On Music NFTs — The Creator Economy

This piece provides an overview of the overall Music NFT sector with an assumption that the reader has an intermediate comprehension of the wider NFT space.

Music NFT is a subsegment of NFTs. They inherit almost all (we’ll get here) properties of NFTs and are created by artists for fans/collectors/investors. Music NFTs are a tokenized version of their source files (.mp3/.wav), similar to how NFTs is a tokenized version of their respective source files (.jpeg, etc.). But of course, it is more than that, right?

Some background. Record labels help artists scale by providing — 1) capital (in the form of an advance), 2) distribution and 3) A&R (i.e., connections and development) [1]. Advances are recouped against royalties the artists earnt, and once the advance has been paid off, the royalty is typically split more evenly (80/20 in favor of label pre-advance recoupment is common). Labels sign multiple artists and being a business, the label will allocate the majority of its resources to artists with the highest potential. If you are not considered as “potentially profitable”, then you will be left with a huge debt (the advance), label lockup (could not sign off the label), and the question “how did my life turn out this way?”.

Figure 1 highlight the revenue distribution of the music industry. Artists earn c.12%, despite being the sheer focus of the industry itself [2].

Figure 2 shows the average payment per stream of top streaming platforms. To make US$1k, artists need a minimum of 75k streams, a lot of effort for a relatively measly sum. This is not the digital streaming platforms’ fault per se, for the economics to work (finding a price that users would pay that keeps the company sustainable), a party has to be thrown under the bus, and unfortunately, it’s the artists. From here comes the phrase, “Spotify is where artists go to be found, not paid”.

It is even said that c.80% of actual music revenue comes from touring [2]. So how can new artists grow, they can’t exactly go on a tour and expect 30 friends to pay off all the costs. It’s a negative-feedback loop where they could not release multiple quality music to be acknowledged but could also not leave their full-time job to commit their maximum effort — not everyone can take a leap of faith.

So back to the main question, yes music NFTs are more than a tokenized .wav/.mp3. Music NFTs aims to help enable newer artists to take that leap of faith (by removing barriers) and help existing artists activate a new revenue stream. For further context, music NFTs include everything music-related that is tokenized (e.g., tokenized concert tickets, etc.). Here come web3 labels and music NFTs.

Web3 labels are crypto-native labels that offer a mutually beneficial deal to both the artists and themselves [1]. Instead of helping your music scale to the masses, their main mission is to assist you in finding superfans (i.e., fans that are passionate about your work, and willing to pay) — quality over quantity [4]. To put into perspective, selling 25 music NFTs at 0.1 ETH pays the same as a million streams on Spotify [3, 5]. In addition to this, they typically do not provide an advance, just an agreement for future profit share. If you are confident enough, you can even launch solo, without any (trad/web3) record labels. As long as you can build your superfan community to sustain your costs.

Getting back to the music NFTs, why would people buy them, and what are their benefits?

There are two main reasons why people would purchase music NFTs. The first one is the same as why someone would purchase the artist’s physical merchandise, to support the artist they like and showcase their support. The second one is the same as why someone would purchase an NFT, be it an investment or community inclusivity. The price of a music NFT would increase (in expectancy) as the artist grow or the track becomes a hit (both of which mean a larger consumer base), the demand increases whilst supply stays constant.

Their clear benefit over physical merchandise is the fact that they have a secure secondary marketplace. The two aforementioned reasons are not mutually exclusive.

Music NFTs are not (yet) competing with streaming platforms, it is a means of income generation. In their current phase, they are more comparable to platforms like Patreon, merchandise stores, and baseball cards. Given the nascency of the space, artists who adopt music NFTs early benefit from gaining a demographic that is more willing to spend for these collectibles. In addition to this, newer artists get access to a platform with much less competition and direct interactions, giving them an edge in terms of exposure.

For artists/producers, it is not harder than creating a typical NFT, just a little more complicated than a drag and drop of a source file to your Dropbox storage. Music NFTs can be classified into three types — 1) 1/1, 2) limited editions and 3) open editions. In the wider NFT space, types 1) and 3) are prevalent.

1/1 refers to a single NFT release, and limited edition refers to a collection with a pre-defined number of pieces. Open edition refers to an unlimited number of mints, though it is typically constrained by a time frame [6]. Editions are often more favored, especially if the goal is for community building.

Music NFTs slightly differ from your typical .jpeg NFTs. Most .jpeg NFTs are 1/1 even within a collection, having their own unique set of attributes. This has yet to be common in music NFTs.

For users, it is not a different experience than connecting to a marketplace and purchasing/minting NFTs. By purchasing a music NFTs, you do not own the underlying rights of the music (e.g., rights to commercialize, etc.), it is simply a tokenized version of what you get when you purchase albums/songs on the old iTunes, except now you have the ability to re-sell [7].

In line with the superfan and quality over quantity thesis, an NFT-powered gated community is a clear case. By providing an exclusive and direct channel between fans and artists, the willingness for superfans to pay is increased.

Royalty share, where users could get an “equity” for the artist’s (specifically a song’s) revenue. This has been realized by platforms such as Royal.

Tokenized concert tickets. Top artists’ tour tickets get sold out, fast. There is a huge hoarder and resell market for these tickets, not only do they charge a hefty premium, their authenticity/security is not guaranteed. By leveraging existing solutions such as NFT marketplaces and on-site NFT authentication, artists could earn a share of that secondary sales volume and users get a verifiable trade method.

Metastars are a new class of musicians, they are artists who exist solely in the metaverse [8]. By only existing in the metaverse, they are able to go on tours without the heavy logistics/riders. Hatsune Miku, but powered by NFTs and DAOs.

The bigger picture, similar to the broader NFT space is when music NFTs reach mass composability. Being able to be engrained in GameFi ecosystems and even NFT finance platforms (e.g., rental, usage as collateral, short/long a collection, etc.) highlights the true colors of crypto.

Although not the greatest representation of the broader music NFT market, figure 3 highlights the traction of music NFTs.

The music NFT space grew relatively quickly, thanks to its close relevance to NFTs, which have laid down the necessary infrastructure and traction. The current music NFT stack has seen players across all verticals — from artists, collectors, marketplaces, labels, collectives, and funds. A full-suite, as seen in figure 4.

Royalty share has been a debatable topic for music NFTs. It seems like a win-win solution, artists earn a non-predatory upfront capital for future revenues and users could “invest” in artists they believe could be profitable. Legal issues aside, there are other problems. As evident from streaming platform revenues, they are minuscule unless you are a big hit artist. But big artists already have an upper hand compared to their labels, they are those who are prioritized by the label as they are already profitable. In addition to this, big artists are more likely to have people that are willing to spend money without financial incentives (i.e., superfans).

The wider NFT space has c.80% of its trading volume from secondary sales (i.e., post-mint sales) [11]. Whereas music NFT only has c.45% of its trading volume on secondary sales [12]. The lower turnover of music NFTs implies two possibilities, 1) more music NFT purchasers are collectors or 2) music NFTs lack liquidity. In the former case, it can be shortly concluded that the product has found its fit.

From an artist’s point of view, there are no major downsides to being involved with music NFTs, especially in the current nascent phase, as previously highlighted. It is noteworthy that some music NFT platforms selectively list artists on their platform, which is counterintuitive to the nature of crypto, but reasonable for quality control measures to deliver the optimal user experience.