How NFTs Can Disrupt the Music Industry
Historically, the music industry generates roughly $42 billion in annual revenue and less than 12% goes to artists. Additional data shows that around 90% of streams on platforms such as Spotify and Apple Music are from the top 1% of artists (1). Working these numbers out, on average, artists collect $0.0032 per stream on Spotify and $0.0056 per stream on Apple Music.
Figure 1: Lorenz curve of music sales by medium. Graph by Rolling Stones, September 9, 2020.
The rights of an artists’ music is another critical issue that has been ongoing for decades. For example, Taylor Swift’s original contract in 2004 held that her record label, Big Machine, would receive ownership of the music she produced. As a result, they owned the rights to her first six albums. In exchange, Swift received a cash advance to kick-start her career. The masters to those albums were then sold to an investment group in 2020 for $300 million, where Swift received none of those proceeds. So, can how NFTs help?
What is an NFT?
Non-fungible tokens (NFTs) are crypto assets that are unique and non-interchangeable units of data stored on a blockchain (digital ledger). They use a blockchain to provide a public proof of ownership, certificate of authenticity, and transparency when ownership is transferred. NFTs are used to represent real world assets, such as artwork, real estate, and music, as well as identities, property rights, and other intangible assets. They differ from cryptocurrencies, which are identical to each other. NFTs cannot be traded or exchanged for equivalency (non-fungible) (2).
Put another way, one Bitcoin will always equal one Bitcoin. However, each NFT is unique and cannot be exchanged for one another on the basis of equivalency.
Because NFTs are based on a blockchain, they cut out all intermediaries connected with the sale of traditional assets, greatly simplifying transactions. This includes brokers, record labels, etc. Another benefit of existing on the blockchain is that identity management becomes easier without a realm for imposters. Since the blockchain is public record, false identities and assets are nearly impossible to create.
Figure 2: Breakdown of music industry revenue. Chart by Audius.org
One of the greatest benefits of NFTs is creating market efficiency. By eliminating intermediaries, they help streamline the process of asset exchanges and allow artists to communicate directly with their audience. Furthermore, NFTs can democratize investing by fractionalizing ownership. Assets, such as real estate, can be more easily divided amongst multiple owners. This in turn allows greater groups of individuals to come together and raise money in a DAO (decentralized autonomous organization).
Figure 3: Notable artists using Audius platform to sell work as NFTs. Source: Audius.com
NFTs represent the next step in the representation and ownership of assets.
How NFTs Can Help
Let’s look at the issues facing the traditional music industry and how NFTs can address them:
Royalties
Many musicians are given unfair conditions to collect royalties, where they may not even be participating in the reselling of their music. The lack of transparency by record labels, complexity of contracts, and nativity of artists may result in under compensation. NFTs easily solve this issue by incorporating smart contracts into their function. A smart contract is a self-executing contract with the terms of the agreement between the buyer and seller being directly written into the code. As a result, artists can code the ownership, royalty, and copyright details into a smart contract, and on execution, revenue will be properly and fairly distributed to everyone automatically.
An interesting experiment that artists are currently doing is selling a part of copyrights to finance an upcoming drop and in return offering the supporters a share of the art’s royalty! For example those who help crowdfund a band or artist’s album could receive an NFT that certifies their contribution. That NFT could then be the key to access a host of exclusive offers, discounts, fan-only releases, concert pre-sales, and more throughout the artist’s career (3).
Ownership
Taylor Swift is one example of thousands that have been taken advantage of by record labels and lost ownership of their own music. By utilizing NFTs and blockchain technology, those concerns become much less dominant.
NFTs give absolute certainty to the ownership of its creator. Each subsequent transaction is also instantly verified as it moves from owner to owner on the blockchain. The ledger which keeps track of each NFT is public and entirely traceable, providing needed transparency to the system. Therefore, albums, songs, and other releases can be minted as NFTs by the artists themselves as opposed to the record labels. Thus, the artist maintains ownership of their work and can choose how, to who, and when to release ownership. The terms become set by the artist.
A New Era
Redefined Relationships
NFTs allow fans to better show their support and appreciation for artists and vice versa. By using NFTs, artist can grant access to private Q&As, sell unreleased studio sessions, projects, unique pictures, and provide 1 on 1 sessions to fans.
By buying NFTs, those with enough means gain the attention of a creator. Sincere bonds between fans and creators because fans are now investing in creators and their ideas or projects (4).
A New Asset
Proof of ownership, control of supply, and provenance allow artists to claim their work as an asset and interact with it as such. Marketplaces have come into place to give artists a place to sell their NFTs, as well as a place for buyers to resell. Some of these include Audius, Airnfts, and OneOf, the latter of which is backed by Quincy Jones. They have sold NFTs for big names such as Pitbull, Doja Cat, Alesso, 3lau, and deadmau3.
In fact, the Grammy Awards announced that they will partner with one of to release NFTs to commemorate the 64th, 65th, and 66th GRAMMY Awards to be released in 2022. (5) The move signals further adoption into the space backed some of the biggest names in the industry.
Flipping the Value Chain
Artists have the potential to flip the value chain, where they currently sit at the bottom. Doing so would put them at the top and communicate directly with the end users.
Figure 4: The traditional Music Industry Value Chain. Source from Wilson and Stockes, 2005.
As more artists begin to explore the intersection of web3 and exclusive content, we will see a revolution in ownership of music rights. Imagine an NFT that represents 100% ownership of a song or album’s master recording rights. The artist can then issue a DAO token that fractionalizes ownership, while maintaining 51% ownership of the total supply. This sure beats the 12% revenue share they are currently sitting with and many of times, without ownership. Artists that sell digital assets may be required to obtain accreditation, abide by security restrictions and KYC. Nonetheless, the space is evolving in real time and will be incredibly exciting to watch unfold in the following few years.
1) Forbes, October 13, 2020
2) Investopedia, December 14, 2021
3) Global Coin Research, September 27, 2021
4) Walid AO – Medium, August 15, 2021
5) Grammy.com, November 1, 2021