Music NFTs Offer Much-Needed Solution

Key Takeaways:

• The current revenue distribution model is unfair for artists and a few players concentrate the majority of distribution power
• NFT technology and especially the application of smart contract to royalties have the ability to disrupt the industry
• Music NFTs are already a solid source of fundraising for artists, a viable collaboration tool between artists, and a monetizable vehicle of fan support
• Fragmented distribution, tokenomics and weak tokenomics models are the biggest scalability barriers
• IP rights and their legal treatment are the greater roadblocker for a change of paradigm
• The NFTs can become the new SoundCloud and displace this platform as the reference for independent artists thanks to the monetization, compossibility and the degree of collaboration that they allow
• The greatest market opportunity is found in retail and independent artists, either as a source of monetization or a collaboration tool
  

Issues in a Monopolized Industry

The music industry has proven to be an efficient cash-generating machine, being able to make more than $60bn a year in combined revenue. Recorded music saw global revenues of $25.9bn in 2021. Streaming accounted for 65% of total revenues, 11% came from a mixture of royalty payments and licensing music to films, TV shows and adverts, the rest from physical sales.

The second major source of revenues for the industry is live events, usually amounting to figures close to recorded music ($23bn in 2017, this revenue source was highly impacted by the COVID pandemic). Publishing is the third source of revenue ($9bn in 2017).

The industry has also made clear its ability to adapt to the times and new technologies, adopting new practices in accordance with consumer preference: pivoting from consumption of physical CDs or cassettes, to an era of streaming (2015 to today) and live events, passing through downloads at a time when iTunes and iPods ruled the market (2004-2014).

But all that glitters is not gold. The entire music industry, from recording to distribution, is monopolized by a small number of players. Just three record labels, Universal Music Group (32%), Sony Music Entertainment (20%) and Warner Music Group (16%), hold a staggering 68% of the music recording market. Similarly, the same firms hold almost 60% of the whole publishing market, leaving the rest in the hands of independent companies (referred to as indie). The same goes for distribution via streaming, where 82% of the market is captured by only five companies: Spotify (32%), Apple Music (16%), Amazon (13%), Tencent Music (13%), and Google (8%).

Fair Revenue Models a Recurring Issue

This situation of oligopoly means that the abundant revenues of the industry are not equally distributed. The aforementioned companies have great control over the industry, which sometimes results in a negative impact on artists who are forced to accept an unfair revenue distribution.

Although it is estimated that there are more than 5 million musicians in the world, very few manage to obtain meaningful revenues out of their creations. The current system means that more than 80% of all revenue goes to the record companies, leaving a mere 12% of the generated income to the artists (after discounting other intermediaries).

The streaming system is also highly extractive for artists. Spotify, for example, only pays $0.003 per stream, the effect of this model is that less than 10,000 artists were able to earn more than $100,000 through the platform last year. This figure seems a bit low for the leading streaming platform (the product that generates the most revenue for the music industry) that had revenues of more than $11bn in the last reported period. This unequal system is not merely an interpretation of the author of this article, but has been ratified by organizations such as the US Copyright Royalty Board.

Music NFTs

The web3 music industry aims to disrupt this situation and fix the recurring issue of unequal revenue distribution. Music NFTs try to make the distribution of royalties and other IP rights more fair by eliminating the middlemen who cannibalize most of these revenues in the current model. Artists can sell their pieces directly to fans in a NFT marketplace and receive royalties every time one of their pieces is sold on the secondary market.

Due to the underlying technology, the application of NFTs to the music industry can be totally revolutionary. One of the main problems of those who own copyrights is to know when and where their music has been played and charge for it. With the traceability offered by blockchain technology, this problem is quickly resolved if the pieces are only marketed as NFTs. Imagine that any time a song that you own to some degree is played or used anywhere in the world, this activity is recorded on the chain and you automatically receive a proportional share of the revenue generated by that action. Although the current situation is still far from this scenario, the possibilities are very promising.

What has already been achieved is that many artists can directly market their NFTs without intermediaries and use this mechanism to raise funds, receiving 100% of the first sale and a fixed percentage of subsequent sales in the secondary market. At the same time, the users who buy it can show their initial support for the artist, hoping for a revaluation over time. These pieces can be sold on marketplaces like Catalog, which has a wide range of musical NFTs. The music nft ecosystem is quite broad and ranges from marketplaces to web3 streaming providers, through web3 communities, royalty platforms or ticketing.

Music NFTs Generate Innovative Revenue Streams

NFTs have the ability to generate new sources of revenue for both artists and users through their musical pieces. Corite or Royal have innovative approaches where users can buy part of albums or songs published as NFTs and receive a proportional income (royalties) every time the piece receives a stream on Spotify. Artists like Chainsmokers at Royal or Alan Walker at Corite have already released a song this way. Corite allows artists to get funded through fans who believe in them in exchange for economic exposure to the artist's streams.

NFTs can also be used as a different way to sell tickets or VIP benefits for concerts, audiovisual pieces or unique collectibles.

Creator-to-Creator Collaboration

Music NFTs are a very powerful piece of collaboration between artists. Platforms like Melos Studio allow musicians to collaborate while being the owners of these works that can later be sold or owned by different users. Melos owns certain unpublished works by artists like David Bowie or Freddy Mercury and allows different musicians on his platform to use those pieces for their compositions. Models like this can be very interesting for copyright holders of unpublished songs. At the same time, it tries to create a community of artists that support each other and favor the creation of music while embracing the distribution of their pieces. Unifying a collaborative platform into a liquid product that can be easily sold is perhaps one of the greatest benefits of NFTs and one of the most promising features for the web3 music industry.

Distribution and Visibility Key Concern for Creators

The existence of very few relevant players in the music industry means that distribution is also highly concentrated. Distribution is crucial for any artist to reach the largest group of fans as easily as possible and these will normally look for the companies that have the greatest distribution power, since the network effects that they guarantee can certainly be beneficial. We can use Spotify as a case study.

In the first quartile of 2022 Spotify had a number of monthly active users (MAU) of more than 422 million. Spotify manages to attract so many users because it unifies the distribution and the global offer of music. If you are looking for an artist, he will most likely be available on Spotify. Spotify’s gigantic pool of listeners is, hence, quite attractive for any artist.  The platform offers users a practically unlimited music catalog, while artists receive all the possible benefits of a unified distribution (visibility, network effects, improved reaching power, recommended by algorithms).

This not just applies for streaming, but for the whole industry. Signing with a major label can open the doors to, for example, acting as a support artist with a famous group or other types of collaborations that will clearly increase the reach of any new artist. Today's music owners virtually control all music distribution channels.

On the contrary, music distribution on web3 is perhaps its biggest Achilles’ heel. Music distribution and supply are highly fragmented, there are too many marketplaces, specific protocols and streaming providers have much smaller catalogs than their web2 competitors. This affects both artists, hindering efficient distribution of their work, and users, worsening their user experience. This situation generates a vicious circle, users doubt whether to take the step to web3 because it is difficult to find the artists they like and as the number of fans or users suffers, the artists do not take the step to web3 either.

The visibility of artists is much lower in a fragmented distribution market, which is not attractive for established artists. If there are no established artists it is difficult for large masses of users to get to web3 and without users it is difficult for independent artists to get off the ground.

Music NFTs can Neglect Users

Another of the main problems that we have observed in the Music NFT landscape is that most of the actual protocols forget about the users. It seems that most current models move in a creator-centric way, but without much to offer users. It is true that the current income dynamics for musical artists seem outdated from several angles, but any business model needs users (demand side of the market), who support the industry through their spending.

The current Music NFT landscape is focused on solving music creators' biggest pain points, whether it's trying to optimize the revenue model with new royalty approaches, promising a higher pay per stream or simply generating an extra layer of revenue (for example releasing an NFT of the last album or with unique compositions). Most of the protocols we've looked at offer the users some possible new revenue streams but they are more focused on offering objects of culture (fan support vehicles) but they don’t address the friction on user experience (e.g., fragmented offer).

It is true that certain protocols try to make users participate in the benefits of the artists they support, through truly innovatives approaches to the payment of royalties. But here two other issues arise: The NFTs do not truly represent intellectual property (IP) rights, so users that hold an NFT cannot benefit from the “ownership of music” in the same way than record labels do and most royalty distribution models use volatile tokens, which due to the current level of market maturation, makes them an easy prey to speculation.

Current Tokenomics Offer Scalability Complications

We believe that the tokenomics of many Music NFT projects constitute another barrier to scalability for protocols and the industry as such. Most of the projects try to reward both artists and users by minting their own token, following mechanisms similar to those spread throughout the crypto industry in recent years. The problem is that the tokens are extremely volatile, which makes it difficult to develop any stable revenue model in the long term. This can cause users and artists to trust this model. An alternative could be the introduction of stablecoins both for the payment of specific services (e.g., paying for a streaming subscription) and the payment of royalties. This would bring stability to the industry at the same time, as well as favor the forecasting of the financial models of music protocols and the income of artists and users; a crucial feature for any nascent industry.

On the other hand, many tokenomics are not compatible with the scalability of the industry. We have seen protocols that pay $0.30 per stream (more than 100 times what Spotify pays), this model may be viable with few hundreds of users, but it does not seem to be scalable to a scenario in which the most listened to song reaches 3bn plays.

Music Protocols are Missing Solid Revenue Model

Poor tokenomcis results in poor revenue models which hampers the adoption and scalability of web3 music. Although a fairer distribution of royalties, combined with the creation of new redistribution models,  is needed, a sound revenue model is crucial to be able to financially achieve this. What we have seen today is that web3 protocols promise to pay 100 times more per stream than their web2 counterparts without any substantiated model that economically supports that ideal distribution. These weak revenue models lead to the demise of many protocols.

It remains in the hands of the current protocols and those that will come up, to design innovative revenue models that can hold a higher distribution of revenues to artists and creators while remaining profitable. Revenue models should allow scalability for the web3 music industry and not just be used as a tool to bootstrap users quickly. Perhaps, by looking at what has worked in web3, we can get a grasp of the mechanics that could work by adding the features that web3 allows.

Music NFTs Don't Solve Copyright Distribution Issue

Currently, most music protocols that use NFTs have managed to generate a new source of income for artists. These revenues are obtained on top of what they get with the traditional model of record companies or streaming providers, in such a way that they launch a unique NFT that brings them a new source of income. The problem is that this neither changes the current paradigm and its problematic unfair revenue distribution for many artists, nor does it greatly benefit the users who buy the NFT beyond showing their support or getting some kind of exposure to streams or sales.

In order for the benefits that web3 has to bring to the music industry to materialize, the IP rights situation must change from a legal point of view. Currently even the most advanced models of NFTs do not entail any kind of IP rights. Therefore, the biggest problem in the industry, the unequal distribution of rights, cannot be fully solved with NFTs. Even if a user owns part of an album of his favorite artist, it will not be possible to obtain the equivalent part of the advertising revenue. This can mainly be a problem for established artists who generate a lot of revenue beyond pure streaming, but not for independent artists who just want to raise funds to start their artistic career. What is certain is that to unleash the potential that web3 has to disrupt the music industry, a strong legal focus on NFT strategies is needed. Chains, protocols and artists must focus their efforts on solving the legal situation of NFTs, so that the unequal distribution of IP rights can be truly tackled.

Web3 could also consider bringing in traditional music brands or partner with streaming providers to together deliver the best possible user experience while enhancing artist revenue. Blockchain technology can improve the traceability of music, which would increase copyright revenue, while already established brands could bring in users, artists and know-how.

Conclusion

• The music industry is one of the most profitable cultural industries, in part thanks to its rapid ability to adapt to market preferences and technological changes
• Nevertheless, it is highly monopolized by a very small group of players in both recording and live events as well as publishing
• This oligopoly generates an unequal revenue distribution system, in which artists usually keep only ~12% of the income generated by them. Not many artists are able to generate a meaningful income from their work
• NFT technology and especially the application of smart contract to royalties have the ability to disrupt the industry
• NFTs have already proven their ability to become optimized collaborative tools between artists. Especially interesting is the use of unreleased songs by established and defunct artists as a basis, approach already followed by protocols such as Melos Studio
• Music NFTs are also a powerful source of fundraising for independent artists and for generating new revenue streams as well as a good vehicle for fan support
• A fragmented distribution, a missing sound revenue model as well as the tokenomics of many projects are the main roadblockers for scalability and mass adoption
• The main long term challenge for the music web3 industry is the legal treatment of IPs and copyrights that difficult the use of NFTs as a single vehicle to hold distribution and publication rights
• The NFTs can become the new SoundCloud and displace this platform as the reference for independent artists thanks to the monetization, compossibility and the degree of collaboration that they allow
• Some of the recommendations would be the use of stablecoin in the business model and tokenomics to guarantee a stable source of revenue, focus on user attraction, collaboration with players already established in the music industry and the study of innovative royalty streaming models and copyrights
• With the functionalities and current legal situation regarding IP rights, the greatest market opportunity is found in retail and independent artists, either as a source of monetization or a collaboration tool

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