Why is NFT the best medium to realize the theory that ‘1000 fans can support a KOL’?

Author: STARZQ

Last week, I wrote about how creators can build their personal brands in 4 steps. Many friends left comments asking how to generate income for their brands. Founders also came to exchange ideas on how to help individual brands earn income.

In my opinion, the most feasible way for creators/individual brands to earn income is to practice KK’s “1000 Fans Theory”, and NFT is the best medium to practice this theory in the new era.

Musicians are an important category of Web3 creators. In this article, I will take independent musicians as an example to analyze the problems and reasons they currently face, and then share new practices in the Web3 era, hoping to inspire you. At the same time, this is also a history of the development of music media. Enjoy~

TL;DR

  • Problem: Only 0.4% of musicians can earn $50,000 a year through streaming platforms.
  • Root cause: Digital music started with singles, and the subscription model of streaming platforms brought prosperity to the industry but is not friendly to independent musicians in the long tail.
  • 2003: iTunes Store pioneered the single sales model.
  • 2008: Spotify pioneered the streaming subscription model.
  • The impact of streaming subscriptions on musicians: Difficult to make money and brought about a “toxic culture”.
  • Independent musicians are not suitable for streaming platforms and need new methods.
  • Independent musicians in the new era: Practicing the “1000 Fans Theory” with NFTs.
  • Summary: Web3 is the new era for individual brands.

1. Problem: Only 0.4% of musicians can earn $50,000 a year through streaming platforms.

In 2022, streaming platforms account for 67% of the global (recorded) music revenue. In other words, for a long-tail musician who relies on recorded music, the majority of their income comes from streaming platforms like Spotify. But here’s the problem, only 0.4% of musicians can earn over $50,000 a year through streaming platforms.

According to estimates from the UK Intellectual Property Office, only about 0.4% of musicians on streaming platforms (1,723 musicians) can generate enough streaming plays (1 million plays per month) from their music to sustain a living.

Streaming platforms typically pay musicians between $0.003 and $0.005 per play. Using an average of $0.004, the income from 1 million plays per month is $4,000, which amounts to $50,000 a year.

5w dollars is exactly the median level of personal annual income in the United States and the United Kingdom, which means it can afford you a middle-class life in society.

According to data from the U.S. Bureau of Labor Statistics, the median personal annual income in the United States in 2021 was $45,792. This means that half of the personal income in the United States is higher than $45,792, and the other half is lower.

By the way, the median personal annual income in New York State in 2021 was $63,172, and in California it was $72,848. In other words, if you want to live in New York or California, $50,000 is not enough, you need a higher income.

In summary, in the era of streaming media, only a very small percentage (0.4%) of musicians can earn $50,000 a year and live a middle-class life. This is clearly an unhealthy ecosystem.

How did this result come about, what are the reasons behind it, and what are the opportunities for breakthroughs? Please continue reading.

2. Going Back to the Origin: Digital Music Starts with Single Mode, Streaming Subscription Model Brings Prosperity to Platforms, but is Unfriendly to Independent Music Artists in the Long Tail

2.1 2003: iTunes Store Introduces Single Sales Model

Initially, digital music did not follow the streaming subscription model, but the single sales model.

On April 23, 2003, Apple launched the first digital single on the iTunes Store, which was U2’s “Vertigo”. The single was priced at $1.29 and sold over 100,000 copies within 24 hours, setting a record for digital music sales at the time.

Digital singles were cheaper and more flexible than traditional music formats (such as CDs), and the launch of the iTunes Store marked a major turning point in digital music sales and helped propel digital music into the mainstream.

Behind the music business model is the changing ways in which users consume music. The increase in the number of songs and the emergence of digital music formats (mp3, aac) allowed users to listen to thousands of songs on their computers, but they could only listen to 10 songs from a CD in a mobile setting. Users still couldn’t “listen to thousands of songs anytime, anywhere”.

On October 23, 2001, Apple launched the first iPod with a capacity of 5GB, which could store about 1,000 songs, meeting the needs of users to listen to music anytime, anywhere. At the same time, a series of advertisements with the theme of “a thousand songs in your pocket” were released, conveying the core concept of the iPod.

The iPod can indeed hold 1,000 songs, but the process of importing 1,000 songs from a CD is actually quite painful (I have experienced it myself), requiring the following 6 steps to be repeated.

  • Insert the CD into the CD drive.
  • Open iTunes and click on the “Music” tab in the iTunes window.
  • In the “Music” window, click on “Import CD” under the CD you want to import.
  • In the “Import CD” dialog box, select the songs you want to import and click “Import”.
  • Wait for the import to complete, and the songs will be saved in your iTunes library.
  • Drag and drop the songs from iTunes to the music library of your iPod to complete the import.

After the introduction of digital single sales on the iTunes Store, users have the flexibility to purchase individual songs and it is more convenient to import them into their iPods (since the purchased songs are already in the iTunes library, they can be directly dragged and dropped into the iPod).

The combination of iPod and the iTunes Store completely changed the way people consume music in 2003.

2.2 2008: Spotify pioneers the streaming subscription model

The digital single sales model makes it easier for users to carry music in their pockets, but it also faces three practical problems:

  • If you want to listen to a lot of music (e.g., 1000 songs), purchasing individual songs can be a significant expense;
  • Each device used for listening to music has its management costs. For example, if you switch to a new phone, you need to re-import the songs;
  • You need to manage playlists yourself, which is also a hidden cost. However, in reality, most listening scenarios are non-purposeful and do not require the creation of playlists.

These pain points have become more prominent with the increasing number of online music (which increased by 25 times from 2003 to 2008) and the diversification of users’ music tastes.

For musicians, if their goal is to become popular and reach millions of people with their music, the need to pay for each individual song becomes a hidden barrier.

Around 2005-2010, internet service providers began offering high-speed broadband services ranging from 10 Mbps to 100 Mbps, and cloud storage technology started to emerge, making audio and video streaming services possible.

  • On February 14, 2005, YouTube was founded;
  • On March 14, 2006, Amazon launched Amazon Web Services (AWS), a cloud storage service.

In this context, Spotify was launched in 2008 in Europe, combining “free” and “paid subscription” models, and pioneering the streaming subscription model.

  • Free: Free users can play music online without any limitations but will hear ads between songs. Additionally, free users cannot freely choose songs on mobile devices and can only listen to songs in shuffle mode.
  • Paid: For users who subscribe to the monthly paid subscription (€10/month), Spotify offers ad-free, high-quality audio streaming, offline playback, and the ability to freely choose songs on any device.

As we can see, Spotify allows users to “access a large amount of music at a relatively lower cost” and “enjoy personalized recommendation services” “anytime, anywhere, on any device”. At the same time, it enables musicians to reach a larger audience. The following set of numbers shows that the streaming model represented by Spotify can reach more than 100 times the number of users compared to the single-track model represented by iTunes.

  • The best-selling single on iTunes: Michael Jackson’s “Billie Jean”. This song was released in 1983 and has sold over 10 million copies on iTunes;
  • The most popular single on Spotify: Drake’s “One Dance”. This song was released in 2016 and has been played over 2 billion times on Spotify.

In 2011, Spotify entered the United States and embarked on a rapid growth path with the help of smartphones and mobile internet. As of April 2023, Spotify has over 420 million subscribers in more than 180 countries and regions (accounting for 74% of the global digital music subscription users). Among them, 172 million users are paying subscribers and 248 million users are free users.

Spotify’s successful model has also inspired other companies. Apple launched Apple Music in 2015, and Amazon launched Amazon Music in 2016. In terms of revenue share in the music product market, streaming music has been steadily increasing and eventually becoming the dominant player.

  • In the early 2010s, digital sales of singles and albums (such as through iTunes) still accounted for a significant share;
  • In 2016, streaming revenue surpassed digital download revenue for the first time in the U.S. music industry;
  • In 2018, streaming music revenue accounted for 75% of the entire recorded music market revenue.

2.3 The Impact of Streaming Subscription Model on Musicians: Difficult to Make Money and Brings a “Toxic Culture”

The streaming subscription model better meets users’ diverse listening needs and has made Spotify the world’s largest music streaming platform with a market value of $220 billion. However, it has also brought about the issue mentioned at the beginning of the article: only a very small percentage (0.4%) of musicians can earn $50,000 a year and live a middle-class life.

In fact, the problems brought by streaming are not limited to this:

  1. The streaming subscription model has almost reached the ceiling in terms of user numbers and revenue. It is becoming increasingly difficult for musicians to earn $50,000 from 1 million plays;
  2. 66% of streaming consumption comes from old songs (released more than 18 months ago), making it difficult for new musicians to break through;
  3. Musicians are no longer creating for the audience but catering to recommendation algorithms, pursuing quantity over quality;
  4. The platform acts as an “intermediary” where users belong to the platform and cannot directly connect with musicians.

Now let’s go into detail one by one

The subscription model for streaming media has almost reached its user and revenue ceiling. The income from 1 million views is decreasing, making it increasingly difficult for musicians to earn $50,000

The subscription model for streaming media started in Europe and the United States, and later growth mainly came from international markets, especially in Asia, Africa, and Latin America. However, non-Western consumers are not accustomed to paying for music streaming, so the per capita contribution to revenue is low. At the same time, Spotify’s commission rate is increasing.

These two factors combined have led to a continuous decrease in the fees artists receive for every 1 million views. From 2014 to 2022, it has decreased by 50%

In 2014, the average fee Spotify paid to artists per play was $0.0078. In 2018, it decreased to $0.0038. In 2022, it further decreased to $0.0034

In other words, in 2022, a musician would need twice the amount of plays compared to 2014 in order to earn $50,000. At the same time, because the overall pie hasn’t grown, competition among musicians has become more intense.

66% of streaming media consumption comes from old songs (released for more than 18 months), making it difficult for new musicians to break through

Friends who understand recommendation algorithms know that the more SKU accumulation data there is, the more likely it is to be selected by the algorithm. However, music itself is a long-cycle consumer product, and when the market growth is limited and the company’s performance needs to continue to grow, the easiest way is to reduce the exposure of new songs in the recommendation algorithm, increase the exposure of old songs, and improve short-term user metrics.

But with the constant influx of emerging musicians, the market also needs fresh blood, and this is not a practice that is conducive to the long-term health of the ecosystem.

Musicians are no longer creating for the audience, but catering to recommendation engines and pursuing scale over quality

Emphasizing scale over quality is another characteristic of recommendation algorithms. This also leads to musicians releasing a large number of music works in order to increase exposure. TikTok will have a “hit song” every now and then, and Spotify releases 100,000 new songs every day. But ironically, these hit songs are almost forgotten after a while, and even after 20 years, Jay Chou is still standing at the peak in the Chinese music industry.

It is not an exaggeration to say that recommendation engines have brought “toxic culture” to creators.

The platform acts as an “intermediary,” users belong to the platform and cannot directly contact musicians

As mentioned above, the streaming media model can reach more than 100 times the number of users compared to the single song model represented by iTunes. However, this is only “reaching,” not “connecting.” What you pay for is Spotify membership, not a specific musician’s membership; the platform serves as an intermediary business and will not let musicians know who their loyal fans are, but this is very important for independent musicians.

2.4 Summary: Independent musicians are not suitable for streaming media and need new methods

The logic behind streaming media represented by Spotify is economies of scale. The goal of success is to become popular: to make musicians transition from “selling works” to “selling exposure”, to have the “opportunity” to reach more listeners, and to gain other sources of income (album sales, tours, endorsements, etc.) after becoming a star.

However, the probability of becoming a star is very low, which is not suitable for all musicians, especially independent musicians who rely on fan support. They need new methods.

3. Independent musicians in the new era: Practicing the “1000 True Fans” theory with NFT

In fact, there is another way to earn $50,000 or even $100,000 a year, which is to practice the “1000 True Fans” theory proposed by Kevin Kelly as early as 2008:

If you have 1000 loyal fans, each of whom is willing to spend an average of $100 per year to support you, then you can earn $100,000 a year (which KK believes is the amount needed to live for most people, maybe because he lives in California and $50,000 is not enough :)).

Let’s review the 4 key points of the “1000 True Fans” theory:

Requirements for these 1000 fans: Willing to purchase any product you produce

  • These die-hard fans will drive 200 miles to see you perform; they will buy the hardcover, paperback, and audiobook versions of your books; they will buy your next figurine without you knowing; they will pay for the “best” DVD version of your free YouTube channel; they will visit your chef’s table once a month

How did the number 1000 come about

  • Your works, as well as your relationship with fans, are enough to make your loyal fans spend a day’s wages to support you, with an average of $100
  • To live the life of most people, KK believes that about $100,000 a year is needed, which means you need 1000 fans
  • Li Jin iterated a “100 Fan Theory” in 2020 based on a sample of course creators, with an average sales volume of over $1,000 per transaction, so you only need 100 true fans to live the same life

1000 is a feasible number

  • Anything that is produced or conceived can at least generate interest from one in a million people – this is a very low standard. However, if only one in a million people are interested, then there may be 7,000 people on Earth who can become your fans
  • You can count to 1000. If you gain one fan every day, it only takes 3 years, and you can even remember the name of each fan
  • If you focus on getting an extra fan today, it is very powerful. One customer after another, are they satisfied? Have I given them value? If you can focus on this, it is truly a superpower

You must have a direct relationship with your fans

  • They must pay you directly
  • If you rely on intermediaries, the first intermediary takes a cut, and the second intermediary does not maintain the fan relationship, resulting in a constant loss of fans
  • If you don’t like dealing with fans (only like drawing, sewing, or making music), it is recommended to add a partner to form a duo; at the same time, the number of fans required to “make a living” needs to increase linearly

In Web2, many creators are already practicing the “1,000 True Fans Theory” through tools like Substack / LianGuaitreon. For example, as mentioned in our article last week, Justin Welsh earns $1.3 million per year by selling his course “Content Operating System”.

  • The price of this course is $150
  • Justin Welsh sells 8,667 copies per year, 23 copies per day

Of course, Justin Welsh is already a top creator. What I want to express here is that if you have 1,000 loyal fans and create a product that is willing to pay $100 annually, based on the tools provided by web2, you can live a decent life.

So, you must be wondering, since web2 can achieve the “1,000 True Fans Theory”, what additional value does NFT bring? My answer is:

(Music) NFT is the perfect representation of “work + fan relationship”, and it combines “work + fan rights + social identity”. The issuance threshold for creators is low, making it a better target for user support.

In Justin Welsh’s example mentioned above, $150 is basically the value of the work. But to be honest, it is quite difficult to create a work worth $100 that can be distributed repeatedly. Is there a way to lower this threshold? In fact, KK has already answered this question in the article: $100 = work + fan relationship

Your work, along with the relationship with your fans, is enough to make your loyal fans spend one day’s salary to support you, with an average of $100

A CD alone is definitely difficult to support a price of $100, at most $20, and the remaining $80 represents the value that can be generated from your fan relationship.

On the other hand, NFT = work + fan rights + social identity. On one hand, it perfectly represents “work + fan relationship”, and on the other hand, it provides more capabilities: assetization of works, fan rights, and a public social identity in the digital world.

Take independent musicians discussed in this article as an example,

  1. NFT itself is a work, a digital CD or a digital single; at the same time, NFT restores the asset attributes of a CD, so if independent musicians become famous in the future, there is room for appreciation;
  2. NFT can enable a series of fan rights based on token gated and open loyalty, such as verifying NFT to enter the musician’s community, priority ticket purchase rights to prevent scalping. For specific cases, you can refer to the thread where the A7X band connects fans and distributes rights through NFT;
  3. NFT itself is also a public social identity in the digital world. In Web2’s streaming platforms, only Spotify and QQ know that you are a fan of a certain musician; but everyone can know that you own an NFT of a certain musician;
  4. NFT has a low issuance threshold, which is also a very big advantage. In the web0 era, fans could also buy signed CDs or signed books to support independent creators, but there were still many barriers to issuance. NFT almost reduces this barrier to 0 (although it is expected to increase later, it is definitely lower than the cost of physical items).

This is why independent musicians actively embrace Web3

Los Angeles singer-songwriter TK: In November 2022, he released his first on-chain album “Eternal Garden”. He sold 700 copies at a price of 0.07 ETH (about $70) each, earning 38.26 ETH (about $70,000) in revenue. It is estimated that TK can only earn $500 to $1,000 in streaming royalties from Spotify each month. The profit TK earned from this NFT sale is equivalent to 70 months of streaming revenue.

Italian musician Violetta Zironi: In April 2022, she released a music NFT collection called Moonshot, which consists of 5 songs she created and 2,500 unique hand-drawn artworks by her father Giuseppe Zironi. The collection had a total of 2,500 copies and was priced at 0.045 ETH, earning 112.5 ETH (about $200,000) in revenue. Inspired by this success, she launched another music NFT collection called Another Life in January 2023, which featured PFPs based on her 5 songs. The collection had a total of 5,200 copies and was priced at 0.1 ETH, earning 520 ETH (about $1 million) in revenue. She is also the first musician to sell over 5,000 copies of a single music NFT.

It is worth mentioning that the success of Violetta and TK is built on their communities and fans (thanks to Henry for the input).

  • Violetta has 66,000 Twitter followers and a high level of interaction. She was once known for streaming 20 hours a day.
  • TK spent years building his Web3 community, and his Telegram group is one of the most active in the music industry.

In my opinion, for creators, NFTs combine “artwork” and “fan rewards” into a “culture-based fan reward”, which is something that Web2 cannot easily provide.

  • For example, being a beautiful live streamer can also make money through fan relationships, with the top streamers earning up to $100,000 from a single donation. However, this lacks a cultural flavor.
  • In comparison, fans are more willing to buy NFTs to support creators, and NFTs include “artwork + fan rights + social identity”, giving them more utility.
  • Some users in our reader communication group also shared that after reading a physical book by an author, they subsequently purchased an NFT-based e-book to support the author.

Therefore, the new model for independent musicians in the digital age is to have both creative abilities and community management capabilities. In the Mastercard Music Program we introduced before, AI and Web3 empower these two capabilities simultaneously.

  • Students create works faster with AI
  • Mastercard helps graduates issue single NFTs to build communities

I will also continue to pay attention to Web3 music-related communities, including Lens and Farcaster.

btw, I believe that the “1000 true fans theory” and streaming subscription models are not contradictory. If you are an independent musician and want to earn $50,000 to $100,000 a year for a relatively free life, the “1000 true fans theory” is more suitable for you. If you want to become a globally renowned star, Spotify / Tiktok / Youtube are your best tools.

4. Web3 is a new era for personal branding

At this point, I have to admire Kevin Kelly’s foresight. In 2008, when Spotify was just launched, KK wrote an article called “1,000 True Fans”. The reason for writing this article was that at that time, people generally believed that the goal of success was to become popular and hit big, but technology allowed us to have another choice.

However, the subsequent story was the emergence of super-scale platforms under the mobile Internet, and the user dividend made “scale” not a difficult thing. Creators did not care so much about the intermediaries taking a cut and whether the fans/customers belonged to them.

Until the past 2 years, people have started to pay attention to “fans” again, and there are three narratives behind this:

  • The user dividend has disappeared, platform cuts are increasing and lacking transparency, and both brand and individual creators hope to connect directly with fans;
  • When users pay 100 yuan on Spotify, musicians can only receive at least 10 yuan. There is a complex industry structure and chain of interests in between;
  • Fans collectively create value, but cannot capture its value;
  • The emergence of digital nomads and solopreneurs. In their value system, freedom >> making a fortune, “making a living through fans” has opened a door for them.

Web3, decentralization, and community happen to meet these three narratives. Individual creators bypass intermediaries and obtain income from fans and communities. As fans, they also have their own identity and assets, and they increase in value through community co-creation, forming a healthier ecosystem.

 

Reference

https://www.waterandmusic.com/just-how-difficult-is-it-to-make-a-sustainable-living-from-streaming/

https://www.waterandmusic.com/starter-LianGuaick-music-streaming-platform-models/

https://www.midiaresearch.com/reports/building-a-fan-economy-with-fan-powered-royalties

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