Paradigm Shift in Progress: Music NFT
Since the NFT upsurge swept the world starting in 2021, it has become clear that NFT has changed many industries or market applications: in art-related fields, the NFT upsurge has not only stimulated a boom in digital art but has also changed the way and form of collecting artworks; in the social and community sectors, many communities are using NFT avatars to rally the crowd or form decentralized autonomous organizations (DAOs); and in the gaming sector, the rise of blockchain games has been triggered by the new concept of NFT technology that allows players to “own” virtual characters, treasures, equipments, lands as well as spaces, and trade them for further coins.
The application of music NFT has the potential to shift the monetization model of the music industry, which has been unable to capture the value of “music creation itself” for years, to a new revenue model. In this article, we will explore what are the driving forces for the further growth of music NFT applications in the music industry, the current state of the development of music NFT, and what changes and business opportunities music NFT will bring to the industry.
What is Music NFT?
Non-fungible Token (NFT), minted by blockchain technology, can be presented not only in the form of images commonly found in the market but also in other diverse media formats, including GIF animation files, video files, pdf files, etc. The so-called “Music NFT” refers to the non-fungible token presented and minted in the form of music files or used in the music industry.
Unlike music streaming platforms where the paying user only buys the “right to play” of the music, the holder of a music NFT can not only play the music but also “own” the music file. This concept is similar to the past behavior of people buying cassette tapes or records to collect music, and the music NFT can also combine with various artistic and creative elements in its visual presentation in addition to music files, thus extending its collection value and forming a major incentive for music fans to buy it.
Not only that, current music NFTs have a wide range of applications and a creative business model design. Some music NFTs license their owners to use the music freely, including reproduction or commercial application; others share the copyright and a portion of the profits of the music with the owner.
In addition to the value that can be derived from the music itself, music NFTs also cleverly leverages the membership mechanism and the fan economy, making them a bridge between the creator and his or her loyal fans, giving the holder more opportunities to interact with the creator and even other benefits. For example, the right to buy concert tickets in advance, attend exclusive events, or receive limited commodities, etc., thus creating more value-add to attract fans to be willing to pay for and hold the music NFT.
The emergence of music NFTs allows music creators to remove the middlemen and platforms, capture the value of their creations, as well as to interact more directly with fans who are willing to pay for them. This gives musicians, who have struggled for years with the current state of the music industry, some hope to realize their creations and a chance to promote a paradigm shift in the music industry’s value realization model.
Music Industry Monetization Dilemma Becomes a Boost for NFT Development
If the value of music NFTs and their extra benefits is attracting creators to release music NFTs, the difficulties faced by the music industry, on the other hand, is pushing creators to do so. The following are some of the current situations and dilemmas faced by the music industry worth exploring.
(1) The digitalization of music storage has caused a significant revenue decline in the industry.
With the evolution of music storage from vinyl records and cassette tapes to CDs, purchasing, collecting, and playing music became more popular. The ales of recorded music grew gradually, reaching a peak in the late 1990s and early 2000s when the total amount exceeded US$21 billion. During this period, the music industry’s revenue was dominated by sales of recorded music, with CDs accounting for more than 95% of total sales in 2002.
The MP3 format, born in 1991, has been quietly taking dominance as the music industry moved toward glory. As a result, piracy became rampant and many people stopped paying for music, which had a huge impact on the music industry. The total recorded music sales fell to the bottom over the next decade.
(2) Streaming music platforms are on the rise, but creators’ income is still not improving.
With the rise of intellectual property protection and the emergence of music streaming platforms such as Spotify and Apple Music, the concept of “paying to listen to music” has become generally accepted by consumers. The avalanche of the music industry’s market value as a whole has come to a halt and has gradually recovered to the level of the early 2000s in the last two years. According to statistics, in 2011, the overall value of the streaming music business was only about $600 million, accounting for only 4% of the industry’s annual revenue; today, the streaming music market has grown to $13.4 billion by 2020, accounting for 62% of the industry’s revenue.
While streaming platforms may seem to be the driving force of the industry growth, there are still many problems that remain unsolved. Take the industry leader Spotify for example, even though the platform now has more than 170 million paid subscribers and a steadily growing revenue, it is still in the red because about 70% of its revenue must be paid to agencies or creators for copyright loyalty, leaving little room for profitability.
On the other hand, for the majority of creators, revenue from Spotify is almost negligible. According to a survey by Business Insider, Spotify pays its copyright owners an average of $0.003 to $0.005 per stream, which translates to an average of about 200 to 300 plays per song to earn $1.
According to another Rolling Stone study, nearly 80% of the artists in Spotify’s Gold Club (the top 0.8% artists) earned less than $50,000 a year, let alone the remaining 99.2% of creators who’s not in the gold club. Moreover, not all of this revenue goes to the creators, but is shared with third parties such as agents, production companies, and songwriters as appropriate. It can be assumed that most of the musicians who share their creations on Spotify cannot make a living from the streaming platform alone, and need to increase their income through other channels such as live performances, concert tours, sales of merchandise and even advertising endorsements.
(3) The pandemic catalyzes creators’ desire to find new revenue streams.
In 2020, the Covid-19 pandemic swept the world and hit the music industry hard. Live performances, such as major concerts, which account for the other half of the music industry’s revenue, were canceled, and nearly zeroed out in the worst cases. In addition, sales of merchandise declined, advertising sponsors’ budgets shrank, and many artists decided to delay the release of new albums in light of the pandemic. The inability to tour and promote their albums further caused the music industry to lose revenue, and created a push for creators to find new revenue streams.
In summary, streaming platforms failed to generate decent revenue for creators, and the pandemic makes the situation even worse, creators are more eager than ever to find new revenue streams and monetization models. With the emergence of the NFT boom, it is only natural for creators to try their hand at it. Besides, the music industry itself is already highly digitalized, making the technical threshold for applying NFT lower than in other industries.
What are some applications of Music NFT?
The year 2021 could be considered the music industry’s NFT inception. Although it is still in its early stages of development, we can already see the potential of music NFT to drive a paradigm shift in the industry’s monetization model from current applications. The following are a few examples of how the use of NFT in music brought more revenue to creators, and even changed the way the music industry operates.
(1) Re-empowering music collections through Music NFT
Although the digitization of music storage has caused a decline in the market value of the entire music industry, one of the trends worth noting is that vinyl records have seen significant growth in sales over the past decade due to their value of collection and commemoration. According to Statista, the sales of vinyl records even reached all-time-high in 2021.
Through blockchain technology, each NFT is unique and irreplaceable, which inherently gives NFTs a certain value of collector’s attribute. If combined with creativity, special content, and proper design, each NFT can be further given extraordinary value of collection.
For example, the famous American rock band Kings of Leon released their album “When You See Yourself” as an NFT in March 2021, becoming the first rock band in the world to release an NFT album. Each NFT includes rights for downloading the digital version of the album, special digital visual art, and limited edition of gold vinyl. Even though the album was available on Spotify at the same time as the NFT released, it seems to have been a big hit with fans, with NFT sales reaching over $2 million.
Another case in point, a never-before-released demo single of Whitney Houston minted as NFT, and was sold for $999,999 on OneOf, a NFT platform, in December 2021. The value of collection brings infinite potential for capturing the value of music. Moreover, the traceability of NFT makes it easier to identify the authenticity of a collection, and the transferability allows the holder to sell the collection when it grows in value, which makes Music NFT more fascinating to collectors.
(2) Leveraging fan economy to increase the possibility of monetization
Another use case for music NFTs is to leverage fan economy, which increases the possibility of monetization. Through the integration of membership mechanisms, creators can give NFT holders special rights and benefits as “utilities” to attract fans to buy them.
For instance, the “Ultraviolet Vinyl NFT Collection” launched by the famous DJ 3LAU was sold by auction and categorized the holders into different levels according to the auction price. The “Gold Level” bidders can create songs together with 3LAU while the highest-price bidder will receive a tailor-made song from 3LAU. Even bidders who failed to buy the NFT will receive a commemorative NFT equivalent to the “Participation Award”.
In fact, King of Leon also created another special NFT called “Golden Ticket” along with their Music NFT album, which guarantees holders reserved front-row seats at their concerts. This is also an example of NFTs leveraging the fan economy.
Through music NFTs, creators can actually turn fan benefits into verifiable digital assets, therefore opening a way for the diehard fans to support their idols directly and enjoy the benefits they’re given.
(3) Turning fans into investors through loyalty sharing
Among all the changes that music NFTs have brought to the music industry, the most disruptive innovation is perhaps allowing creators and NFT holders to share the copyright loyalty and revenue. In the past, the relationship between creators and music lovers was that of suppliers and consumers of music products. When music NFTs are empowered to share copyright with their holders, the holders become both fans and investors, and can earn revenue from the royalties of music NFTs.
In January, Nas, a well-known hip-hop artist, sold the rights of his two songs “Rare” and “Ultra Black” as NFTs. Depending on the price and level of each NFT, the holder can share different percentage of the royalty revenue of the song.
For these music NFT holders, as the music continues to circulate and spread, the royalties from the music NFTs will also increase, making them more willing to promote the music and see the creators succeed as they share a common interest. This will no doubt give fans a greater incentive to support the creators, creating a win-win situation.
(4) Disintermediation, Metaverse, and More
Through the above case studies, we can see that music NFT has, to some extent, replaced and integrated some of the roles and functions of record companies (releasing records for collection), agents (copyright and royalty management), streaming platforms (play music and earn), and social platforms (interaction with fans), thus creating a “disintermediation” effect, and further enlarging creators’ profit margins. More importantly, by removing the middleman, creators, especially independent musicians or bands, can better concentrate on their works and still make a living.
Case in point, Ape-In Productions founded by famous singer Timbaland, combines the famous IP of NFT (Bored Ape Yacht Club) with the music talents in its community to create music and release singles in NFT format. In the past, it was very difficult for independent musicians or bands like this to make a living in the early stages of their development. However, the NFT of “THE ZOO” by an anonymous musician has so far accumulated 195 ETH on Opensea, equivalent to over half a million dollars in sales. Which is 10-times more than most of Spotify’s top 0.8% artists’ annual revenue.
Perhaps the success of Ape-In Production still has a celebrity element to it, but when you look at the music NFTs of other independent music producers on Opensea, many of them have surpassed Ape-In Production’s total cumulative sales, which shows that music NFTs do offer a better model for independent musicians to cash in on.
In addition, the combination of Music NFTs and the Metaverse concept also brings more possibilities to the music industry. For example, the project 0x0, which is also based on Bored Ape Yacht Club, established a music label in the Metaverse and operates as a decentralized autonomous organization (DAO). Each of their NFT represents part of the ownership of the music label, and is also equivalent to one 0x0DAO governance token.
0x0’s debut single “Hello Tokyo” uses Medicine Man, one of the characters in the BAYC collection, as a virtual idol. Moreover, the visual art of each NFT is carefully designed, making each NFT unique in appearance. According to the roadmap revealed on 0x0’s website, 0x0 expects to purchase more blue-chip NFTs as virtual idols in the future, and even plans to open a merchandise store, host virtual concerts, and fan meetings.
In the future, we can expect more music projects that combine NFT and Metaverse concepts to inspire a more diverse and innovative look for the music industry.
Music NFTs are changing the music industry for the better
Kevin Kelly, a well-known author, once wrote an essay about the “1000 True Fans” theory, boldly predicting that in the Internet era, creators could make a living through their creations if they could find 1000 diehard fans willing to pay for any of their creations. Unfortunately, this didn’t happen in the Web2 era because the internet is mostly dominated by large platforms, and creators could not really cash in directly from the support of their fans.
Through the sale of music NFT, creators can filter out the loyal fans who are willing to pay to support them and maximize the possibility of realizing the fan economy. On the other hand, this also lowers the threshold for creators to enter the music industry on a full-time basis, which in turn makes the overall industry more vibrant and dynamic.
Music NFTs are changing the music industry for the better. With the development and expansion of the blockchain industry, when NFT finds its way to mass adoption, there’s a great chance that “the second curve” of the music industry can be triggered.
