How NFTs Could Change the Music Business

November 21, 2022

By Murtuza Merchant

The music business has experienced turmoil before.

The way we listen to music has always changed, from records to cassette tapes to CDs to mp3s.

As a result of the near-universal popularity of music streaming services as well as several royalty structures that unfairly favor record labels over musicians, it is believed that NFTs will be the next digital innovation to significantly upset the music business.

Compared to current digital service providers (DSP) like Apple Music and Spotify, NFTs have advantages.

89% of the $12.2 billion in recorded music sales in the US are accounted for by digital service providers.

Artists receive less than a proportional income share under the DSP model.

In essence, the royalty payments made to rights holders take too much of the pie away from the artists.

Record companies including Universal Music Group, Sony Music Entertainment, and Warner Music Group are the main rights holders.

Statista estimates that from 2018 to 2020, 74.42% of Spotify’s revenue went to authors, distributors, and rights holders.

The artists, meanwhile, only retained “somewhere from 5,25%”

The industry has dated, ambiguous structures and is economically and legally complicated.

Costs are too frequently paid by the artists, from intellectual property law enforcement to bureaucratic payment systems.

It is therefore perceived that NFTs have the ability to change the way things are done in the music business.

The Development of the Music Business

How content creators produce and disseminate their work has been governed by some enduring trends in the creative business.

For instance, in the 1960s, there were four or five major media channels that carried the vast majority of TV programming.

Following that, more specialized private channels were developed, eventually leading to the development of video on demand (VOD), including YouTube and Netflix.

YouTube creators no longer had to overcome obstacles to enter into a deal with a production company or distribution channel.

They may directly share their work with their target market and benefit from the majority of the sales made as a result.

With readily available venues for content creators like Tik Tok, Instagram, and Twitter, the trend is still going strong today.

In the past, a record label was necessary for musicians to have any chance of ever building a following.

Record labels were crucial for a career in music since they had all the connections required to broadcast on the radio and distribute CD albums throughout brick-and-mortar retail establishments.

Many do-it-yourself (DIY) musicians have been able to share their music and develop a following from their home studios thanks to the introduction of SoundCloud, Spotify, and other DSPs.

However, very few people have succeeded in making music their main source of income.

This is due to the fact that Spotify’s largest shareholders, the record companies, control all advertising and subscription revenue.

Spotify music rights holders can only make a sizable profit with a scale of millions of hits. Recording artists only obtain roughly 12% of the whole music industry as a result.

Only 42,100 musicians (0.53%) out of the nearly 8 million artists on Spotify earned more than $10,000 in 2017.

NFTs have the potential to reduce the importance of middlemen while rewarding artists as the primary revenue generators for their music.

Entry barriers included the high gas costs associated with cryptocurrency transactions and the difficulty of first setting up a wallet.

NFT markets, on the other hand, are helping artists educate themselves and removing these barriers by covering gas costs and allowing customers to pay in fiat.

To diversify away from DSPs and provide their carefully selected audience exclusive ownership of music and other digital treasures, artists can release music NFTs.

So, musicians with fan bases of any size can easily monetize them to make up for revenue lost to the DSP model.

NFTs as the Music Industry’s Natural Next Step

NFTs for the music business is currently best suited to a specific application.

Particularly, musicians can earn from the sales of NFTs and monetize their “super fans.”

As a result of NFTs becoming assetized, consumers like fans and investors are more willing to spend more when they anticipate that there will be high demand, which may even cause the digital item to appreciate over time.

In addition, the audience drawn to buy such items is probably the same one that eagerly awaits the arrival of new albums, saves money to buy collector vinyls, and engages in a variety of fan engagement activities to perhaps get a seat backstage for a prospective meet-and-greet on tour.

It is operationally possible for artists to have a tighter interaction with their collectible-holding super fans thanks to NFTs’ exclusive nature.

A discrete number of NFTs are often supplied when an artist auctions one, effectively preventing the value of any particular NFT from decreasing over time as more NFTs become available.

Fans thus enjoy unchangeable ownership over priceless digital goods that contain “unlockables” only accessible through the token they are carrying around.

Investors, on the other side, wager on the token’s value increasing for resale to affluent fans who want to formalize and strengthen their relationship with their favorite musicians or to nth-degree resellers.

The Ecosystem: How Music NFT Ventures Can Disrupt It

Traction To This Day

For a staggering $11.7 million, American DJ 3lau sold a collection of 33 NFTs featuring sound clips from his album Ultraviolet and animated artwork created by surrealism master Mike Parisella (also known as SlimeSunday).

Grimes received $6 million in NFTs for a collection.

Receiving $4.5 million, Steve Aoki performed similarly.

On the investor side, a lot of venture capitalists (VCs) are actively funding music NFT startups, and large incumbent companies like TikTok are also joining the bandwagon, particularly through their partnership with Audius, a decentralized music streaming service to export tracks for short-form TikTok videos.

Additionally, a sizable amount of venture capital is funding music blockchain firms across other industries.

Conclusion

Because of NFTs, artists could benefit fully from their work, with the exception of a far lesser payment to the NFT market than was required from DSPs.

The ability to compensate creators in a way that allows mid and low-tier musicians to properly support themselves via their craft is one of the most significant benefits NFTs bring to the music business.

Additionally, NFTs provide collectibles that provide fans a chance to forge deeper connections with the artists they prefer through the direct purchase and blockchain-based ownership of exclusive digital assets.

By including extra benefits like VIP access to concerts and hand-signed t-shirts, the collectibles can give further material utility to music sales and help to solidify the more intimate connection made possible by NFTs.

Beyond NFTs, blockchain-enabled firms in the music industry can address other problems because of the distributed ledger’s unmatched security and automatic enforcement methods.

The potential to revolutionize and innovate how all agent interactions take place in the music industry, in both B2B and B2C verticals, is limitless.

About the author

Murtuza is an avid follower of blockchain, cryptocurrencies and NFTs.