5 questions artists should consider before minting NFTs
Water & Music recently published a report analyzing music NFT sales from 2021 — it is arguably the most comprehensive and nuanced look at music NFTs at the moment. From the summary slide:
- ~1,500 NFT drops tracked throughout 2021 represented more than $86M in primary sales
- Indie artists accounted for the majority (64%) of primary music NFT sales
- The most popular genre by share of primary sales revenue was electronic (65%), followed by hip-hop (19%)
- Between February and December 2021, the average price per music NFT fell by 46%, from $18.8K to $10.2K per unit
- Artists continue to experiment with different forms of utility for NFTs, like royalty shares, usage rights, NFT splits, live music access, and community-building
For artists/creative industry professionals who are bought into the promise of web3 but are not sure how to start — this is my attempt at a first-principles based NFT strategy. The approach can be broken down into five questions:
- What is your objective?
2. Who is buying your NFT?
3. What kind of investment would it take from you?
4. What are you actually selling?
5. Have you considered the risks?
TL;DR: Just because you can mint an NFT, doesn’t mean that you should.
1. What is your objective?
An artist’s objectives are unique to them based on their situation and should form the core of their strategy. Artists (and their teams!) often get caught up executing elaborate release strategies leaving their actual objectives undefined. It is extremely important to have clearly defined objectives right from day one. Depending on where you are in your journey, examples of objectives can look like -
Financial objectives:
- Getting to a place where you can charge $X for one of your beats, or a minimum floor price of $Y for your token
- Financing a 4 city tour in your country
Social objectives:
- Growing your email subscriber list (or your Discord audience) by 50% over the next 12 months
- Growing your YouTube channel to 100k subscribers
- Collaborating with a specific artist in your scene
- Being added to specific Spotify editorial playlists
Personal take: NFTs have opened up a new dimension within the artist-fan relationship, as we will touch on a bit more in the next question. I would encourage artists/creatives to look at NFTs as nothing more than a deeper form of storytelling. Dropping an NFT should not be the goal in itself, it should serve your overarching goal or objective.
2. Who is buying your NFT?
By understanding who is buying the NFT, an artist will be able to design the creative strategy and pricing accordingly. This means understanding their audience (or community): how and where to reach them, what they care about, and what their spending power is.
The prospective buyers may also be at varying points on the spectrum of web3 literacy. This makes communication strategy extremely important — how will you let them know where to go and what to do? Do they need to set up a wallet and buy some crypto first? Are you using a new platform they may not have heard of?
The image above is a visual representation of the journey a fan might go through before purchasing a product/service such as concert tickets, physical merch, vinyls, memorabilia or NFTs.
Personal take: In a content-saturated attention-deficient world this marketing funnel becomes even more relevant. Dropping an NFT without knowing the target audience and what they care about is like putting the cart before the horse.
India, for example, is an extremely price conscious market. A recent article cites Devraj Sanyal (MD & CEO, Universal Music Group India & South Asia) saying that only 0.4% of Indians are paying users of music streaming services. A standard monthly subscription for Spotify in India costs INR 119 [USD 1.5]. This point highlights how pricing dynamics change based on consumer culture.
DIVINE, Nucleya and Ritviz are pioneers of their sound and are three of the biggest independent homegrown acts. They all have performed internationally and are regular headliners at any Indian festival. Yet, they did not manage to sell out their NFTs (here and here). I suspect they priced out too many prospective buyers and/or lacked an attractive value proposition for their target audience.
Side note: It is still early days for crypto and NFTs, so there may be more speculators than genuine fans or superfans out there right now. Knowing this will also be relevant for the same reasons mentioned above — know your audience.
3. What kind of investment would it take from you?
Web3 protocols have enabled the rise of new internet-native business models. Tokens (fungible and non-fungible) are a new revenue stream for artists. This new stream should supplement traditional revenue streams: digital, physical, performance, synchronization, live, brands and merchandise. To put it another way, consider web3 as an additional source of revenue. Don’t put all your eggs in one basket.
Preparing an NFT campaign requires investing time and money.
I would recommend investing time in learning about web3 technology as it will be useful and important going forward. Considering the amount of brilliant people working in this ecosystem, we should see mainstream adoption in the coming years. If you do not feel like you have time, interest or aptitude to learn about the technology, I would suggest having someone on your team who you trust, who understands the space and will be able to help you with your web3 strategy.
Investing money in NFTs is also a real consideration — the gas fees alone could be cost prohibitive for some. In addition to the gas fees, content creation costs might require a separate budget.
Personal take: When investing money, always consider the time horizon of that investment, i.e. are you looking for short term returns or are you okay to wait for a few years to realize your gains? If you look at your investment with a short time period in mind, e.g. if you intend to make money off your next NFT project, I would suggest having a clear value proposition (see next question), target market, pricing strategy and promotion plan in place. If you look at your investment with a long-term time period of 3+ years, you can place a higher value on the storytelling aspect so that the value of these NFTs continue to grow over time as your loyal fan base grows.
4. What are you actually selling?
A key feature of blockchain technology is traceability i.e. the ability to track the transaction history of a specific digital file. This means if copies are made and uploaded online, it will be easy to distinguish the original files from the copies. This allows creators to sell a finite amount of NFTs, as each file can be tracked and traced reliably on the blockchain. Applying basic economics — if demand for a limited set of NFTs is high, that would send its price up.
Consider this: If a fan has 10 different artist NFT projects to choose from, which collection would they willingly spend their own money on? What makes yours the one project they pick? Why?
To keep the demand high an artist should sell something that others want to own, i.e. the NFT should have some socioeconomic utility. This is also why creating an NFT for the sake of creating an NFT may be a good marketing/branding tool for now (because “Hey I minted an NFT” is still abstract and cool in early 2022), but it is not sustainable if there is no unique selling point. The real game lies in creating long term sustainable value for artists and for fans.
See this slide from the same Water & Music report which breaks down utility a bit better:
Using the classification presented by Water & Music, here are some real world examples of NFT projects launched by artists and labels:
Personal take:
- An effective NFT strategy should be about storytelling and community building.
- Read this Mirror post by Masego and notice how he articulates the difference between his two worlds of Masego [the celebrity] and Masego [the world-builder]: “I love being Masego, but with fame and mass marketing there’s no room for these deeper layers of me… I have far greater things planned than being a celebrity. And some of those speak-to-the-masses, famous guy moments will appear but know the difference between Masego and Masego.”
- Regarding earning streaming royalties by virtue of owning an NFT (e.g. Nas on Royal): I am skeptical at this stage due to the costs and logistics of administering the rights and paying correctly to investors. The global copyright framework is too complex and riddled with bad data at the moment. As also pointed out in the Water & Music report, “Web2 streaming royalties are already paltry, producing questions around whether buyers will ultimately generate a return on their investment”.
- One common utility I have noticed bundled with NFTs is an opportunity to meet the artist. I suspect this meet & greet utility will become old very soon, as artists may not have the time and emotional energy to keep it up.
- As the space develops, the value proposition/focus for NFT utility will be more on the fan part of the artist-fan relationship. See this essay on status as a service: “people are status-seeking monkeys; people seek out the most efficient path to maximizing social capital.”
5. Have you considered the risks?
“Given the Fourth Industrial Revolution’s extraordinarily fast technological and social change, relying only on government legislation and incentives to ensure the right outcomes is ill-advised. These are likely to be out-of-date or redundant by the time they are implemented.” — World Economic Forum
Paraphrasing the above: technology is moving too fast for regulation to keep up with. From the same link: “There are interesting similarities between [social media and electronic cigarettes]; both use advanced technology in innovative and fast-changing environments, and are therefore almost impossible to define with enough specificity to allow the lengthy regulatory process to run its course. By the time that a regulation is finally approved, the product or service has changed.”
Similarly, the NFT landscape feels like a lawless playground at the moment. Here are some risks to be mindful of:
Certain types of NFTs may be classified as financial securities
Securities are financial assets (e.g. stocks, bonds, derivatives) and fall under the purview of financial regulation authorities like the SEC (USA), the FCA (UK) or SEBI (India).
From this article by Dan Fowler: “the finance industry is tightly regulated, and thus it is important to understand what the rules of engagement are when gaming out how this could evolve going forwards. If 2017 taught anyone anything then you don’t want to build something that the SEC decides is a security, or even looks like a security.”
Questions still remain as to whether royalty-bearing music NFTs might be classified as securities. [Water & Music report, slide 35].
Who owns the copyright?
Although obvious, it is worth stating — you cannot monetise something you do not own or control the rights for. The same thing goes for using samples in songs — although arguably you may or may not get caught, it is illegal and you could be in big trouble and/or have a PR nightmare.
Read this Wired article about how SpiceDAO bought a rare copy of Alejandro Jodorowsky’s production book for Dune at Christie’s and tweeted its intention to “tokenize” the book, which it cannot do because owning the book does not mean owning the copyright.
Last year a number of artists were taken by surprise when a website called HitPiece (now offline) listed their music on the platform without permission. The Recording Industry Association of America (RIAA) is going after the website for infringing on music IPs. RIAA’s Chief Legal Officer Ken Doroshow said it used “buzzwords and jargon” to hide the fact that it didn’t obtain the rights it needs and to make fans believe they were purchasing an article genuinely associated with an artist.
Additionally, consider personality rights. Here is a real world example to expand on this — “there is a lot of potential for misappropriation of celebrity personality rights in the NFT space…For example, if you go to OpenSea and search for a well-known athlete like Tom Brady, there are currently 14,811 results…It’s more likely than not that most of the accounts that are posting these NFTs do not have Tom Brady’s permission to do so…Tom Brady’s likeness is being used for commercial gain through the sale of these NFTs, and Brady could potentially have a claim against anyone who has profited from selling his image.”
Conclusion
There has been a ton of activity in the NFT space, with artists and creators of all kinds experimenting with this new technology. However, given the volume of new entrants, it is increasingly important to filter the signal from the noise by discerning which projects offer a genuine value proposition and which ones are simply riding the hype train.
Just because you can mint an NFT, doesn’t mean that you should.
Acknowledgements
Thanks to Yash Bagal and Ed Peto for their time reviewing and suggesting edits!