The music industry is no stranger to disruption. From records to cassette tapes to CDs and to mp3s, the way we enjoy music has always been in constant flux.
And now, with the near-ubiquitous popularity of music streaming services and some royalty schemes that disproportionately favor record labels over musicians, we’re predicting that the next digital disruption set to shake up the music industry will be NFTs.
NFTs offer advantages over current digital service providers (DSP) such as Spotify and Apple Music.
Digital Service Providers account for 89% of the $12.2 billion the U.S. recorded music income.
However, the DSP model leaves artists with less than a proportional income share. In effect, the royalty fees paid to rights holders reap too large a portion of the pie relative to the artists. The rights holders are predominantly record labels such as Universal Music Group, Sony Music Entertainment, and Warner Music Group.
According to Statista, in the years 2018 to 2020 the share of Spotify revenue funneled to publishers, distributors, and rights holders averaged 74.42%.
In contrast, the artists only kept “anywhere between 5,25%”
The industry is legally and economically complex with archaic, opaque structures. From intellectual property law enforcement to bureaucratic payment systems, costs are too often borne by the artists. We see NFTs as offering the potential to disrupt the music industry’s status quo.
In the creative industry, some consistent trends have ruled how creators come to generate and distribute their content. For example, in the 1960s, the large majority of TV programs were concentrated on four or five mass media channels. After that, more customized private channels were created, ultimately giving rise to video on demand (VOD), namely YouTube and Netflix. On the artist’s side, YouTube creators no longer needed to face hurdles in terms of signing a contract with a production studio or distribution platform. They could directly share their work with their niche audience and reap a majority of the profits generated to this effect. The trend continues today with accessible platforms for content creators like Tik Tok, Instagram, and Twitter.
Historically, musicians with any hope of ever growing an audience required a record label. With all the connections needed to broadcast on the radio, and distribute CD albums across brick-and-mortar retail outlets, record labels were essential for a career in music. With the arrival of SoundCloud, Spotify, and other DSPs, numerous do-it-yourself (DIY) artists have been able to share their music and grow a following from their home studios. But only a rare few have been able to make music their primary source of income. This is because all advertisements and subscription profits are concentrated in the hands of the record labels, who are majority shareholders at Spotify. Only with a scale of millions of hits can Spotify music rights holders turn any significant profit. As a consequence, recording artists only capture about 12% of the entire music industry.
Out of approximately 8 million artists on Spotify, only 42,100 artists (0.53%) made over $10k for the year.
NFTs hold the promise of downsizing the magnitude of middlemen and rewarding artists as the chief earners for their music. The gas fees surrounding cryptocurrency transactions and the complexity of setting up a wallet to partake in the market initially were barriers to entry. However, NFT marketplaces are increasingly removing these barriers by absorbing gas fees and allowing users to pay in fiat, alongside artists educating themselves. Artists can release music NFTs to diversify away from DSPs and offer their curated audience unique ownership of music and other digital collectibles. Therefore, artists with followings of any size can readily monetize their followings to recapture profits lost in the DSP model.
Currently, music NFTs are best suited to a distinct use in the industry.
Specifically, artists can monetize their “super fans” and make substantial profits from NFT sales.
Indeed, with NFTs being assetized, fans and investors are more likely to spend larger amounts when they expect that the demand for it is strong and that it may even drive the digital good to appreciate with age. Furthermore, the clientele that may be brought to purchase such collectibles is likely to be the same as that anxiously anticipating new album releases, saving up to acquire collector vinyls, and participating in all manners of fan engagement to possibly earn a seat backstage with a potential meet-and-greet on tour.
The exclusive nature of NFTs makes it operationally feasible for artists to have a closer relationship with their collectible-holding super fans.
Effectively, when an artist auctions an NFT, they typically announce the discrete number of them being offered such that the value of any given NFT may not be diluted over time due to additional ones being circulated. Therefore, fans enjoy immutable ownership over prized digital items that come with “unlockables” accessible solely through the token they carry with them. Investors, on the other hand, bet on the token’s value going up for resale either to nth-degree resellers or to wealthy fans who want to crystallize and reinforce their connection to their favorite musicians.
It is no secret that there is often a predatory relationship between record labels and distributors, and artists. Because of this, musicians must hire managers and lawyers to mediate with record companies on their behalf, which inflates entry fees into a career in music and detracts aspiring music professionals.
Not only do smart contracts tune down the need for legal advice and fees, but they can also enforce how royalties are redistributed to all parties involved.
What’s more, for entry-level players, it provides the opportunity for investors to bet on the future success of an artist while funding him or her and claim ownership of a portion of royalties for a specific song.
Further, investors in music assets looking to generate passive income through royalties can do so through smart contracts even as NFTs are resold in the secondary market, thanks to the tamper-proof traceability inherent to the blockchain. Artists along with first, second, and third-degree buyers can claim a portion of royalties as predefined at the outset in the NFT’s smart contract. Finally, for charity concerts where a portion of profits are to benefit non-profit organizations, smart contracts effectively can add transparency and security to the NFT’s value proposition. Indeed, the blockchain can facilitate sophisticated investment instruments for music assets and enforce rules in a systematic and secure fashion, without shaving off much profit margin with middlemen's handlings.
Of course, industry disruption does not mean merely improving existing processes. Rather, it must introduce entirely new ways to experience goods and services. This is especially relevant when it comes to music NFT integrations to the metaverse.
Atari’s CEO, Fred Chesnais, speaks of a virtual world where one can boost their digital avatar’s health after they purchase and watch a melodious NFT from within the game. Effectively, use cases abound. From dressing up your avatar with a t-shirt bearing your favorite band’s logo to obtaining tickets for your avatar’s number-one DJ for a night out that increases its happiness score, game designers within the Metaverse are free to think up any unlockable with or without conjunct, physical add-ons. Artists like Twenty One Pilots, Ariana Grande and Travis Scott are all hosting their own virtual concerts on platforms like Fortnite and Roblox. Metaverse-native bands are forming: KINGSHIP is a band of three Bored Apes and one Mutant Ape leveraging BAYC’s IP and partnering with Universal Music Group to give fans token-gated experiences. The digital worlds offer exciting opportunities for artists and loyal fans alike.
With countless blockchain solutions promising to solve some of the longest-lasting issues in the music industry, it is no surprise that music NFT-based ventures are multiplying. A sample of successful ventures in the space is as follows:
Thanks to NFTs, artists could reap full profits from their craft barring a much smaller portion paid to the NFT marketplace relative to that required from DSPs.
Effectively, one of the most important advantages NFTs offer in the music industry is to reward creators in such a way that mid and low-tier musicians can effectively make a living out of their craft.
Additionally, NFTs offer collectibles that create an opportunity for fans to connect more deeply with their chosen artists through the unmediated purchase and blockchain-based ownership of limited-edition digital assets.
To cement this more personal connection facilitated by NFTs, the collectibles can bring added material utility to music sales by appending special perks to them such as VIP access to concerts and signed t-shirts.
Beyond NFTs, blockchain-enabled startups in the music industry can bring solutions to innumerable pain points thanks to the unparalleled security and automatic enforcement mechanisms that the distributed ledger can provide. The opportunities are endless to transform and innovate on how all interactions between agents are done in the music landscape, in B2B as well as in B2C verticals.
Del Castillo, M. (2021, August 13). Are NFTs The New Napster? This Time The Music Industry Isn’t Taking Chances. Retrieved from Forbes; Hissong, S. (2021, August 4). NFTs May Seem Like Frivolous Fads. They Should Be the Future of Music. Retrieved from Rolling Stone; Holmes, H. (2021, July 7). NFTs Generated $2.5 Billion in Sales in the First Half of 2021, New Reports Indicate. Retrieved from Observer; Leising, M. (2021, June 7). NFTs Shift Power to Artists as the Music Business Evolves. Retrieved from Bloomberg; Perez, S. (2017, April 26). Spotify acquires blockchain startup Mediachain to solve music’s attribution problem. Retrieved from TechCrunch; Robert, R. (2021, April 19). Does Spotify pay artists a fair rate? Here’s what musicians, managers and Apple Music have to say. Retrieved from LA Times; Soñador, E. (2021, August 4). The Evolution of Blockchain-Based Music. Retrieved from Messari; Statista. (2021, March 25). Share of Spotify’s cost of revenue from 2011 to 2020. Retrieved from Statista; Steele, A. (2021, March 24). NFT Craze Reaches the Music Industry. Retrieved from WSJ; Taylor, A. (2021, May 20). NFTs: Are they the future of the music industry? Retrieved from BBC; Tears, Y. & Gains, W. (2021, March 25). Using NFTs to Enhance Live Performances and Fan Interaction. Retrieved from NFT Music Conference:Lynch, J. (2018, August 7). Musicians only got 12% of the $43 billion the music industry generated in 2017, and it mostly came from touring. Retrieved from Business Insider India; Stassen, M. (2022, May 11). Universal’s Web3 Label 10:22PM Launches NFT Collection And Virtual World For Metaverse Band KINGSHIP. Retrieved from Music Business Worldwide Marr, B. (2022, July 27). The World Of Metaverse Entertainment: Concerts, Theme Parks, And Movies. Retrieved from Forbes;
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