NFTs and the coming music renaissance

July 2022

“Ah, music," he said, wiping his eyes. "A magic beyond all we do here!” (Albus Dumbledore)

Music is one of the most undervalued assets on the planet. It makes us smile, and it makes us cry. But its economic value has never matched its place in our lives. Music NFTs are poised to change this. In this essay, I’ll explore how they work and why they’re the start of a music renaissance.

Intro

Music NFTs are tokenised audio files - that could be a song, album, EP or mix. In a nutshell: the token is a programmable representation of music.

Broadly, there are two buckets of music NFTs: 1/1s (single, unique editions for ultra scarcity) and multi-edition collections (usually in the range of 25-100 tokens).

Tokenising music financialises it and makes it composable. Financialisation gets a lot of heat, but it just means making an asset ownable and tradable (by assigning it a price). Blockchains enable genuine digital scarcity. And NFTs are an instrument for digital property rights, so now we can own music and trade that ownership with others.

This is a profound shift in how creative goods work online. Until blockchains, the only asset users could own on the internet was domain names, and, as Li Jin says, everything else is rented. Owning music is meaningful. There’s an immutable record of that music, with authenticated provenance, linked to you. Currently, that means owning a link to the audio file in a decentralised storage solution like IPFS or Arweave. Saving the file directly on-chain would be too expensive (though this may change as scaling solutions open up more data availability). Ownership imbues the holder with certain rights depending on the structure of the NFT.

Borrowing a framework from Cooper Turley, it helps to think about music NFTs as a stack. The core innovation is tokenised audio - this is the foundational primitive and what defines music NFTs. Artists can then layer additional utilities on top. Some we’ve seen so far are digital art, community, tokengated perks, and access to cash flows.

Bringing music on-chain through NFTs releases the power of composability. Blockchains are based on open-sourced code. All the components are building blocks which can be used, reused, and remixed permissionlessly by builders. Anyone can create infrastructure for music NFTs and build on top of existing protocols and applications. Each problem only needs to be solved once because everyone can leverage the solution, and products are symbiotic, not walled gardens like web2. This unlocks experimentation and use cases we can’t imagine right now.

Interoperability follows, meaning the output of one protocol or application can be the input to another. Music NFTs are portable between different protocols and applications because they follow the same token standards. NFTs from one platform will be usable across all web3 music platforms, as well as crypto protocols and applications in other areas like DeFi and DAOs.

Why would artists mint NFTs?

NFTs disrupt two parts of the music value chain: financing and distribution.

Releasing music requires capital to get into listeners’ ears. Currently, artists have a choice when deciding how to fund their music: sign a record deal or stay independent and self-fund (maybe attempt a crowdfund, but that’s a tall order). For many artists, record labels are the path of least resistance, which has given them the leverage to perpetuate an exploitative advance-based model. Music NFTs are a new form of creative capital for artists to raise money from their superfans.

Streaming platforms are the dominant channel for distribution to listeners, but their model has led to commoditisation and undervaluing of music. Web2 streaming platforms, à la Spotify and Apple Music, are aspiring aggregators. They want to own all listener demand for music and commoditise supply (aka artists) to extract the maximum margin possible.

I’m not throwing shade on these platforms. It’s just the business model that emerged with the technology available at the time. Companies answer to shareholders, and their job is to deliver them the highest returns possible.

Aggregators start by cooperating with their supply partners because they need them to attract demand and develop network effects, but over time the relationship becomes more extractive. This is where we are today with music. Spotify, the largest streaming platform globally, pays artists $0.003-$0.005 per stream on average. Apple, the number two, pays slightly more at $0.01 per stream. A few variables influence the final number, but essentially all music is artificially priced in the same range set by the streaming platforms, not by artists and listeners.

This tiny fixed price requires artists to achieve massive scale to realise meaningful revenue. Just think: one million streams equate to only £3k, and not all of this goes to the artist. Anyone with rights to the music, such as the record label, will take a cut. This model has resulted in a power-law distribution amongst artists where a handful of household names make most of the money in the industry and a long tail who don’t make a living from the music they create. Last year, Spotify’s numbers showed only 0.09% of artists (7.5k from 8m) earned $100k annually.

The streaming model precludes artists from reaping the rewards of 100 true fans - they either have to achieve huge scale (which, of course, not everyone can do) or never be able to live off their music. Music NFTs make 100 true fans a viable route because artists can realise the value of their music through differentiated market pricing and capturing more of the economics themselves.

First, on market pricing: NFTs enable price discovery between artists and buyers, rather than arbitrary one-size-fits-all pricing imposed by the streaming platforms. Artists can set the sale price for their NFTs with complete autonomy. In the secondary market, listeners can bid to find a fair value where supply and demand intersect. Consequently, artists realise the market value of their music at any time - almost certainly more than $0.003.

Second, with music NFTs (and web3 music generally), artists will capture more of the economics from their music. Web3 networks are minimally extractive. The contract code between platforms and users is open source, and community governance mechanisms give users a voice. Since users own their data and can fork the code any time, they have lower exit costs, so platforms must cooperate to survive. In the context of music NFTs, this means artists always own their music, and the platforms facilitating the relationship between artists and listeners have to give them the lion's share of the value to incentivise them to stay, which pushes fees down.

Eventually, these platforms could become completely agnostic hyperstructures running free forever. Furthermore, if artists can reach their listeners directly with NFTs, this puts pressure on record labels to reduce their cut (or be dropped entirely), giving more value back to the artist. The upshot is that rather than intermediaries skimming large fees, in web3, more of the value (rightly) goes to artists.

Additionally, there’s now an enlarged surface area for artist value capture. Not only do artists receive revenue from the initial sale, but they can program into the NFT the right to receive a share of secondary sales.

NFTs also open the opportunity to fractionalise a song to its lowest atomic units. The artist could get rewarded for use of those units elsewhere. Imagine artists tokenising their songs as well as the stems, vocals, or any other “building block” of the track. These could be sold as their own NFTs, and if other creatives use those components for their art (such as in another song, video or other media), it would be tracked on-chain, and the original artist could be paid, with attribution.

The cherry on top for artists is that all these cash flows are instantly available. Unlike the lag with streaming, where artists receive payment 3-6 months in arrears, smart contracts expedite the process, so proceeds from NFT sales (primary and secondary) go straight to the artist’s wallet.

Disintermediating the artist-listener relationship economically benefits artists and enables a closer relationship with fans. Right now, artists are blind to who their fans are. NFTs empower artists to identify and reach their biggest fans through wallet addresses. Armed with this data, artists can build communities with their listeners. Artists can find their fans, and those fans can find each other, all via the NFT.

Our web2 experience of music is one-dimensional and solo. The closest we have to a music social layer is shareable playlists, but there’s no interaction space. Streaming has taken the human element out of music - there’s just abstract “music” with no connection behind it. Music NFTs can change this. The shift here is going from channels to networks.

To paraphrase Bas Grasmayer, with the existing tools, artists broadcast their music unidirectionally through channels, mainly streaming platforms, but it's much more valuable to build networks by placing themselves inside their community of fans, enabling multidirectional interactions.

The prerequisites for artists to build a network are knowing who their fans are and understanding more about them - both of which are made possible by NFTs and the blockchain’s record of activity (with the latter, down the line, artists will also be able to see who attends their concerts and streams their songs).

Many artists want to know, engage, and reward their biggest fans, especially their earliest ones. And it also makes “business sense”: having a stronger relationship with fans makes it more likely they’ll stay fans. Plus, if artists own the relationship with fans directly through a network, rather than relying on channels, the network effects accrue to the artist, instead of the platform, which gives them more freedom and control of their destiny.

The bottom line, as David Greenstein says, is music NFTs blow open the design space for artists. New products, experiences, and rights will be built around music consumption. Exciting times ahead!

Why would listeners buy an NFT?

Okay, we’ve established why artists mint NFTs, but what makes a listener buy one? There are two layers of utility for NFT holders: patronage and patronage+.

Patronage is what we have in web2 today: fans support artists they like by listening to their music, going to concerts, and buying merchandise. NFTs are a new way of providing patronage by owning a share of music. Ownership is powerful and creates a closer relationship between artists and fans than passive web2 consumption.

Web2 platforms like Patreon enable fans to pay a subscription to support artists' work in return for perks. But they’re renting access: they must keep donating to stay on the right side of the paywall. NFTs give listeners true irrevocable ownership. Fans can identify themselves as one of the artist’s biggest supporters by purchasing their NFT. Humans love to signal so this will be a big deal. Listeners will also be drawn by the communities of fellow fans.

Patronage+ is brand new. Jesse Walden pioneered the concept to describe how NFTs combine the social and utilitarian benefits of patronage with the opportunity to earn a profit. This gives fans skin in the game of the creator’s success. Music NFTs have two sources of financial value for fans: the collectible value of the token and access to future artist cash flows like royalties.

The trading of NFTs enables holders to speculate on the face value of the token. Fans can buy an NFT at the initial sale and sell it for a higher amount on the secondary market. What drives this appreciation? The cultural value of the underlying audio of course! The more renowned a piece of music, the greater its cultural value, and the more valuable owning it becomes. As the cultural value of the music increases, more financial value accrues to the NFT. Greater distribution of music propagates its meme and makes it more of a cultural artefact, which all juices the token value. Hence why music NFTs won’t prevent music from still being available for general consumption.

Artists want their music to be heard by as many people as possible. Streaming will still be a distribution channel to maximise ears (it’ll migrate to web3 native streaming platforms… but that’s for another essay). In fact, with NFTs offering an alternative monetisation mechanism, music streaming could become free entirely, with no Spotify or Apple-like subscription fee, since artists will no longer be reliant on streaming fees as their only tool for making revenue from listeners online. Again, Cooper Turley has a great framework for this: “free to listen, buyable to own” as the future paradigm.

The other source of financial upside on music NFTs is potential access to cash flows. As we saw above, music is a cash flow-generating asset through royalty payments on streams. Platforms like Royal enable artists to bake a share of their royalty income into the NFT contract, so they go to the holder for as long as they have the NFT.

Historically, music as an asset class has been limited to industry insiders and sophisticated financial institutions like private equity. Now, retail can invest in music.

This piece is optional for artists to layer on. All music NFTs will have a collectible value because of the liquid secondary markets, but not all will receive cash flows. You can imagine artists giving their NFT holders a share of all their revenue streams, not just royalties, like concerts and merchandise. Because of these cash flows, such NFTs will also make for more solid collateral in DeFi so holders could use them to borrow and make other transactions.

NFT holders have skin in the game of artists’ success, which incentivises them to help the artist grow. Holders will be artists’ biggest evangelists (way more than anything we see today), championing the artist and spreading their meme. Because of this upside opportunity, music NFTs will attract fans and general speculators betting on the token appreciating over time. The largest upside opportunities will be identifying future big-hitting artists early, purchasing their NFTs, and helping popularise them.

Spotting, curating, and promoting up-and-coming artists will be an investment opportunity. To date, if you found and backed an artist early, the most you got for your efforts was bragging rights. Now, with music NFTs, you can benefit financially. When fans are incentivised to contribute to artists’ growth, we may see them working for artists and a transition from the creator to the community economy.

Outro

In case it wasn’t obvious, I’m excited about NFTs shaking up the music industry.

NFTs will be the foundation for the web3 music ecosystem that everything else gets built on top of. At their heart, they take power from centralised intermediaries that have dominated web2, and distribute it to artists and listeners.

Artists can create new networks, secure better economics for themselves, give listeners ownership, and create financial upside opportunities from patronage.

It’s time for music to get the treatment it deserves!