Music in Web3

This is Part II of a three-part exploration into the world of music and Web3. Part I focused on how musicians make money today and why 2021 turned out to be ripe time for experimentation with NFTs.

Music NFTs generated $80M in primary sales last year and have increasingly garnered interest from artists, especially as they come to realize that NFTs can help remove industry middlemen, who have historically profited on the backs of artists, and more directly connect with fans. Looking back on some of the largest revenue generating transactions (see section 2021:The Perfect Storm here), a few things stand out to me:

1. NFTs are not a cure all (at least not yet) to the complexity of the analog music copyright system

2. An abundance of Web3 companies have been built to be a decentralized and more artist favorable version of similar Web 2 business models

3. Web3 companies are creating new forms of digital collectibles for fans to show off their fandom (e.g., digital collectibles, fan and social tokens)

4. Web3 is giving artists more autonomy in creating a music career without needing the traditional music intermediaries that have historically taken $0.88 of every dollar spent in the industry.

Let’s dive into each of these.

NFTs cannot cure all (at least not right now)

Many of the largest revenue generating transactions in 2021 were NFT purchases where consumers bought the right to something of the artist (a song, album, publishing rights, recording rights, etc.). But what exactly did these people buy?

In order to answer this question, we first need to do take a little detour into the complexities of music and copyrights.

This looks complicated…

This picture above from Citi’s research report starts to highlight the complexities of copyrights and the various licenses associated with copyrights. Without boring readers through all the details, the main thing to highlight is that there are two main sets of copyrights:

1. Music publishing (or composition copyrights) — this pertains to the arrangement of the musical notes in a particular sequence. These copyrights are usually held by songwriter, lyricists and composers*.

* A portion is often given to publishers because publishers have the administrative capabilities and technology to track royalties throughout the various mediums to ensure that all possible royalties are claimed

2. Sound recording (or master recording rights) — specific sound recording or expression of the underlying musical composition created by performing or recording artists. These copyrights are usually held by performing artist and their label*.

*One reason why the master recording is often held by the artist’s label is that in a typical artist deal, the label signs the artist before the recording is produced and pays for recording process, thereby becoming the primary owner of the master copyright. The label then shares portion of the revenue with artist as dictated by the recording contract.

Royalty payments for copyright owners then come in 3 forms:

1. Synchronization rights (e.g., when music is used in TV show or commercial)

2. Reproduction (mechanical) rights (e.g., when music is sold on CD or used in interactive stream like Spotify or Apple

3. Performance rights (e.g., when music is performed via terrestrial radio, satellite radio or internet including interactive services like Spotify or non-interactive services like Pandora)

The original thought for blockchain’s applicability to music was that blockchain could be a decentralized transparent book of record for all the various copyright ownership and metadata. This information combined with smart contracts could then verify and automate the royalty flows, relinquishing the need for musicians to have to give up a percent of royalty rights to middlemen to help them track their royalties (e.g., publishers) and giving musicians more time to do what do best — creating music. Many startups and projects like Ujo Music (under ConsenSys), JAAK and Berklee/MIT’s Open Music Initiative sprung up from 2015–2018 to take on this ambitious challenge of creating the decentralized licensing and payments infrastructure for the global music business. Ujo Music stated as such in a post in 2018 where their aim was to “enable 1-click licensing of all media for any use” by enabling musicians to “publish their metadata into a machine-readable, distributed database, consumable by all. From here, anyone can utilize the smart contract attached to the metadata to enter into an automated agreement to buy and use the rights attached to it. A media custodian, as part of the agreement, will disburse the media for its particular usage.”

But so far, these have not panned out — perhaps because of the sheer level of effort of getting thousands or even millions of songs on chain. Therefore, instead of trying to bring legacy music industry structures on Web3, artists have been trying to break with the past and invent / create new systems.

Now, that you are equipped with at least a basic understanding of copyrights for music and what has not yet been accomplished to date (i.e., moving the legacy music industry structure on chain), we can better analyze what consumers of NFTs purchased this year when they bought a NFT of a song that promised publishing rights, recording rights, etc. What fans bought was a newly constructed digital ownership token established by a contract on the platform in which they transacted (e.g., Zora, Catalog, Foundation, Royal, etc.). BUT this did not represent an actual change in ownership in the “analog” world. Stated differently,

NFTs added another ownership layer but the blockchain entry did not actually change ownership in the original work.

The reason I brought up a high level overview of music copyright above is to illustrate that today, there is a gap between legal ownership in the music copyrights and recorded ownership on the blockchain. And many NFT contracts conflates the digital ownership with the “analog world” of intellectual property ownership.

With this conflation, there is little financial regulation and accountability mechanisms to enforce what the digital ownership in the NFT gives you. Such questions that often go unanswered with is how payments will occur (i.e., via which cryptocurrency or stablecoin), how often payments will occur, how collectors will receive payments, who covers gas fees, etc. Moreover, it is unclear if you purchase a music NFT, what rights do you get (e.g., do you have the right to create derivative works?).

Therefore, if fans are approaching the space first as a fan supporting an artist by owning a newly created digital work of the artist, I think expectations and delivery of goods will largely be in alignment. If fans are viewing owning the digital piece more from an investment lens (i.e., the promise of some right that equates to earnings), fans may be disappointed on the financial “return” of the earnings associated with the promised right as often not enough structure has been put in place. Relying upon music NFTs for financial return, fans are really gambling on that NFT being able to be resold for a higher price than what it originally purchased for.

Still, even with some of the ambiguity around these NFTs, I am not against these types of NFTs — far from it. It gives the artists a new way to help monetize and create connection with their fans — just may not have been part of the original larger ambition of blockchain’s solve for music.

Merch 2.0

Artist memorabilia and merchandising is one way in which fans have supported artists in the past and shown off their fandom (notice how many people are wearing old tour shirts of the artist that is performing at your next concert or how expensive an old Metallica t-shirt may be in a vintage store). In my previous post, I showed how important concerts and live performances are for a musician’s livelihood. Concert and live performance revenue includes merchandise sales which could represent 10–35% of the artist’s revenue (big name artists can generate $300–400K from merchandise sales alone in one show). And the reasons merch sales at concerts do well are because:

1. Scarcity — if you don’t get the merchandise at the concert or another concert of the same tour, that shirt will be much more difficult to get

2. Pride in ownership — the shirt signals to the outside world that you were at this concert

One thing that NFTs does well is create a verifiably scarce digital items powered by blockchain technology. Given that part of the intrinsic and extrinsic value of a collectible is how scarce an item is, it has only made sense that entrepreneurs have created companies that enable the creation of selling music and audio collectibles that have technologically enforced scarcity. Move over old rock n’roll band t-shirt!

Here is a non-exhaustive list of companies that have sprouted up in this space with some notes:

Music / audio collectibles

• Catalog — 1/1 music NFT marketplace for established and upcoming artists
• Fanfare — Audiocentric NFT marketplace specific for music NFTs; either a song or a music video, available in either editions (one of many flat price NFTs) or exclusives (one of one auctions)
• Royal — music NFTs where purchase gives you the right to the song’s royalties

Marketplace companies — perhaps given the success that OpenSea has had and the belief that NFTs are in its early stages of growth, marketplaces have been sprouting up all over the Web3 ecosystem

• Music focused marketplaces (e.g., Oneof )
• Niche music focused marketplaces (e.g., RCRDSHP focused on dance music)
• Geography focused marketplaces (e.g., Allbetuned and Phonogram for Brazilian artists; Xave for Latin American artists)

Marketplaces focused on all types of artists (visual, audio) and others (e.g., celebrities)

• Zora and Foundation — more visually focused marketplace for NFTs that also has music soundtracks
• Fanaply — Digital collectibles from artists and athletes. Rewards listeners with most streams according to Spotify with NFT token
• Curio — own a piece of content from your favorite television shows, graphic novels, movies or music in new formats such as character motion art, video clips, or 3D models

The common themes across the collectible and marketplace Web3 companies are they enable consumers to discover, collect, and potentially showcase their music NFTs and collectibles. Varying level of crypto-expertise is needed to use these platforms — many platforms are increasingly trying to attract the non-crypto native individuals by giving the option to purchase via credit and debit cards while some are attempting to get customers at least familiar with basic tokenomics through token issuance and staking.

Web2 but Web3 Companies

Perhaps the easiest bucket of startups to understand are the Web3 companies that have modeled themselves after Web2 companies (i.e., skeuomorphism) but in a decentralized form.

The most clear-cut example of this is the Web3 equivalents of Soundcloud, the music streaming platform. Soundcloud is notorious for its not-so-friendly tactics towards artists including:

1. Artists are forced to sign an agreement in which they state they will not sue nor contest the deal at any point in time ([artists] “forever discharge us and our related parties from all claims … including any and all actual or alleged acts of copyright infringement”).

Translation: artists give up any right to seek damages against Soundcloud even if they have caused harm to the artist (including copyright infringement)

2. Soundcloud can make any changes to payment program at any time without advance notice.

Translation: Soundcloud can change payment terms whenever they want

3. Soundcloud can choose to pay artists out monthly or quarterly “or another accounting period basis Soundcloud elects to use.”

Translation: as an artist, you don’t know when you are going to get paid.

So, in summary, Soundcloud does not allow artists to contest or sue Soundcloud at any time, even if Soundcloud were to choose to not pay the artists properly, and Soundcloud can change their payment structure at any time — to which the artists, again, have no way of protesting that. Oh, and Soundcloud has been known to haphazardly take down content. While the above sounds drastic in how egregious how they treat their constituents or artists, analogous arguments can be made for many of the other Web2 stalwarts today (e.g., Twitter, Facebook, etc.).

Enter Web3 versions of Soundcloud.

At the core value proposition for listeners and artists, these Web3 companies seem similar to their Web2 counterparts in key aspects:

· Simple sign up process for listeners (i.e., the key for Web3 companies is to have a signup process in which the user is not required to be well versed in crypto)

· Simple upload music process for artists (artists also do not need to be well-versed in crypto)

· Allow fans to discover and follow artists and stream music

However, where these Web3 companies, including but not limited to Audius (Ethereum blockchain), Rocki (BSC blockchain), Emanate (EOSIO blockchain), aim to differ from their Web2 counterparts is to empower artists by giving a higher cut of the streaming revenue to artists directly (up to 90+% with remainder going to node operators) at quicker time increments. Instead of hosting the music itself, these protocols decentralize the music across independently operated nodes so that it does not have the power to remove music content which means there is no centralized entity controlling what is hosted on the platform (which doubly protects these platforms from lawsuits). Furthermore, these platforms do something that Web2 companies never did — reward listeners who consume / listen to the music. All of these marketplaces have their respective tokens to further reward artists for their streams and listeners for listening; these tokens can be traded for monetary value in decentralized exchanges or held to exercise voting rights on any overarching changes to the platforms themselves, thereby putting the control in the artists and the listeners.

New models of fandom

One of the benefits of blockchains and tokens is that it has enabled distribution of ownership at scale. Distribution of ownership at scale is the infrastructure that never existed in Web2. Now in Web3, platforms can reward the users who helped drive value creation– large or small. With these contracts / agreements relatively quickly uploaded to the immutable blockchain, creators of the token can easily see and track those that own the token and distribute rewards to that fan (e.g., airdrop, token gated communication channels and virtual storefronts). With this new Web3 enabled infrastructure, new Web3 business models have used this to foster different fandom.

Artist / Fan Joint Collaboration

• DoomsdayX — turns fans into collaborators by giving them access to an artist project from beginning to end. Fans buy in via NFT token and then get producer credit — access to making of the video, governance rights, AMAs with production team, etc. It replaces the resources and marketing of a major record label with fervent fans — true ownership economy.

Social tokens

• Between Bolero, P00LS, Rally — all platforms that enable the creation of social tokens (also called creator cryptocurrencies). Fans invest by purchasing their favorite musicians’ social tokens that often comes with special rights (e.g., private discord, exclusive newsletter, discount to merchandise, exclusive events, etc.). And as the artist becomes more popular, the social token rises in value on decentralized exchange which further incentivizes audiences to consume creator content and to promote, share, and scale it.

Listening and release “parties”

• Sound — Artists can launch a listening party for new song releases with a series of limited edition NFTs to capture more value from their art and more closely connect with their fans. Owning NFT gives right for fans to comment on the song and receive additional benefits (e.g., exclusive listens, concert tickets, etc.). Creates a way for artists to essentially crowdfund from fans.

Artist tools to navigate Web3

Web3 is complex for tech-saavy individuals, let alone non-crypto native musicians. Given the increasing amount of Web3 capabilities for musicians, companies have been created to help musicians navigate this space.

· Manifold — enables artists to mint their own NFTs with creator-owned smart contracts that enable the interoperability with all major NFT marketplaces. No code experience is needed

· Artiva — lets artists build their own NFT platforms in a Wix-like manner.

· NFT.kred — NFT platform for brands and artists to create NFT hubs. Features include batch minting, timed drops, redeemable NFTs that can be used by artists showcasing their digital art or used to power events and communities (e.g., different forms of tickets, sponsorships, souvenirs)

· Envoy — B2B service for artists around to creation and marketing of NFTs

These companies above represent only the first wave of companies sprouting up in this nascent music Web3 ecosystem. One hope is that with the infrastructure of Web3, we will continually be progressing to a world where artists are funded, produced, managed, and distributed by fans. While there may be some tech and entrepreneurial saavy musicians who choose this route, I am not sure if that is the ideal state as the middlemen today do have some expertise in promoting the artist that ultimately warrants some fee (though perhaps not as high as they take currently today) in exchange for creating a larger ultimate pie of revenue for the artist. In part III of this series, I will talk more about this dynamic and offer some ideas as to what the future may hold for Web3 and the music industry.