The NFT renaissance is transforming all pieces of media from traditional formats and business models to digitally native ones. Visual Art has been the prominent format that has seen billions of dollars in volume, with continued growth in market size and players. Art NFTs have seen activity around profile pictures (PFPs), generative collections, visualizers, digital/physical pieces, gaming objects, etc. Typically, art NFT owners, outside of profit, find intrinsic value in the art and artists, and bluechip collections have done exceptionally well, even though investments in NFTs remain largely illiquid.

Music has proven to be a more complex situation as it involves multiple layers of creation and production effort from many persons and entities.Compared to static images, audio content is dynamic and requires iterations of sound, writing, and production value before coming to its final form.However, the effect of NFTs on music appears to be something artists and builders alike are trying to figure out as NFTs provide increased opportunity for artists to unlock added channels of revenue and opportunity, including bringing fans into the mix.

Rather quickly the market is forming a consensus – NFTs will restructure the music industry as a whole, first by altering how music is created and consumed.

The Current Playing Field

Various collectives have formed to support music in areas such as discovery, production, and distribution.

In terms of infrastructure, there is music activity on virtually every chain that supports NFTs, but activity on Ethereum and Tezos is picking up the most.

Ethereum

The majority of Web3 NFT platforms are largely Ethereum-based such as Foundation, Zora, and OpenSea. There are a couple of primary music NFTmarkets to highlight: Catalog, SongCamp, MintSongs, and Sound. Let’s take a look into one of these––Sound.

As of now, 90% of all music streams are earned by top artists. Sound allows artists to launch a listening party; in parallel, listeners are able to comment reactions to the track and mint those moments as limited edition NFTs––this mechanism is a way to incentivize organic discovery vs. streaming-only top tracks or the top playlists as is common with Spotify.

The platform is quickly approaching $1M in the total secondary volume.

Tezos

Established artists often opt for releasing projects on Tezos due to it employing the environmentally friendly proof-of-stake consensus model.

There have been interesting releases and upcoming partnerships with Tezosthat signal that Web3 solutions will start exploring a bit more. An unreleased recording made by Whitney Houston was sold on OneOf (TezosNFT marketplace) for $1M in December, the highest-priced auction onTezos to date. Doja Cat launched an NFT collection on OneOf which came with benefits such as concert tickets and entry into her Discord. WarnerMusic Group recently announced a partnership for their artists with OneOf, which has become the premier music NFT platform on Tezos.

Music’s Middlemen: Record Labels and Streaming Services
In an ideal world, art would move directly from the creator to the consumer, but it usually doesn’t due to the challenges brought on by distribution and discovery. Within the traditional music industry, there are two middlemen that the artist is usually dependent on record labels and streaming services. Let’s also clarify here that there are various types of artists ranging from part-time, full-time, DIY, pure producer, and indie artists to artists who've signed to a major record label. Depending on their situation, each artist will prefer varying approaches to monetization of their work.

Kyle Samani, the managing partner at Multicoin Capital, proposed viewing record labels as a venture fund––likening the artist to a high-risk startup. With this analogy in mind, the current music climate is very oligopolistic with only three major record labels, Universal Music Group, Sony Music, and Werner Music Group, dictating who the biggest artists in the world will be. These three labels generated more than $20B amongst themselves at the end of 2021.

Collector DAOs: The New Record Labels

The venture DAO is becoming increasingly popular, with groups of folks gathering together to raise and deploy capital into music NFTs. As we move towards permissionless investing, more casual investors are entering as angels or investing through services like Republic and are choosing to take on early-stage risk. Fans and collectors themselves get to choose which artists “succeed” through investing in them directly, thereby questioning the need for the record label.

A provider of venture DAO infrastructure, SyndicateDAO, launched earlier this year, and immediately 450+ investment DAOs formed two weeks after launch. Though we cannot clearly prove that all of these will remain in operation and will inject sizable capital into the ecosystem—it is still an indicator that there is an appetite for self-managed venture funds.

The need for a music label will not suddenly disappear as artists start using more Web3 native channels for their art, but rather, artists’ new demands will force the music label to evolve to better suit them. Although the three major labels we know today will likely remain, several of these new “music labels” will emerge. Retail investors can now follow this natural path to getting involved with music collections. The collector DAOs will take the role of determining which artists make it mainstream, and with so many DAOsand fans influencing this decision, a new fan model will emerge to sustain this.

We’ve seen art NFT collector DAOs focus on curation and supporting artists in many different ways. For example, Flamingo DAO, which now has a portfolio worth over $1B, ended up as an early investor in several highly valued NFT projects. Under the Tribute Labs umbrella, Noise DAO hopes to collect music NFTs and curate work but also partake in recruitment and artist development (A&R) efforts. The record labels of today possess a vice-grip on curatorial functions as they are responsible for finding and funding the new talent, which eventually ends up being the music we consume.

Music collector DAOs will eventually act as a label by taking on all of these functions in some way, which is a natural progression because investing in NFTs is typically an investment in the creator.

The Web3 Streaming Services

Streaming services often pay artists very poorly, with top artists benefitting the most because they accumulate the most streams. Apple Music pays their artists $0.01 per stream, while Spotify pays out $0.003 per stream. Audius, a Web3 streaming platform, pays out almost $0.35 per stream due to their token ($AUDIO) structure.

The highest streamed track on Audius has 500k streams, while Spotify has3B. Given that the latter is a household app, artists can do well by Audius in addition to traditional streaming channels.

Music streaming is an important industry, but only a fraction of that revenue eve reaches the artists. Web3 streaming platforms like Audius enable better revenue structures for artists.

NFTs Are an Industrywide Shift

When music went from analog to digital, it changed forever. At the hardware level, it became easier to record and produce music––artists are now able to do this at home with more portable equipment and software, which has led to new genres and a diversity of artists entering the scene. After this digitalization, physical CD sales plummeted, and artists had to adjust to using streaming services and put more effort into live performances. The pandemic put a pause on this, and artists started to gate live stream events. The internet catalyzed the shift from cassettes, CDs, and MTV music videos to the world of streaming, and now NFT-based music.

The simple opportunity to utilize NFTs for music is to take tracks or entire albums and tokenize them. NFTs create a multitude of opportunities for artists to rethink their creation and distribution models. As alluded to earlier, minting and auctioning off a piece of music is just one way that NFTsprovide opportunities for artists and musicians to evolve.

Here are a few interesting applications of NFTs artists have been turning to:

Track/Album/EP Ownership

Artists can sell 1/1 versions or editions of single tracks or albums. Most NFTmarketplaces allow for audio files to be sold directly. Catalog allows artists to mint single tracks or albums as NFTs, powered by Zora. There have been about 622 records sold so far on the platform at a median price of $2,311.

Tokenizing Royalties

The idea of sharing in the success of an artist is no better exemplified than with sharing in royalty sales. EulerBeats, a generative sound project, was one of the first experiments on tokenizing royalties. There were 27 tracks released with a Genesis track and copies of that track. The Genesis holder of each track earned 8% royalty on each new copy of that track that sold, and they also held commercial rights to the track.

Royal allows fans to purchase tokenized royalties and then earn a proportional share as digital service providers (streaming services) pay out the artist. Fans are also able to trade royalty tokens outside of the platform as well as earn exclusive benefits for holding them.

Similar to the streaming services situation, token holders will likely see insignificant return on investment while sharing in royalty with an artist until the platform gains adoption. Additional value accrued is through the utility the artist is about to offer to their token holders.

Social Tokens for Music

Social tokens allow artists to almost progressively decentralize themselves. With the launch of a token and the formation of DAO around the token, artists can use this to token gate fan experiences and interactions. RAC is an artist and producer who took advantage of this potential when he launched his own social token, $RAC. He also recently released an operating system called racOS, where he provides token holders with exclusive products.

Generative Sound

Generative tracks are another way that music NFTs can get fans more involved in the actual creation process, sometimes to the point of them having the ability to own tracks from the artist and produce their own remixed versions.

Soundmint is focused on working with artists one-on-one to help them release their NFT collections. Their first collaboration was with Kloud, and the release was a collection of visualizers paired with an array of stems produced by the DJ. Kloud has released all IP and commercial rights to these pieces to the collector and plans on also allowing the collector to swap out sounds from their NFTs in order to create new tracks/sound.

The Challenges With Music NFTs

With this still being somewhat a novel idea and a new monetization method, there are several issues that make working with music NFTs less than ideal. If an artist chose to sell their music solely through NFTs, the current atmosphere would not be sustainable nor lucrative. Compared to the 1.4M active OpenSea investors, there were only 500 unique music NFTcollectors on Ethereum at the end of 2021, according to music researchDAO Water & Music. These investors tended to be wealthy NFT investors and to gravitate towards established artists.

As Li Jin writes, the creator model is starting to edge towards fewer fans who pay more. For artists, this means having a smaller true fanbase could generate larger revenues. This effectively takes power away from record labels because followership and streams are huge indicators for who they support and take on and ultimately who sees fame in the industry.

This model turns the idea of a fanbase on its head. Typically, a creator would amass millions of fans, most of whom contribute $0 and consume music through channels like Spotify, some a subscription-based service, or YouTube or pay nothing at all for streams. However, the top percentage of fans always buy records, merchandise, tour tickets—all these contribute to the creator’s income––aside from sponsorships and any other partnerships that they might have outside of fans.

On the other hand, getting a few large sales from a small number of fans does not guarantee that those fans or collectors will return for subsequent releases, especially since most music NFT collectors today are NFT whales. However, large sales do make it so the artist has more runway and the ability to spend more time on other channels.

Limited Discoverability

Music discovery for artists will continue to depend on mainstream channels, with additional tactics that have been popularized. TikTok is a major channel for artists to gain virality through a soundbite, and a handful of artists have organically ended up on Billboard Top 100 or Spotify’s Viral 50.

For native NFT artists, discovery is limited as there just aren't many users on these platforms compared to the incumbent services. On the other hand, artists such as 3LAU and Steve Aoki already have an existing audience to who they can easily turn to purchase their pieces.

Risk/Reward for Established Artists

Big artists do not spend time cultivating community or utility around their NFT drops. As an example, Snoop Dogg recently dropped a mixtape on OpenSea, and the quality does not match up with what fans might expect. Established artists have the ability to make incredible amounts of side revenue from NFTs, but the same artists and their teams likely won’t spend time on their own Discords interacting with fans or setting up experiences exclusively for them as it is likely more profitable to open up to their broader fanbase.

A lot of collectors continue to be NFT whales who might not be actual fans, which makes it difficult to gauge whether the reading on the appetite for music NFTs is precise.

NFTs Don’t Solve the Music Rights Issues

It might not be obvious to consumers, but the processes of the current music industry are rather antiquated and convoluted, with several types of rights and royalties tying into music ownership.

As an example, when Scooter Braun’s holding company acquired a record label, the masters to Taylor Swift’s albums were sold, and Swift had to re-record her albums. Masters are the original recordings of a track or album, and the owner has legal rights to earn from them. In Swift’s case, the record label denied selling rights to the music back to the artist. Situations like this are common, and record labels still hold plenty of power over the artists. Rights, terms, and royalties are usually split up, and record labels end up typically profiting much more than artists and retaining most rights over music. Normally, the record label holds masters over the signed artist's work, and the artist is often entitled to 15% of royalties.

Though smart contracts provide the ability to publicize agreements and terms and distribute royalties programmatically, music rights are still complex, and putting them on chain doesn’t necessarily solve the underlying issue. Opulous provides the ability for anyone to trade music copyright shares and also offers DeFi loans backed by real-world music assets and royalties. The team released their Music Security NFTs (S-NFTs) on Republic, allowing Lil Pump and KSHMR to put shares in their royalties and offer them as NFTs. According to Water & Music, the team did not register the S-NFTwith the SEC, which will likely become an issue in the future, due to all the current activity and nebulous regulation.

But, the Timing Is Right

Despite the natural challenges in moving something on-chain, music will continue to explore tokenized solutions. Major record labels and artists are already experimenting on various chains and platforms. There are already50+ music NFT projects that are actively trying to sell NFTs or onboard artists, and the reality is that not all of them will survive. It is also undeniable that there is a growing appetite for music NFTs, in whatever form they might be in. Here are a few important indicators:

1. The NFT market overall is thriving
2. Artist realizing that grandfathered structures of label deals are not in their favor
3. Moving towards a one-to-few vs. one-to-many fan model (OnlyFans, Patreon)
4. Web3 platforms are already onboarding big artists (Steve Aoki, Diplo)

With traditional music contracts figured out, NFTs provide the ability for increasing licensing efficiency in smart contract form. Additionally, artists have new methods to monetize and fans have the ability to become true investors. Regardless of the music NFT impact, artists who have signed to record labels are missing out on revenue that is taken up by the label and even lose rights to their IP in the process. In the new, improved music industry, we’ll see artists regain the power to control their art and revenue streams and share it with their consumers, their fans.

Source: https://messari.io/article/the-nft-effect-on-the-music-industry