Thoughts on Web 3 and Spotify
Note: this is an update to my deep dive on $SPOT. This post is best understood by reading the deep dive first.
Summary:
Web 3 radically augments the ways creators can monetize their work.
SPOT 0.00%↑ ´s fundamental source of value is search. Web 3 has the potential to change the industry´s incentive structure in such a way that could displace $SPOT at the search level down the line.
As $SPOT continues to get bigger and smarter, it is in a very strong competitive position to counter web 3 forces at the search level. Further, it´s in an excellent position to embrace them itself.
It seems that web 3 is primed to augment creative material, which instead of menacing $SPOT´s current model seems more likely to make it look small in hindsight.
Modelling Potential 10X Forces
Complexity Stems from Simplicity
The market has begun to tentatively price in $SPOT’s margin expansion and without getting complacent about that, I am now increasingly tempted to look out further into the future and play with some new unknowns. This week I read Andrew Grove’s “Only the Paranoid Survive”, in which he narrates how he pivoted Intel from working predominantly on memory chips to working on microprocessors. In this book, Grove talks about 10X forces - forces with sufficient strength to bring about strategic inflection points for companies, such as the one that forced them to exit the memory chip business. The book has inspired me to think about potential 10X forces that may be acting on Spotify today.
Web 3 is perhaps the most likely 10X force candidate to web 2 platforms like Spotify. Like with any other technology, the potential ramifications are many. However, in our universe, complexity stems from very simple rules and I believe we can leverage this principle when thinking about uncertain future developments. We can gain much clarity just by breaking both web 3 and Spotify down to their essence and then modelling potential interactions between the two, at a fundamental level. The below is by no means a prediction, but rather a mental exercise to get us thinking about a future that is coming right at us. We don´t have to get it 100% right today to be way ahead of the market, but we probably do need to start thinking about it actively.
Before moving on, I want to make sure that I convey what I mean by complexity stemming from simplicity. Consider Wolfram´s Rule 30, introduced by Stephen Wolfram in 1983. “It specifies the next color in a cell, depending on its color and its immediate neighbors.” The first few iterations form some very simple patterns, which are analogous to what we are going to see in this post regarding $SPOT and web 3:
After 250 iterations, it produces some marvelous complexity, which depicts the unpredictability that we cannot tackle yet:
What Does Web 3 Do?
Fundamentally, Web 3 enables private property on the internet. Web 3 is powered by the blockchain, which simply allows computers to make commitments, because whatever information we store in the blockchain is very hard to eliminate / modify. More broadly, this allows for value to be sent around at a much lower marginal cost than in the analogue world, because now you can send any given asset with the same ease you are accustomed to send emails with.
If you think about how we have enabled private property in the analogue world, what we have done is prop up a series of institutions and rules that make it hard to change information about who owns what and relatively easy only when a legitimate transaction takes place. As such, private property is feasible. Blockchain (web 3) now allows us to do just that, but on the internet and with no intermediaries.
As it refers to creators, web 3 enables them to gain ownership and control over their digital assets, enabling them to monetize their creations with no middlemen. If I am a singer-songwriter, for instance, I can tokenize a song of mine, put it out in the internet and make money every time someone listens to it, for example. As a creator, I can now put my private property on the internet, with a series of implicit and immutable rules that define how other people can interact with it. This is a new fundamental property for the internet.
What Does Spotify Do?
$SPOT is a marketplace that brings audio creators and listeners together.
It makes it increasingly easy for creators to be discovered by and interact with (and monetize) their audiences.
It also optimizes the value listeners receive per every unit of earshare they choose to assign to Spotify, striving to in turn maximize the latter.
None of this would happen without search, which is the key facilitating technology. The better search gets, the more Spotify succeeds in pleasing both sides of the marketplace. As the platform continues to grow and get smarter, this further compounds the value of search. When I refer to search, I do not just mean the interface in which you type a search query to obtain results. I mean the entire infrastructure that intelligently matches market participants, ultimately maximizing engagement on both ends.
Spotify and Web 3
The New Creator Sales Funnel
With the above fundamental analysis we can now attempt to model a few iterations, by addressing functionality for creators. What can creators do in a hypothetical Spotify with web 3 functionality, which they previously could not (excluding the analogue business components such as concerts and merchandise)? My take on this is that creators can go from:
Outputting songs / podcasts.
to:
Outputting songs / podcasts.
Creating equity, through the emission of creator tokens.
Selling scarce creations, in the form of NFTs.
#1 in my opinion is subject to little disruption at an early phase. As a creator, even if I chose to cut Spotify by emitting my songs / podcasts as NFTs on some other platform, I´m still losing out on the value of search and I most likely still have to pay 75% of my proceeds to a label, which does not seem like a profitable move. If I am an independent creator, I am arguably in even more need of search. However, #2 and #3 are extra alpha for all, because they allow creators to further monetize their work and considerably so. This increases $SPOT´s GMV and in turn, the labels´royalties. Under this scenario, creators end up with an updated business model, resulting in a new sales / monetization funnel. #1 becomes predominantly the means to acquire potential clients, whilst #2 and #3 become the means to really make money. Not that creators would cease to make money from streams, but rather that it would look small next to #2 and #3.
Whilst #3 is straight forward, #2 may sound a bit strange. However it´s no longer a secret that anyone / anything with an audience can now launch a token. For instance, Taylor Swift could launch a token of her own and have it be one of the larger ones in the world by market cap. Why would she? Because this would enable her to convert otherwise intangible fandom into actual equity. By keeping a % of the total supply, she would obtain capital gains as her popularity continues to rise. This does not only apply to Taylor Swift, but to any creator that has an audience and that wishes to further monetize it. Down the line, this would imply a securitization of fandom, allowing fans to perform operations on the tokens to express their views, by for example buying / selling options on the tokens.
Before we move on, note that for both #2 and #3 growing an audience is desirable. If you do not have mechanism to grow your audience, both #2 and #3 are not as useful. Per this definition, it follows that $SPOT´s platform (search, notably) is valuable for creators despite new forms of monetization emerging from web 3 technologies. Whomever owns search, owns most of the power. Nonetheless, there is a catch.
Listeners Become Promoters, Search Becomes Displaced
Through #2, listeners become equity holders, meaning that it is now in their interest to promote the creator in question, so that they may obtain capital gains from the appreciation of their equity. This fundamentally changes the industry´s incentive scheme. Listeners can now go from being net consumers to net investors if they so wish to, which means that growth could stem from the listeners´own promotional behaviour. Therefore, a theoretical new decentralized platform operating around creator tokens could unleash rapid network effects that could jeopardize $SPOT´s domination in terms of user volume and ultimately displace it at the search level. This in my opinion is the major disruptive 10X force that web 3 has to offer to $SPOT, at least in the early iterations.
Having said that, as $SPOT continues to grow and get smarter (AI), it´s search capabilities will act as a strong moat against this. This is because such a decentralized platform would not only have to grow very quickly, but also catch up with an AI that would be quite ahead of it, since search would necessarily also be its key component. This is because regardless of an incentive structure change, both sides of the marketplace are still there to be matched with each other. Catching up to $SPOT´s AI may prove to be a very difficult task, or at least one that would take quite a bit of time.
Optionality
My opinion is that the best thing $SPOT can do to hedge the above 10X force is continue to grow as fast as possible and continue to get smarter. This will act as a strong moat against a potential displacement at the search level, which would be existential. However, I believe that launching creator tokens and NFT sales within the platform would be a wise thing to do. It would not only serve to multiply the value creators get from the platform and explode overall engagement on both sides, but it would simultaneously serve as a hedge against #2 evolving into a $SPOT killer. The risk is that #2 spirals into a destructive force, but if it spirals within the $SPOT platform then there is a chance that it can be captured. Further, in $SPOT´s case it does not seem to me that web 3 has much flesh to bite into for #1 - it seems primed to augment it more than anything else.
Currently, $SPOT is growing into an intelligent and global audio network. By adding #2 and #3, it adds a layer of securitization on top of it which could potentially dwarf what it is today. There would be infinite ways to monetize it.
Web 2 Platforms and Web 3
I think that from the above a sort of framework begins to emerge. What I speculate about $SPOT regarding web 3 seems to extend to other web 2 platforms. Ultimately, web 2 platforms are about bringing people together through search. These platforms are getting bigger and smarter, cementing their position in this regard. However, the securitization of the world that web 3 enables menaces to change incentive structures, which in turn may displace web 2 platforms at their most fundamental level.
However, in platforms that deal with creative material, it seems that web 3 is more of an enabler than anything else. It multiples the monetization possibilities for creators and in turn opens up a whole new level of interaction with fans, by transforming intangibles into equity. I may be wrong, but I think it wouldn´t hurt web 2 platforms at least in the creative space to embed web 3 tech to augment the value they deliver to creators. If the resulting forces turn out to be destructive, at-least they have a front row seat to the show that may help them figure out how to get through the strategic inflection point. It´s the ones who turn the blind eye that may be in irreversible danger at some point.
Until next time!
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