NFTs have become a booming business for the music industry, with artists and labels embracing the new tech.
Gregor Pryor, partner at Reed Smith and a Music Week Awards winner, has been looking closely at this new frontier for the music industry. While many see the potential of NFTs, some doubts have been raised about the rush to enter the blockchain-based business.
Here, Gregor Pryor looks at the potential for the new technology and considers how it could disrupt the existing music streaming economy…
It was extremely hard to go anywhere at this year’s SXSW without hearing about NFTs and how everyone wanted to leverage music using web3 technology. Yet despite the market for NFTs growing to almost $41 billion in 2021, only 25% of the British public know what NFTs are. Many in the music industry still wrestle with the question of whether Web3 is a force for good, or is this relatively new phase of the internet going to cause another period of disruption and challenge?
First, it’s worth examining the fundamentals of NFTs, starting with blockchains. At a high level, a blockchain is a system of recording digital information in an accurate way that makes it difficult or impossible to change or cheat the system. A blockchain is a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems. Each block in the chain contains a number of transactions; every time a new transaction occurs on the blockchain, a record of that transaction is added to every participant’s ledger.
NFTs, or non-fungible tokens, are unique tokens that exist on a blockchain. Most NFTs use the Ethereum blockchain. Content and data can be associated with a token. Some people think of NFTs as a music carrier, albeit of a more technically sophisticated nature. Unlike a traditional download, a music NFT has a unique identifier that exists on a blockchain. The revolutionary difference is that an NFT can be easily bought (using cryptocurrency) and traded. It can be sold, resold and exploited.
As it is cryptographically impossible to copy an NFT, musicians who use them as a distribution channel have the flexibility to set the economics of distribution by setting the commercial terms that apply to their works. Unsurprisingly, musicians have been quick to capitalise on the opportunity, with the release of the Kings Of Leon album When You See Yourself last year marking the first band release of an album as an NFT.
Some argue that NFTs offer a potential solution to the age-long complaint that musicians have not been adequately compensated for their work. Linkin Park’s Mike Shinoda is a prime example. Having raised in the region of $11,000 for his first NFT release, Shinoda subsequently tweeted “Even if I upload the full version of the contained song to DSPs worldwide (which I can still do), I would never get even close to $10k, after fees by DSPs, label, marketing, etc.”
There are several hurdles to mass adoption, including the fact that NFTs are reliant on cryptocurrencies
With lower distribution costs and a greater degree of freedom away from the restraints inherent with the traditional digital distribution model, NFTs are seen by some as an incentivising force for collaborations between artists. A good example is the release of an NFT collection by DJ Steve Aoki and digital artist Maciej Kuciara last year. The potential to add a royalty mechanism into the NFT combined with the existence of quick, affordable, smart contracts in the industry, means that collaborations could prove to be a further lucrative source of revenue for musicians.
Without the restrictions or friction derived from multiple participants in the distribution chain used by centralised streaming platforms and DSPs, by using NFTs artists have the ability to retain or transfer ownership rights. In the event that a subsequent owner sells an NFT, royalties can be automatically received by the creator through the record of ownership inherent in the NFT’s metadata. This immediate, undiluted, error-free ability to distribute a sound recording is in stark contrast to the traditional distribution model, whereby a track is produced, delivered to a record company, which in turn distributes the track to a series of centralised consumer-facing streaming platforms and beyond.
The fact that the digital file embodying the sound recording passes through multiple stakeholders provides multiple opportunities for inefficiency and inaccuracy. Many creators complain that they only see ‘cents on each dollar’ generated by their work, after each party in the distribution channel has taken their cut or commission.
By contrast, forward-thinking DIY musicians are now choosing to reach their fan base directly using NFTs and web3 technology. The creation of platforms on which fans can access unique NFTs and fan experiences enables artists and fans to participate in works together. Musicians have been quick to capitalise on the opportunity, with Snoop Dogg’s recent collaboration with Gala Games marking one of the earliest initiatives in the industry.
Whilst NFTs offer a new, lucrative way of distributing music for artists, it is likely that centralised streaming services will continue to be the dominant consumer avenue for the time being. Despite the huge growth of NFTs in 2021, centralised streaming platforms remain increasingly popular with listeners. In 2021, Spotify’s global premium subscriber base grew to 180 million, a year-on-year increase of 16%. Part of the attraction for consumers is that they get access to the world’s music in one single place, a paradigm that cannot be easily replicated by Web3 distributors.
Whilst hypothetically, NFTs are an attractive proposition for consumers and artists alike, presently NFTs are not understood by the majority of users. They are not yet ‘mass market’. There are several hurdles to mass adoption, including the fact that NFTs are reliant on cryptocurrencies, which are notorious for suffering value volatility. Ethereum leads the pack as the most volatile crypto at the start of this year.
Further concerns surrounding the ability to pirate NFTs coupled with calls for closer regulation suggests NFTs still have a long way to go before they are more widely embraced by the music industry at large. Nonetheless, the potential is clear and enterprising artists will surely continue to experiment and embrace NFTs as a new way to connect with and monetise their fanbase.
Click here to read Music Week columnist Sammy Andrews on Web3.