A New Funnel for Music

There’s a new funnel emerging in the music industry.

In the past week, several news events have occurred that may seem inconsequential on the surface, but when carefully examined, reveal a structural shift in the music industry that is gaining momentum: 

1. TikTok launched a set of immersive music filters for creators to use in their content. 
2. Newsletter publishing platform ConvertKit acquired FanBridge, a fan relationship management tool for musicians.  
3. Music distributor Ditto enabled fans to buy shares of musicians’ sound recording copyright, and subsequently earn a monthly dividend, i.e. royalties. 

The best way to understand all of these events is to hang them together on a funnel:

1. Top-of-funnel — discovery on TikTok
2. Mid-funnel — re-engagement through email
3. Bottom-of-funnel — monetization via NFTs

To be clear this is not a mainstream way to operate as a music creator. But in our view, we’re seeing early signals of an important shift. The new funnel will compete with the traditional music industry while empowering a new generation of artists to make a living online as part of the creator middle class.

To understand its significance, we’ll first trace the history of the old funnel, and then explain how and why it is being replaced.

The old funnel: Record labels controlled and monetized fan relationships

The old, pre-digital structure of the music business led to a fan relationship funnel with multiple gatekeepers, primarily major record labels. 

Artists used radio as their top-of-funnel channel, to get discovered. They subsequently went on tour as their mid-funnel device to re-engage fans through live concerts. And to make money, artists monetized fans at the bottom of this funnel at local record stores when they bought CDs. At each step of the way, labels had control.

This was the dominant practice up until 2000, when CD sales and the music industry’s fortunes were at an all time high. But things were about to change very quickly—digital consumption of music and widespread piracy led to a sharp decline in the music industry’s overall revenues. Digital downloads through the iTunes store, paired with the stylish iPod offered a glimmer of hope. But the real turning point was 2008, when Spotify launched its on-demand streaming service. Consumers transitioned from the ownership of physical CDs and Digital MP3s to accessing an unlimited catalog of music, for $9.99 / month (a price that has not changed almost 13 years later).

This is for a good reason: the streaming model works. Fans get access to every song ever recorded, and—for a nominal fee—music creators can have their songs available to them in minutes.

But this, too, presents a new problem.

Today’s funnel: An explosion of choice 

There is an overload of music. 60,000 songs are uploaded to Spotify every day. Over 20% of those don’t get streamed even once. The ubiquitous access to almost every piece of recorded music in history has led to a paradox of choice, promoting passive and playlist-driven music consumption and creating winner-take-all effects for the biggest artists. 

The advent of streaming in the music business was supposed to lead to a transition from selection by gatekeepers to election by listeners. However, streaming services are still choosing which music creator gets a chance to partake in these elections. The gatekeeper status has just shifted from record labels to streaming services. Major record labels like Universal, Warner, and Sony used to determine who became a successful music creator. Now its streaming services like Spotify, Apple Music, and Deezer.

Note: this is an oversimplification of the complicated commercial relationships underlying the music industry: Streaming services control music discovery, but major record labels own a substantial share in streaming services—essentially bringing us back to square one. 

How the new funnel could work: Creators in control

In the old music business, record labels controlled the artist-fan relationship funnel. In the current model, streaming platforms control this funnel. This led to a pressing need for artists to have their own and control direct relationships with their fans, and the recent news seems to be enabling this: 

TikTok and other social platforms are acting as potent top-of-funnel discovery channels for emerging music creators. ConvertKit’s acquisition of Fanbridge could help these newly discovered music creators re-engage fans. And recent developments around NFTs powered by platforms like Audius and Ditto Music could offer substantial and reliable monetization opportunities. 

Let’s look at these layers starting from the top: 

1. Top-of-funnel — discovery on TikTok

TikTok has proven to be a potent top-of-funnel discovery channel for emerging musicians. The platform wants to gain an even stronger foothold in music discovery, and has been shipping updates that reflect this strategy. TikTok recently announced its plans to launch a new set of immersive music filters that integrate seamlessly with its catalog of sounds. 

These newly announced creation tools enable strong network effects of creativity. This makes TikTok propel songs to overnight virality, and the artists behind them to overnight success. Here’s just one recent example: ever since #ShantyTok went viral, Spotify users have created more than 12,000 sea shanty playlists. Nathan Evans, the creator who was behind the viral trend, signed a record deal with Universal Music Group. 

This new medium of music discovery has already left a lasting impact on the message. Songs are being intentionally crafted to serve easily distractible listeners. Creative briefs given to songwriters often contain specific instructions to make the song ‘TikTok-friendly’. This entails adding a 15 to 30 second danceable bit that is conducive to content creation on the platform. Multiple studies also show that the average length of a pop song has significantly reduced over the years. 

Having said this, even though TikTok is a strong top-of-funnel, it is a leaky one. The same engaging characteristics that make TikTok so potent for discovery also lead to some of its main drawbacks. The ever changing flux of TikTok trends mean that fandom accumulated on the platform is fickle, and doesn’t last too long—fans just move on to the next viral trend. For music creators to have a more sustainable and long-term career, they need to optimize this new funnel by re-engaging with new fans before TikTok’s temporary spotlight fades. 

A small fraction of music creators have improvised to make the current funnel work for them, but these happen to be established names that don’t represent the burgeoning middle class of creators. Artists like Amanda Palmer, Jacob Collier, and Cautious Clay are proactive Patreon users. Linkin Park’s Mike Shinoda frequently uses Twitch to ‘crowdsource creativity.’ Superstars like Drake, Travis Scott and Chance the Rapper use Fortnite as a channel to re-engage with their fans. 

Most importantly, creators need a way to solidify relationships beyond ephemeral streams in aggregation layers. ConvertKit’s recent acquisition of Fanbridge could enable music creators to do just that. 

2. Mid-funnel — re-engagement through email

ConvertKit has 300,000 creators using its email marketing software to run their paid newsletters and membership based offerings. Fanbridge’s ‘fan-relationship management’ toolkit enables these same things, but for music creator-specific needs. They have integrations that help their user base of 1000 music creators embed Spotify links, tour dates, fan giveaways, and so on.  

The acquisition will facilitate direct-to-fan (D2F) relationships, helping the long tail of music creators to not only have greater ownership over their fanbase, but also have the opportunity to monetize these relationships. It will enable music creators to establish  a direct communication channel with fans. This is highly valuable because streaming services don’t have the functionality for artists to communicate with their listeners. Artists have to rely on social platforms, which do not offer an efficient way to segment fans, or even communicate in a personalized way. It's also harder to integrate commerce in music. While it's a fun challenge to creatively plug a sponsor in a YouTube video, it's interruptive and inelegant to do so during a song. Creators would also have the opportunity to optimize deeper forms of engagement, which may include private lessons, Discord servers, Patreon memberships, and more. 

2. Bottom-of-funnel — monetization via NFTs

At the bottom of this emerging creator-centric funnel that we’ve outlined, NFTs could be a potentially lucrative way for music creators to monetize their relationships with superfans. If a creator re-engages their 1000 true fans via ConvertKit, their 100 true fans could then be encouraged to make an actual investment in the music itself.

Of course, NFTs are still nascent. One of the main problems beyond educating listeners on the basic mechanics is persuading listeners that a digital token will retain value over time. That’s why startups are experimenting with ways to mint NFTs with added benefits.

Ditto, a digital music distributor, is using NFTs to help music creators sell tokens that entitle owners to a share of revenue streams generated by a song, almost like a dividend-bearing stock. Music creators can sell shares of the copyright associated with their upcoming songs and obtain upfront cash. This cash could help them fund their new releases: hire a great producer, set up a paid promotional campaign, etc. Fans who purchase these NFTs are eligible for monthly dividends, i.e. royalties from streaming. By divesting a part of their copyright, emerging music creators could receive an intimate form of financial support from their most devout fans. 

Moreover, by enabling these transactions, Ditto facilitates the creation of NFTs tied to assets with tangible value. Music creators can monetize by letting fans have equity in their music, making it akin to classical investing. To be clear, this concept has been tried before. Sweden based Corite, and Austria-based Global Rockstar are some examples. Unlike Ditto however, these existing companies have not used blockchain as a way to power fan investments. Perhaps NFT fervor will help Ditto cross the chasm. 

This is reflective of a broader trend—artists want direct ownership over the relationship with their fans, and to be compensated based on how these fans interact with their music. Case in point: SoundCloud’s recent foray into ‘fan-centric’ payouts, Deezer’s continued experimentation with user-centric payout models, and the ongoing parliamentary inquiry in the UK on the economics of streaming underscore this shift. 

Today, platforms like Audius offer a blockchain-powered, decentralized version of Spotify, where fan-centric payments are inherently built in. Artists can set their own prices, retain control over their IP, and get transparent access to fan insights. Holders of $AUDIO also have the ability to give input on the platform’s strategy. A recently introduced feature also lets artists showcase their for-sale NFTs, and fans to display their already purchased ones.  However, unlike Spotify, Audius doesn’t have the major labels onboard, and is only restricted to a small set of early adopting music creators. This limits their catalog size and hinders listener acquisition.

Enabling fans to invest in creators raises questions around regulation—similar to how shareholders are entitled to certain information about publicly traded companies, should fans be entitled to a higher degree of financial oversight? Backend access to a creator’s Stripe perhaps? These are questions worth assessing in the future, as NFTs chug along Gartner’s Hype Cycle. 

Given these recent developments, it almost seems like the music industry has come full circle—it moved from the ownership of physical CDs and digital MP3s, to unlimited access to a vast catalog of songs enabled by streaming, and back again with the resurgence of ownership through NFTs. 

Li Jin@ljin18

Remember when everyone kept saying that millennials preferred access over ownership?

April 13th 2021, 2:38pm EST

15 Retweets283 Likes

Irrespective of whether art is owned or accessed, from a creator’s standpoint—greater ownership over the relationships we share with our own fans is something every creative industry should aspire towards. 

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