Napster - A Four-Point Update

When we first helped lead the investment consortium to acquire Napster in May, 2022, Hivemind had a very clear investment thesis in mind:  Napster was a viable, scaled business, with a well-defined commercial and consumer value proposition in a space highly complementary to web3 tech, and an instantly recognizable brand name. So, unlike many nascent web3 plays, our view and the view of our partners was that Napster presented a rare example of a proven web2 business model where leveraging various aspects of the crypto ecosystem could provide a natural extension of its core business and unlock significant additional value.

That view remains even more true today, notwithstanding the volatility and re-pricing for much of crypto during the “winter.” With four-plus months and version one of a litepaper under our belts, we wanted to share more about our basic investment thesis regarding Napster’s web3 potential, and highlight some key points about the transaction that also illustrate how Hivemind itself thinks about opportunities in crypto.

I - Crypto’s not just about tradable assets - it’s also about better programming for ownership

Many informed crypto audiences will take this as a statement of the obvious. But given how some commentators reacted to the deal, it is worth elaborating here.

A lot of market value has been created - and some of it lost - on trading-oriented crypto business models adjacent to the securities markets.

While one can argue that there has been some early utility derived from the crypto ecosystem (DeFi, NFTs), it is fair to say that in general, most of the nascent attention has been focused on volatility, hype, and speculation. Long-term, however, those activities represent only a fraction of web3’s potential value. At its core, a blockchain is a decentralized and trustless record of transactions, which allows digital information to be recorded and ownership to be tracked. In doing so, Web3 enables fans the opportunity for deeper engagement, both within their communities and with the artists directly. By extension, Web3 will allow artists to reward their fans in a focused manner deepening the bond to the benefit of all parties

Reminding ourselves of this helps us to see how this is acutely relevant to Napster - which at its base, helps consumers, artists, and labels share value derived from proprietary IP, which just happens to be the digital information formerly known as music.

II The blockchain isn’t just useful for Napster in theory - they’re practical improvements

Music isn’t a speculative application for crypto the way, for example, commercial real estate is. Instead, the music space offers a much more organic and intuitive use of blockchain technology to improve an already technology-informed set of consumer and business relationships. Gaming is another sector where this same point holds true. Longer term, there will be many others as well.

But medium term, music is a space where tokenizing business and consumer relationships makes a great deal of commercial sense - because often, right now, those relationships are in tension with each other. Artists - except perhaps for the most successful ones - require support from labels to produce, market, and distribute their music. Labels want to be compensated for their investment.

And fans, of course, just want to connect with artists and enjoy what they hear - and up to a point, are willing to pay for that connection. Web2 blew a hole in that interdependency by lowering barriers to music production and distribution, and to connecting artists with fans. While consumers have clearly benefited in terms of cheap, easy access to endless amounts of music, web2 has threatened the economics of the labels, and it’s also arguably under-rewarded artists.

Web3 can fix that. How? While the litepaper referenced above provides more detail, the basic answer is that blockchain technology offer a better way for artists and fans to connect, while also making IP (music) more valuable for rights holders. If fans can access both music and other content/goods in unique ways, that creates new value for both them and for artists - who also gain a new distribution mechanism.

That new value, in turn, can also benefit labels, given that true ownership and transactions can be tracked on-chain. These capabilities get to the heart of web3’s broad value proposition, which expands the ways in which different stakeholders can share ownership over an asset that they all agree is worth something.

III Not every music business, however, is equally right for web3; Napster stands out.

As we’ve noted before, Hivemind is also an investor in Limewire, another “legacy” streaming music brand. And while that investment also makes great sense, we want to differentiate our thinking about Napster. Napster is a scaled business, with a user base in the millions, and a proven ability to work well with labels and artists. In other words, it’s an iconic - if slightly controversial - brand that itself stands out in a crowded streaming and music technology space. Not every music platform has as many users and as deep relationships as Napster has with both artists and rights holders. And not every music platform generates nearly nine figures in topline revenue. Napster is a great investment because it has an opportunity to define how a technology platform that balances sometimes-competing interests can benefit all those involved to a greater degree than would be the case without it.

Our conviction has only grown in this regard, especially since adding an industry-leading CEO, a music industry veteran and joining from Roblox where he was Head of Music. This, coupled with the addition a high-profile CFO Pete Wylie, and more talent being attracted by the day, gives us great confidence that Napster as a stand-alone business is well prepared for what’s ahead in the music industry at-large.

IV Napster is prepared to invest in the future of music AND web3

One of the first announcements from Napster’s new CEO Jon was the launch of both Napster Ventures, and an artist development fund in partnership with Algorand. While Napster Ventures will focus on fostering, investing in and acquiring Web3 music start-ups, the artist development fund will be utilized to help support the marketing and launch of the web3 artist project globally. In today’s environment, it is extremely difficult for artists to get their project seen, discovered, and to break through the noise. By leveraging its rich history, size of existing music assets, and millions of subscribers, Napster is uniquely positioned to work with artists and creators to help them bring their projects to larger audiences while giving them the technical support that they need and deserve. We support and applaud these initiatives which Napster is pushing forward and believe they can truly help educate and create momentum in the market, which will not only speed up adoption of Web3 in the music industry, but also help solidify Napster’s position as the leader of the Web3 music era.

When Managing Partner Matt Zhang sat down with Sunday Times to discuss Napster’s recent developments, he summarized our vision for the company: to turn the music OG brand into a music super-app for the post-streaming era.

“We are not unique at all. There are many better investors in the music space out there. But I think the timing is unique,” Zhang said “ the next paradigm shift of the music industry is in front of us.” And that, dear readers, is why we invested in Napster.