed Securities
Royal fractionalizes music rights ownership by issuing Limited Digital Assets (LDA). LDAs offer pure-play exposure to mechanical royalty streams. They are an asset-backed security, but by name only.
Artists partner with distribution services to deliver records to streaming platforms. Accrued revenue is then distributed back to the artists as their local fiat currency. Artists on the Royal platform agree to offer a percentage of accrued revenue as an LDA. The smart contract embedded within later pays out token holders from its treasury.
The Nas “Rare” LDA offering sold out within minutes, raising $369k USD in the process. Although an obvious success for both Royal and Nas, it’s far from an achievement for the Music Economy as a whole.
For the Nas drop, fans could purchase between 0.0133% and 1.5789% of Nas’ streaming royalties for the track ‘Rare’ and between 0.0143% and 2.14% for the track ‘Ultra Black’. ..a fan who purchased the highest tier and spent $4,999 for 2.14% of ‘Ultra Black’ will only turn a profit once the track has been streamed 34.3 million times.
The Bizarre Bazaar
Open markets allow for price discovery. But what exactly is Royal pricing? Music rights? Or the ancillary elements (giveaways, VIP experiences) used to market the token itself? Investors looking at diversifying their portfolios should look the other way. It’s clear. The utility is not the investment potential. But rather, the novelty of music rights ownership.
Royal does more harm than good to the music rights framework. It weakens music rights as an offering. It does not establish songs as a legitimate alternative asset class. Instead, they operate on pretense and adopt existing issues within current frameworks. The result is a crypto startup with weak fundamentals. Glossed over by its rich advocation from both crypto and music incumbents.
Although tempting, it is imprudent to forgo existing dynamics within the Music Industry. Venture contributors seeking to deliver real system change should do better. A serious approach includes an understanding of copyright law and modern music economics. YC Combinator-backed Decent XYZ offers a more thorough approach.
Music is Like Water
What makes pricing music rights so difficult is that its value is not based on scarcity. Music is like water. It’s abundant and available across the entire planet. Tokenizing music rights ownership half-solves this. Its immutability allows for verifiable ownership which enables efficient attribution. Yet music pricing is inelastic. To solve this, Simon de la Rouviere thought up the Bonding Curve to price non-rivalrous goods.
Decent offers a unique way to solve price discovery for music rights. They offer a royalty backed token tied to streaming revenue. Making use of bonding curves to enable dynamic pricing. Supply determines the price of a single token. As more tokens are distributed the price of each subsequent token goes up. Upward pressure on the price increase mimics a supply cap creating artificial scarcity.
Artists commit a percentage of future royalty streams to Decent’s Vault for a period. The platform mints its royalty backed token. The vault holds accrued revenue throughout its listing period. Holders receive accrued streaming revenue at the end of that period. Artist-fan incentives are much more aligned in this model. Fans take part in the financial upside for having skin in the game.
Moreover, Decent innovates by creating a new collateralization tool for music rights. Ethereum from token sales held within the smart contract fund DAO treasuries. They also facilitate governance rights, helping to manage assets within the DAO. Music rights can thus be represented as the accrued revenue of royalties over a period of time. This approach reinforces music rights as a legitimate alternative asset class.
Music Rights as an Alternative Asset Class
Decent establishes an efficient mechanism for price discovery of music rights. But it’s only half of the equation towards solving for an efficient music rights market. Besides, they are still reliant on streaming revenue from their distribution partner. It evinces a single point of failure that can drive investors away from the music rights market. Ethereum is also quite volatile and funding IP projects in this way is speculative in nature.
This iteration of offerings cannot capture the full future value of music rights as an asset. But the potential for a new framework for music rights management is real. One where fast and reliable royalty distribution with trustless intermediaries carry out globally coordinated rights holder payments. Daily liquidity changes how music is financed and evaluated. More fidelity in the day-to-day performance of an asset welcomes investment in new catalogs.
Solving market inefficiencies in the music rights space is big business. Protocols that focus on both price discovery and rights attribution have tremendous value. But price discovery follows rights attribution. Current solutions are putting the cart before the horse, so to speak. So then what would it take for the entirety of the Music Industry to port metadata on-chain? It would have to be more costly not to do so. And more costly it is!
The real system change begins with an understanding of rights attribution. Founders with a long-term vision of efficient markets for music rights know this. Successful use cases will help. They’ll start off as experiments and then replace incumbent frameworks altogether. Venture contributors who know this will win out in the long run too.
This article was first published here.