Music NFTs: The Changes Web3 Ushers in to the Music Market

[Xangle Originals]
Written by Ponyo
Translated by elcreto

Summary

The current music market is dominated by the largest record labels and music streaming platforms, but only about a mere 10% of their profits are distributed to the artists.
In a bid to overcome the uneven playing field, lesser-known artists and newbies are increasingly choosing music NFTs.
The leading music NFT platforms include: Royal, Sound.xyz, Catalog, Arpeggi, and Audius.

Already, many are familiar with the fact that PFP projects like CryptoPunks and BAYC were the prominent drivers behind the meteoric rise of NFTs. Yet, NFT’s unlimited potential is rather a threat to PFPs’ throne and hastens the arrival of a new trend – which, I believe, is music NFT at this point. Even if music NFTs may not replace the entire music market, fandom culture (community), appetite for collectibles, and membership benefits can equally be applied to the music market. The accelerating growth of music NFTs seems to warrant attention.

Biggest Record Labels Swaying Music Market

Before we start analyzing music NFTs, we need to know what the issues are in the industry and how NFTs can be the solution.

It is not an exaggeration to say that the current music market is the playground for a handful of record label giants and music streaming platforms. Universal Music Group, Sony Music Entertainment, and Warner Music Group take up 68% of the music recording market while the four largest entertainment companies hold a 60% share of the sale of albums. In the music industry, these major record labels are predominantly powerful, and for the lesser-known artists, landing a contract with the companies can pave the way for success. The problem, however, is the skewed profit sharing arrangements: those record labels take more than 85% of the profits for such reasons as production, distribution, and marketing. The arrangements may differ depending on how celebrated the artist is, but most little known artists receive 10-15% of the profits.

This goes the same for the music streaming market. While a small number of Web2 platforms like Spotify, Apple Music, and Amazon Music are the predominant players in the market, only about an average of $0.004 per stream goes back to the artists (see chart below). Assuming that 20 songs are streamed per day per subscriber, Spotify, the no.1 music streaming platform, takes 80% of the revenue from creation (see formula below).

As such, artists who rely on centralized platforms cannot expect much profit. While Spotify became a $4M company, only the top 10% of the artists represent a whopping 99.4% of all streams. In 2020, merely 13,400 artists took most of the profits. With income from streaming being hardly enough for a livelihood, most artists inevitably rely on gigs. This is the reason artists in North America earn an average of less than $25,000 a year.

Music NFT: A Powerful Tool That Can Empower Artists

Artists are well aware that the record label and music streaming giants are ruling the market, wielding an influence, and feeding off of their creations. Yet, they find themselves left without a choice but to vie for a contract with the big-name companies. Music NFTs are gaining traction as a promising solution to the uneven playing field.

First and foremost, if songs are published in the form of NFT, 100% of the revenue generated from music goes back to the musician. This is in stark contrast to the Web2 platforms that take 70-90% of the revenue. Below is a chart that compares annual proceeds returned to the artists on leading music NFT marketplace Catalog and Spotify. It shows that the NFTs allowed the artists to earn nearly ten times what they used to earn from streams.

Another benefit of music NFT is the secondary market that generates royalty revenue. Artists can anticipate passive income from the market, which is about 2.5% in the case of OpenSea. Below is the royalty revenue that artists using Sound.xyz earn solely from the secondary market. It confirms that the amount of revenue is substantially higher than what little known artists used to earn in the traditional music industry. Daniel Allan is a case in point. Allan used to be an artist who had a few hundred followers on Twitter but has succeeded in raising $170K with $85K from Catalog and the rest from Sound.xyz. Music NFT is particularly expected to offer a promising opportunity for those who have not yet risen to fame.

As such, the number of creators flocking to Ethereum for greater revenue is rapidly on the rise. In 2021 alone, painters, musicians, writers, and many other types of creators made as much as $3.5B off of Ethereum, sprinting to chase centralized platforms like Spotify and Youtube Music. The rise of Ethereum in this industry bears great significance given the dominance of the centralized platforms in the creator economy.

Strong Enough Incentive for Consumers to Purchase Music NFTs

For artists, the incentive seems quite straightforward to opt for music NFT since it offers a means of income. But what about consumers? Why do they buy music NFTs, and will the demand continue to rise?

To begin with, music NFT is capable of effectively connecting artists to fandom (or fan communities) in an industry where keeping fans (or fan communities) connected is key to success. Currently, some of the fan clubs ask for enrollment and annual membership fees and enforce purchase of albums and merchandise in bulk, while the lack of transparency in how the funds raised are managed is another cause of concern.

Music NFT allows fans to enroll for fan clubs (or communities) more easily and effectively without having to rely on trustworthiness. Once bought, music NFTs give the holders entitlement to the artist’s Discord channel, where fans can have a conversation directly with the artist. Some musicians may offer NFT holders additional membership benefits, such as yet-to-be-released songs, advance tickets, one-on-one chat, and airdrop. This narrative appears to have much in common with the narrative of PFP’s success.

Second, some music NFT platforms, such as Royal and Decent, pay out royalties like dividends to the NFT holders. Part of the demand for music NFT looks for an investment vehicle since holding a music NFT could turn into a stable source of cash. This is how music is translated into a means of investment. Royal, for example, is designed to let the artists decide on the royalty distribution ratio.

The driver of demand for music NFT varies. It could be either an interest in collectibles, sponsorship for artists, or could be a variety of other reasons, depending on the type of the music NFT. Backed by such needs in the market, the trading volume of music NFTs is steadily on the rise.

The Accelerating Growth of Music NFT Ecosystem

The ecosystem of music NFT is sprawling fast. Recently, institutional investors have also joined the trend and are aggressively investing in music NFTs.

(In 2H 2021 alone, Royal raised an investment of $55M, Sound.xyz $5M, Audius $5M, and Async Art $2M).

Major Music NFT Platforms

Royal.io: A platform that provides part of the ownership (royalties) and copyrights for the artists’ creations to the NFT holders. All the rights, including royalty distribution, are in artists’ discretion. The service was launched in Oct 2021. In Jan 2021, popular American rapper Nas converted two of his songs “Ultra Black” (from the “King’s Disease” album) and “Rare” (from the “King’s Disease II” album) into NFTs. The NFTs were released on the Royal platform and sold out in just a few minutes. The benefits of the NFTs differ depending on the tiers of the tokens, which are Gold, Platinum, and Diamond.

Sound.xyz: A music NFT platform that allows artists to mint multiple copies of an NFT. Artists can use Sound.xyz to premiere their new releases and designate a date of sale for their NFTs. Largely, there are two main benefits to owning music NFTs: i) NFT holders can earn a spot on the playback bar and inscribe a public comment on the song they own and ii) become entitled to a Discord channel where they can communicate directly with the artist. Some artists would offer an unreleased track, concert ticket, or opportunity for collaboration or simply mingle with the token holders.
Audius: A music streaming platform that launched its mainnet in Sep 2019. Unlike traditional streaming platforms that take 80-90% of the revenue from the streams, Ardius provides 90% of the revenue to artists and the remaining 10% to node operators. So far, it has got more than 100,000 artists onboarded.
Catalog: A 1/1 music NFT marketplace. Currently, an invite-only beta is available. Artists can turn their music into NFTs for sale, and purchasers can enjoy the benefits.
Arpeggi: An on-chain digital audio workstation (DAW) that allows musicians to compose and mint their songs. Interestingly, unlike most NFTs that store only the link of an original digital copy, Arpeggi allows users to store 100% of the music data on the chain. Generally, recording in MP3 format costs $100,000 for gas alone, but Arpeggi stores files in .arp format, slashing gas fee to as low as $25.

Cons, or Risks, to Music NFTs

Royalty Distribution of Non-Blockchain Platforms: Revenues generated on non-blockchain platforms, such as Spotify and Apple Music, face an Oracle issue because the revenue from such non-blockchain platforms can only be tracked and managed off the chain. Whether those labels can be trusted for the process of recording and distributing royalties to NFT holders remains an issue.
NFT Platforms Possibly Launched by Labels: If major labels that are in contract with high-profile musicians start building NFT marketplaces, the market can be skewed. One might shrug it off, saying that artists will always have the freedom to end their contract. But record labels have dozens of years of know-how, providing a full suite of management, including incubating, producing, and marketing. It means that ending a contract with a label can be a significant risk for artists. In South Korea, the “Big 4” entertainment agencies have already announced their upcoming NFT projects.
Compliance Risk: Most musicians who are already in a contract with labels and entertainment agencies cannot mint NFTs due to legal issues involved. Those companies are highly likely to i) start their own NFT business, or ii) make NFT creation difficult for artists.
Absence of Celebrity Singers: The established musicians may not find music NFTs attractive. Without them, however, the music NFT may find it difficult to gain momentum. Yet, the growing number of high-profile music artists increasingly having an interest in music NFTs, such as Snoop Dogg, Grimes, 3LAU, Kings of Leon, and Avenged Sevenfold, is encouraging.
Absence of Valuation Tool: There is no valuation model yet to estimate the value of music NFTs that do not distribute royalties.
Fees: On average, minting NFTs would cost artists $100 on Ethereum, which can be not quite affordable not only for lesser-known artists but for fans as well (Sound.xyz, for example, is selling artists’ NFTs for 0.1ETH, or $300).

Conclusion

In a world where copies can be replicated endlessly, NFTs, which can validate sole ownership of digital data and convert them into an asset, are revolutionizing many industries. Currently, the change NFTs are bringing in the music industry is even blurring the line between consuming and investing in music. NFTs may take some time to grow into a mainstream choice in an industry where very few Web2 companies have such a strong grip like a cartel. Still, just like what Bitcoin has become, NFTs are looking set to build a stronghold in the market.

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