Music x Web3: Bets on the Future

This is Part III 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.
• Part II focused on takeaways from all the activity in 2021.

In Part I and Part II we’ve discussed music x Web3 as it exists today — let’s now shift our attention to the future state. What is exciting about Web3 is also simultaneously what makes it hard to predict — the space is so early-stage and evolving at a rapid pace. Therefore, I am cognizant that my predictions and related thoughts may be constrained relative to what I know about companies and capabilities in Web2. My mental paradigm will likely miss out on the use cases for blockchain technology that have not even been conceived of yet…

…But let me try my best with my predictions (some bold, some less bold) in my crystal ball!

My predictions:

1. Some artists will look to supplement their existing recording / publishing practices with Web3 tactics
2. Other artists will experiment with ways to use Web3 to go around / replace middlemen
3. The old guard (traditional middlemen / Web2 music companies) will not sit idly by while Web3 companies try to eat its lunch
4. Decentralized Autonomous Organizations (DAOs) will gain a stronger foothold in music
5. New metadata standard for music will be established
6. NFTs will become increasingly prevalent in IRL music events

Some artists will look to supplement their existing recording / publishing practices with Web3 tactics

There is often the quick storyline of Web3 companies pitted against Web2 companies, with the implication that all things Web3 will aim to replace the incumbents in Web2. I do not necessarily hold that belief — certain things benefit from having the centralized control (for example — having centralized customer support for customers). Even if I did believe that Web3 would replace all the incumbents of Web2, it will take time given the onboarding hurdle of Web3 (e.g., creating a wallet, confusing nature of NFTs and what they represent, gas fees, etc.). Let’s also remember that the less tech savvy boomer generation still represents over 70% of the nation’s disposable income — we can’t ignore the impact this could have on mass adoption or lack thereof.

The same can be said for the music industry. 2022 will be a year of increased involvement of artists, who are active participants in Web2, in Web3 (i.e., using Web3 to see if they can generate additional sources of revenue and connect differently / more closely with their fans). For example, specifically with album releases, I think artists will follow Kings of Leon’s lead of releasing new albums with the traditional streaming platforms (e.g., Spotify, Apple Music, Amazon Music, etc.) AND additionally selling NFTs for that album release. The benefits of the NFT Album release can be a mix of digital and physical collectibles as well as digital and IRL experiences including but not limited to:

Digital collectibles

• NFT album cover art
• Song NFTs

Physical collectibles

• Limited edition vinyl
• Exclusive merchandise
• Signed collectibles

Digital experiences

• Access to exclusive discord channel
• Twitch performance

IRL experiences

• Tickets to shows
• Backstage access
• Work on upcoming songs together with artist

This strategy will represent a “safe” way to learn about Web3 without staking their livelihood on Web3.

Other artists will experiment with ways to use Web3 to go around / replace middlemen

…if I was to really break down, okay, in the 10 years I’ve been making music…six albums, and you [combine] all those advances, what I did in one drop last year in NFTs, I made more money.

— Steve Aoki, American DJ

As mentioned in my previous prediction, the majority of artists will look to dip their toes into experimenting with Web3. However, there will also be a subset of artists, either those more Web3 knowledgeable and / or those that just refuse to play within the confines of a world where the majority of the value is extracted by the middlemen.

As a reminder in Part I, I illustrated how little artists make from streaming services like Spotify: “artists outside of the top 10%, earn on average $36 in the quarter, or $12 a month, or the price of two coffees in New York City.”

These types of industry stats are no longer a secret given all the articles and publications on this topic. In 2022, artists will increasingly realize that there may be an alternative in the Web3 world:

• Musicians can make more money off NFTs than how they previously generated income in the Web2 world
• Web3 supports an ecosystem where artists can thrive and fans can be an active part of the growth

“Web2’s take rate is Web3’s opportunity”

— Chris Dixon, VC at A16z

As we reflect on how artists will use Web3 to go around the middlemen, a few guiding questions, looking forward:

• Which Web2 models will be the most susceptible to Web3 entrants first?
• Which Web2 incumbents have the highest take rate?
• Which business models that could be as good if not better served in the hands of the community rather than a corporation?

Two examples where we are already starting to see the replacement of Web2 companies prediction manifest today:

1. Community owned record label: Good Karma aims to be a community owned record label where artists are given tokens at signing and share in the growth of the label and roster of artists. I believe more of these will crop up especially how much upside artists cede to major record label and the concentration of record labels (Universal Music Group, Sony Music Entertainment, Warner Music Group comprise ~70% of the market). You are already seeing some backlash against record labels including some recent public fights between artists and record labels
2. Music video production by fans: DoomsdayX, through its Producer NFT Collection, gives fans governance rights on creative and marketing decisions for artist’s music video

Another area where Web3 can disrupt Web2 is in the collection of royalties. Today, artists are extremely dependent on 3rd parties to help collect royalties (synchronization rights, reproduction rights, and performance rights of both music publishing copyrights and sound recording copyrights).

• Performance Rights Organizations (PROs) — collect performance royalties whenever the song is performed or broadcast in public arenas (television, radio, club, restaurant)
• Mechanical licensing organizations (e.g., HFA) — collect royalties for recording and reproduction of music streams, CDs, digital downloads

Artists’ reliance on external parties for this revenue collection will likely not change given the technology and effort needed to know when a given song is being played / used at any point in time. However, artists today have few choices when deciding which organization to use given the relative concentration and, as a result, these Web2 companies do not need to be artist friendly (e.g., payouts can happen monthly at best but more than likely happens on a quarterly basis, tough for artists to verify being paid correctly for all of their music plays, etc.). The blockchain could potentially help improve visibility for artists and streamline the payments in a quicker fashion (if we have the right metadata and data structure set up).

Web2 and traditional middlemen in music will not sit idly by while Web3 companies try to eat its lunch

Whether recognizing the potential of NFTs and Web3 for musicians or playing good defense to maintain (as much as they can) their hold on $0.88 of every dollar spent in the music industry, Web2 and traditional middlemen will make a (continued) splash into the Web3 music ecosystem in 2022. We have already started to see early signs of interest as evident by:

• Spotify exploring adding blockchain and NFTs to streaming services
• Warner Music Group partners with Genies to Develop Avatars and NFTs for WMG Artists
• Warner Music Group signs partnership with OneOf to create exclusive NFTs for artists across WMG’s music catalog
• Universal Music Group acquired collection of NFTs from Bored Ape Yacht Club to create a metaverse band
• Universal Music Group partners with Curio to develop NFT fan collections for its record label and artists
• Sony Music to launch Baby Shark collection

Of the headlines above, I am most curious about how the creation of a metaverse band by Universal Music Group plays out. If this model sticks, the “acquisition” and “management’ of artists will change significantly given the artists are now digital PFPs owned by the record label itself.

Given the growth of music startups in Web3 space, I expect record labels to sign additional partnerships with companies (see “Artist Tools to Navigate Web3”) that provide tools for artists to create NFTs and build NFT platforms. The record labels stand to benefit from providing additional value-added services to keep the artists captive as well as take a share of revenue of these new revenue generating opportunities.

DAOs* gain a stronger foothold in music

*Decentralized Autonomous Organizations (DAOs) are decentralized organizations owned and run by members that work together to allocate resources (capital or people) to achieve a common goal. Another way to think about DAOs are that they are online communities that share one bank account and where members vote to decide how funds are raised and allocated.

For music, imagine you have one fan who is a marketer, one fan who is an attorney, and one fan who is an events coordinator, all participating in a DAO created by their favorite artist. Through equitable governance, these contributors can be rewarded for applying their skills to the DAO while simultaneously helping their favorite artist grow and succeed.

Today, many of the music DAOs are communities are ones that fight or offer alternative solutions to the concern around Web2 music industry’s unequal pay, lack of financial transparency, and broken data collection. Some early types of DAOs in this space include:

• Investment DAOs — invest in Web3 native artists and music NFTs (e.g., NoiseDAO)
• Industry Facing DAOs — looking to improve music data / tooling and infrastructure of music in Web3 (e.g., MODA)
• Stewardship DAO — around an artist (e.g., Holly+)

There are many broader forms of DAOs that exist today in the broader Web3 ecosystem including but are not limited to:

• Operating systems DAOs— DAOs that offer tools to help people to start DAOs (DAOstack)
• Grant DAO s— take donated money and decide how money is allocated based on governance (e.g., Aave Grants)
• Protocol DAOs — sometimes synonymous with automated market makers, DAOs that give protocol users a collective say in future direction (e.g., which layer 2 networks the protocol should be displayed on, marketing initiatives, how treasury should be managed) (e.g., Uniswap, Lido)
• Investment DAOs — as name suggests, a DAO that raises money to investing (e.g., including in items like a golf course or even a NBA team)
• Service DAOs — crypto-native talent agencies of sort
• Social DAOs — bring together people of similar interests
• Collector DAOs — focused on investing in collecting NFTs

I point out the broader set of DAOs because fans / entrepreneurs will likely look to DAOs in the non-music space and whether those models can be translated over to the music space (or new models wills be created). It will be interesting to see how DAOs are created to solve the pain points that artists experience in the Web2 world and how artists aim to replace some of the intermediaries (e.g., record labels, music publishers, venue owners, personal managers, agents, attorneys, and business managers) with DAOs to capture more of the pie for themselves. For example, instead of selling their music catalog and royalties to investment firms and companies, musicians could sell their catalogs to an investment DAO composed of fans.

New metadata* standard for music will be established

*Metadata is structured reference data that helps to sort and identify attributes of the data it refers to.

Today, one NFT marketplace reigns supreme: OpenSea. Given OpenSea’s volume of transactions and users (over $20 billion in sales and 1.2M traders since its inception in 2017), NFT platforms have been conforming their metadata standards to those of OpenSea in order to maximize exposure in the broader NFT marketplace economy. The metadata standards of OpenSea include:

• Image
• Image_data
• External_url
• Description
• Name
• Attributes (e.g., primarily used for color and clothing traits for PFPs)
• Background_color
• Animation_url
• Youtube_url

As one could see from the list above, metadata that is important for music NFTs (e.g., genre) is excluded. This poses at least two significant problems:

1. Imagine trying to discover a new artist without even being able to search by your favorite genre of music? How would you start? The NFT market is very concentrated — 10% of traders accounting for 85%. Without better metadata, we cannot create better front end features (including discovery) that can ultimately help onboard further individuals into Web3 space, which will be needed to shift the market from just innovators / early adopters to early adopters / early majority (depending on how mature you believe the NFT market to be).

2. Setting the right standard early on is important to ensure less “fixing” later on. Specifically, the longer we wait for a metadata standard, the more music NFTs that would have been created with bad metadata framework and the more work it will take (and potentially a centralized entity) in the future to conform these older generation of music NFTs to the more ideal standard (and could require a centralized database in order to do so).

These two reasons are why I believe 2022 will be the year in which significant progress is made on the metadata side for music. There is a bit of a tragedy of the commons for implementing this standard but luckily we have industry facing DAOs (e.g., MODA) and other groups (e.g., Mintsongs) already starting the work on this. An improved metadata standard could be the first step in improving data generally on the industry level that can ultimately allow for provenance tools at the creator level (i.e., helping artists better understand where their listeners are).

NFTs will become increasingly prevalent in IRL music events

NFTs at live events represents an additional way for artists and event organizers to connect with fans both during the event itself and after the event in a way that was previously not possible. For example:

During the event

• Fans can scan codes during live shows to claim and collect exclusive NFTs
• Gamification: Fans receive tokens or coins for performing certain actions (e.g., making purchases) or going to certain areas of a festival
• NFTs give access to special locations (e.g., VIP lounge)
• Concert highlights are captured in real-time and minted into NFTs (e.g., moments similar to what is sold on NBA Top Shot)

After the event

• Holders of NFTs can get access to broadcast-quality live-set warehouse recording, recording of the entire show itself, behind the scene footage of rehearsal for concert, etc.
• Event go-ers now have a digital ticket stub (which in itself could be a collectible)
• Tokens accumulated during the event (if ERC-20 or ERC-721s) could have monetary value on platform that allows users to trade these collectibles
• Concert participants get special access to future events, fan clubs, merchandise, etc.

We are starting to see various existing players in the space pay attention, event organizers experimenting, and new upstarts trying to capitalize on the various use cases of NFTs with live events. Ultimately, fans and artists stand to benefit as NFTs could be used to enrich the fan experience at live events and broaden the connection of artists with fans afterwards.

I believe we are on the precipice of monumental change in music thanks to Web3. 2022 will be a year in which we make significant progress towards democratized music distribution and publishing and as a result, a chance for creators to own a larger piece of the marketplace.

Regardless of whether or not I get any of these predictions right or if I look back on this piece at the end of 2022 in a cringy manner for being too early or too wrong, I share the sentiment that Warner Music executive Steve Cooper mentioned in a recent interview, “there are going to be more opportunities than we can even imagine.”