The Evolving World of Music NFTS

The drumbeat on music NFTs is getting loud, but is it all just insolent noise?


Today we are exploring the intersection of music and NFTs.

Immediately after NFTs took the world by storm, critics began questioning what it was that was actually being bought and sold. Was it a digital file? Copyright? Commercial permissions? Bragging rights?

In a huge number of cases, the answer still isn’t clear. And these issues haven’t gone away.

The latest debacle with SpiceDAO is a perfect example. SpiceDAO raised $3m to buy a screenplay adaption of Dune, which they wanted to turn into an animated series. But, it turns out you can already read the book for free online, and buying it wouldn’t give them the rights to adapt the series in the first place!

But rights are more well-defined with music. You can mint a song on-chain and bake royalties into the smart contract. And music isn’t as easy to “right-click” and copy as artwork.

In this issue, we explore why the music industry is broken, and why NFTs present an opportunity to progress the industry forward.

Modern music distribution is killing innovation

Technology is having a tremendous effect on music distribution.

It wasn’t long ago that recording an album was tough and expensive — and getting anyone to listen to it was even tougher. Record companies were the funders, gatekeepers, and distributors.

They took all the upfront risk, paid for an expensive studio, handled promotion, ensured the songs got radio airtime, and in return took a whopping 80% of revenue, with just 20% going to the artist.

But the cost of producing music has plummeted (especially electronic music, which partially explains the rise of EDM). And thanks to streaming giants like Spotify and Apple Music, artists suddenly have an easy way to share their songs with the world. This is all a very good thing.

However, in making distribution easier, the music industry has stopped rewarding innovation, leading to a pop music landscape that is, well, boring.

Look, we don’t want this to be some lecture about how good musicians are locked away by villainous record companies that control the market. Of course new talent is discovered and distributed every day.

But take this study on how people discover new music:

Over 30% of respondents said they use music apps and social media to find their next favorite tune. Yet, if you think about it, none of these methods are so much people discovering music, as it’s new music discovering them.

You don’t choose what comes up in your TikTok feed, or your Discover Weekly. It comes to you, based on what the algorithm decides. These forms of music discovery are all algorithmically-driven.

To be clear, there’s nothing necessarily wrong with that! Discover Weekly is one of my all-time favorite products, period. I’ve found incredible new tracks from amazing artists on Spotify mixes. But this trend disproportionately favors those already established, or those who game the system.

How labels game the recommendation algorithm

In the 70s and 80s, record labels would pay off local radio stations to promote their music. Today, labels outsource third-party companies that specialize in social media & influencer marketing.

Think of it as artificial insemination. These companies own hundreds of popular Instagram and TikTok accounts, often pretending to be real people. They pay off influencers and force-feed their clients’ new music onto the masses in order to game the algorithm into thinking a track is more popular than it actually is.

That’s just one tactic. On Spotify, some ‘playlist curators’ charge musicians for song placement on high-follower playlists. So artists can buy their way onto playlists, further manipulating the algorithm.

Again, this isn’t all that different from people paying off DJs to get their music played. But now it’s a more prevalent and mathematically predictable game.

In 1970, musicians released approximately 4,000 new records in the US, and about 10% of these broke even. Today, 60,000 new songs are uploaded to Spotify every single day, but artists need a whopping 1.4 million streams per month to earn the US median wage from streaming royalties. Fewer than 1% of artists achieve this.

These growth rates are good, but the raw numbers are very low. Less than 1% of active musicians earn the US median wage from royalties.

In fact, given how important music is to our lives, it’s astounding how small the industry truly is. The entire global recording industry is under $20 billion; roughly equivalent to what the video game market was in 1983.

And get this: streaming aside, the industry brings in just $5 billion per year — about the same as arcades (yes, those big bulky things we used to put coins into.)

Data from the enormous 2022 Messari report.

Could music NFTs be a solution?

Okay, so earning a living as a musician is more difficult than ever, and despite the huge emotional attachment we all have to music, the industry is half as big as it was 30 years ago.

One of the key goals of NFTs is to snatch power away from monolithic middlemen — which in music’s case are record labels and streaming giants.

In a world where algorithms are king, a handful of large enterprises largely control the flow of music and who gets paid what. Independent distribution and cheap production hardware have slightly evened the playing field, but not to the point where talent is fairly valued.

In theory, music NFTs could challenge the music industry’s status quo by shifting the economic power back to consumers.

When you listen to a song on YouTube, you’re not thinking about how much you value it. You just listen and hope the artist gets a fair cut. But buying an NFT of a song cuts out the middleman and lets those that actually love the music effectively decide how much it’s worth.

The transaction is conducted between the musician and their fans, with maybe a small cut to a distribution platform like OpenSea. Fans get a chance to interact with and support those they believe in, and artists get a sniff of fair valuation for their efforts. The record label no longer receives a slice of the pie and, in theory, has little reason to exist.

When I was in high school, discovering a band “before they were cool” was just about the coolest thing you could do. Napster was invented just a few miles away from my house, and I got into The Mighty Mighty Bosstones, Incubus, and Korn (ugh, I’m not proud of this) way before everyone else. Imagine if I could have bought a token as an early fan, which gave me exclusive access at shows and appreciated over time!

It’s an exciting prospect. An independent musician could build a decent income without needing millions of plays. Just 1,000 superfans willing to pay $50 for an album would do the trick, and the artist would keep 95% of revenue.

What’s not to love?

The problem with music NFTs

The idea is fantastic. The music industry’s current distribution and marketing processes need disruption, and music NFTs are at the frontier.

Unfortunately, a good idea isn’t always enough on its own. The need for marketing may be reduced, but it has not been snuffed out entirely. You still need to solve for discovery and distribution. And this is what Spotify excels at.

Most recent media coverage of music NFT sales has revolved around artists like Deadmau5, Grimes, and Kings of Leon – musicians that already pull in millions of monthly Spotify listeners.

Last year, Kings of Leon, made headlines by becoming the first band to release an album as an NFT. It was hailed as a game-changer, and in many ways it was. But so far, music NFTs have mostly just helped bridge the economic gap between the already big, and the even bigger. To get big in the first place, you still need marketing and distribution. You always will.

To earn money, artists still need a solid fanbase made up of people actually willing to pay. But ever since the advent of subscription streaming, we just don’t value music like we used to. We’ve become so conditioned to paying $10/month for unlimited access that we’ve almost forgotten about other options.

Musicians who reject labels and turn to NFTs ignore a huge number of potential fans. Sure, NFT streaming service Audius has 4 million monthly users, but Spotify has 364 million, making them 94x bigger!

Yes, Spotify and the streaming giants could fling the NFT door wide open and embrace new royalty protocols. But that hasn’t happened yet, and frankly, may not be in their best interest. NFT music has promise, but no real legs yet. Why would they risk breaking their model this early?

At this point in their evolution, music NFTs seem most beneficial for budding low-tier musicians. Those without the marketing power of record labels, but with enough fans to consistently make an income that says “this isn’t just a hobby.”

Music exchanges and NFT platforms

So what platforms will be responsible for the impending “revolution” that will get artists out of this current state of artificial distribution? How are these platforms using tokenization, and how do the benefits trickle down?

Music NFTs can take different forms. For instance, an NFT can contain an entire album or a single song as unique 1 of 1 collectible, limited editions, or open editions. They can also entitle buyers to merchandise, royalties, and other collectibles.

Several music platforms either fractionalize or tokenize songs, albums, and royalties. Let’s have a look.

Sound.xyz

This site gives new artists a legitimate platform to distribute their singles. It works by tokenizing a music single through an NFT that carries the music file. Early supporters can buy the NFTs, store them in their digital wallets and download them into their music players.

Artists can program the smart contract to receive a percentage of royalties from all secondary sales. In addition, if the NFT holders ever want to sell their single, they can list it on a secondary market like OpenSea.

Artist Iman Europe is exactly the kind of musician that can benefit from NFTs. Iman recently released a set of 50 music NFTs of her music single titled Commitment, raising $15,600.

For Iman Europe to receive $15,600 in royalties from Spotify, the song would need to 5.2 million streams.

Royal.io

Royal sells streaming royalty rights by tokenizing them as NFTs.

Royal was co-founded by electronic artist 3LAU. When they first launched the platform, they held a referral contest where 3LAU would grant streaming royalties for one of his tracks to the top 333 referrers. I was #137.

The deal was that 3LAU would grant 50% ownership of streaming royalties for his new track, ‘Worst Case’, among the 333 winners. Each winner gets an LDA (limited digital asset) representing the streaming royalty rights.

After some Metamask friction, the token hit my wallet. According to Viberate this track gets around 265k streams per week. Essentially, each stream should earn me 1/2 of a cent, divided by 333! So doing the math, my partial ownership of this track should yield about $1.60/week. Big money, right?!

However, I was surprised to log into OpenSea a few weeks later and find that someone had offered me 1.4 ETH for this. It’s a good thing I missed the offer — the floor price currently stands at 2.4 ETH, around $6,000!

Music catalogs typically sell for between 10-15x annual revenue. The floor price on this 3LAU track is currently at 83x revenue. Should I sell? I think so.

On January 20, Royal had its first public drop when it sold 1,870 tokens for royalty rights to two singles, Rare and Ultra Black, by the rapper Nas. The tokens were tiered, with the percentage of royalty rights increasing in correspondence to the price of the NFTs.

The drop resulted in $369k in revenue for a song streamed 26 million times since its release in 2021.

By one fan’s estimate, Rare has produced $112k in streaming royalties so far. If you had bought the $9,999 token for 1.5789% of royalties since its release, you would have earned $1,768 and would need the song to stream 147 million times to break even.

In other words, Rare would need to nearly match Nas’ most popular song of all time, the classic If I Ruled the World, featuring the one and only Lauryn Hill, which has streamed 174 million times on Spotify.

This seems unlikely to happen. One can argue that buying royalty rights isn’t so much about making a profit as much as it’s about fandom. It’s about showing support.

We can’t argue with that, but it will be interesting to see how Royal expands its offerings. Will the company seek to cater to the most well-known artists, or will it dig in to potentially help propel the careers of emerging musicians?

Royalty Exchange

Royalty Exchange was early to the music royalties game. They’ve been around since 2011, billing itself as the largest online platform for the buying and selling royalties.

While Royalty Exchange is not (yet) a blockchain company, it was an important first-mover finding additional revenue streams for artists. Big-time artists like Jay-Z, A Tribe Called Quest, and Shakira have used the platform to sell future rights.

Royalty Exchange also has a secondary market where auction winners can sell the remaining years on their royalty rights. Some of the available songs and albums are eye-opening, including legitimate hits from Drake, Shakira, and Twenty One Pilots.

Traditionally, Royalty Exchange was not a place for an emerging artist to begin. However, Royalty Exchange is making inroads here, and just announced that YouTube creators can get investor-funded advances.

Audius.co

Founded in 2018, Audius is a free on-chain music platform like Spotify and Pandora, except that it’s decentralized and run by artists, fans, and developers. The platform is governed by the crypto token $AUDIO, a currency that rewards developers and creators for participating in the ecosystem.

Since its release in October 2020, the AUDIO token has risen from $0.24 to between $1.25 and $2. Artists that meet certain metrics, including streams, uploads, and engagement, earn greater shares of AUDIO.

The token also gives platform developers and artists a chance to participate in the ecosystem with voting rights and staking rewards.

$AUDIO is not immune from January’s crypto crash

Anyone can upload their tracks onto the platform without being vetted, but artists have copyright issues since their music is on a decentralized platform. If a track infringes upon an artist’s copyright, no central authority at Audius can take it down.

There is a proposal to create a member-based council to vote on copyright disputes within an arbitration system. However, the details of that system are not clear. The lack of clarity can be a potential drawback for newer artists experimenting with new releases to garner more followers.

Foundation.app

Foundation a platform for live auctions of NFTs. While they got their start with NFT artwork, an array of creative pieces are now available, including music NFTs.

Jacques Greene, an electronic artist, sold his 2021 single ‘Promise’ as an NFT for approximately $20,000. In contrast, this track has 890,000 plays on Spotify, equivalent to $3,600 in royalties.

Other players

  • Catalog.works is a leading music NFT marketplace with a sizeable Twitter and Discord. They had a huge October, and are definitely another one to watch.
  • TangyMarket is a music marketplace from Sweden aiming to let anyone invest in songs and share the profits. They’re new to the scene but have put together a great team of industry pros.
  • Songcamp runs month-long songwriting camps. Think of it like a Web3 music accelerator.

There are dozens more to explore that we don’t have space to cover here. The music NFT landscape is evolving so rapidly that we already need a map to help make sense of it all.

Conclusion

I feel like much of Web3 is a “hammer in search of a nail.” Web3 and DeFi maximalists seek to solve problems that don’t really exist. But the music industry is actually broken! Streaming giants and major labels made the rules and cut artists from most of the upside. Musicians deserve their share of the value they create. There’s money on the table and it belongs to artists.

I’m absolutely a believer in music NFTs. A generation of underpaid, unsuccessful musicians are beginning to get restless. But the technology is still a long way away from disrupting the current algorithmic powerhouses that dictate the music industry.

If musical NFTs and blockchain-based streaming services begin to see adoption growth the way Spotify did in the 2010s, this will go a long way to ushering in change. But for now, most musicians are still going to struggle if they put all their apples into the NFT basket.

Music NFTs have figured out a key piece of the puzzle – ensuring fairer compensation for artists and increased interactivity between musician and fan. However, they’re still missing the final piece: solving marketing, discovery, and distribution.

Even so, as a musician, it’s exciting. When, and if, the technology can figure this out, the industry as we know it could undergo a revolution. An inflection may be hit at some point, and then it could be record labels, not musicians, scrambling desperately to adjust.

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Author

Stefan Von Imhof

Stefan Von Imhof

Stefan lives and breathes asset analysis and valuations. Before founding Alts, he was the Head of Product at Flippa, he created and ran Flippa's Due Diligence Program, and has bought & sold dozens of websites & newsletters. Prior to Flippa he was the first product manager at HG Insights, a market intelligence company which sold to Riverwood Capital Partners. Originally from Boston and later Santa Barbara, CA, he now lives in Australia with his wife & Boston Terrier, Charlie.

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