Music NFTs: Passing Fad or Future of Music?

Level 3 - Virgin DeFi Analyst

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The music industry has drastically changed over the decades. From how music is made, to where and how it’s consumed, all the way to how artists monetize their creations.

And it’s not just music. The media landscape has changed entirely, creating trillions of dollars in value for the companies that have won a spot in content leadership.

These companies are household names. Apple, Netflix, Amazon, Disney, Spotify, and more are spending billions of dollars to attract consumers to their platforms. To attract these consumers, they need content. Tons of it.

The basic idea is that these platforms will put content in front of their consumers with the hopes of keeping them engaged and getting new subscribers interested in that content. Creators will either get paid directly for creating the content, get a small fee based on the consumption of that content, or, in the case of music, not receive much at all.

Musical artists have a love/hate relationship with streaming services.

In 2014, Taylor Swift famously pulled her music from the Spotify platform, stating that they undervalued her music as well as that of other artists. She eventually returned to the platform in part due to demand from fans. If a major artist like Taylor Swift wasn’t making enough money, imagine the plight of smaller, unknown artists.

Artists use these platforms to distribute their music and build an audience. Once they have an audience, they user other means of monetization to earn income from their work.

This is a critical component of the business model for artists. Streaming on its own is often unprofitable for artists who often have ongoing expenses. However, it provides an all important vehicle for the artist - distribution. Platforms like Spotify and Apple Music are where fans listen to the artist’s music. Hence the love/hate.

Today’s free post is the beginning of a series of posts we’ll make on music NFTs. Paid subscribers will receive deep dives on projects we’re looking at and what pockets of the market we’re interested in.

Technology and Music

Technology and music are inextricably linked. We’d go as far as to say the evolution of the music industry has been *driven* by the evolution of technology every step of the way.

Live music was transformed by vinyl records.

Vinyl records were transformed by cassettes.

Cassettes were transformed by CDs.

CDs became portable with CD players.

CD players turned into small MP3 players.

MP3 players were phased out by smartphones.

Today you listen to music in a car, at a restaurant, at a concert venue, in your wireless headphones, on your TV, and more.

Long ago you had to discover your favorite band in person. Today, you can find music anytime, anywhere, and even watch digitally.

People can access unlimited music on-demand.

To say this has changed consumer behavior is an understatement. Consumers have 24/7 access to an all you can eat buffet of all the world’s music.

Consumer Behavior and Music

In the 2000s, music was largely consumed for free due to pirating. Services like Napster, BitTorrent, Limewire and more let users download music with no payment to the agents, labels and artists. Heck, even artists weren’t paying for other artists’ music. No one wants to pay $20 for a CD album that only has 1 or 2 songs you like in it.

Eventually, iTunes came along and made music widely available digitally. They unbundled albums into individual songs for consumption. Even then, consumers didn’t want to buy music. The year Napster was founded (1999) was the same year the music industry’s revenues peaked.

Consumer behavior had changed. Permanently.

And with music easily accessible for free, consumers found more music. Gone were the days of only hearing music from superstars played on repeat on radio and TV. Music fans could discover music more easily. Up and coming artists could publish their music for free on platforms like YouTube to build a fan base and community around their work.

Over the course of the 2000s, the method of distribution for music shifted massively. But the music industry wasn’t able to shake the pirates off their tail. Despite legally pursuing platforms and even listeners, piracy continued. It wasn’t until the streaming model was solved for the masses that the music industry started to grow again.

By keeping the all you can eat buffet on-demand concept for music, providing an improved user interface and offering curated music for discovery, streaming services were able to make a dent against piracy. Consumers could pay a small monthly fee or consume music for free with ads.

With social media, streaming platforms, and curated playlists, artists didn’t have to rely on record labels to get their music noticed. Artists could build their own audience completely organically or get discovered through the streaming platforms.

Artists could “blow up” through virality. The “long-tail” of artists could bypass labels entirely. Artists can now assemble communities around music that might never see airplay. Even if the audience never buys a single song, they’d come out to performances, buy merch, and allow artists to prove their worth to labels by having existing support (similar to how a startup will find it easier to raise funding by having users or revenue).

The D2C model for music enables artists to build communities and even monetize far earlier.

Music Industry Landscape

The music industry is an oligopoly. Universal Music Group (33.6%), Sony (27.0%) and Warner Music Group (18.3%) make up a combined *78.9%* of the total market share of the industry. They own almost all the record labels your favorite artists are signed to.

They also often own the artists themselves. While deals can differ between artists, major labels make money on everything an artist gets paid for including the records, performances, merchandise and other income streams. If it involves the music or the brand, the label gets their cut. Another way to structure the deal is when the label provides artists an advance, then the label gets all the income until they breakeven. After that, the label gets a percentage of profits.

In any case, labels often represent a major expense to artists. The smaller an artist’s existing audience when they sign with a label, the less negotiating leverage they have in a deal. The more desperately and artist needs the label’s money or other resources, the less negotiating leverage they have.

And that’s just the label. The artist will also have a manager who also often shares in the profit. They may have one or more managers handling marketing and promotion. Artists have far higher costs than people think, and keep a lot less of their topline earnings.

True Fans and Music NFTs

Just like other forms of art, music creates a connection between the artist and the consumer. But most people probably don’t think so deeply about it.

There is a big difference between a “casual listener” and a “true fan.” This holds true for anything with a fan base.

The way we think about the difference is quite simple: the casual listener will consume, but the true fan will engage. The engagement may range from social media likes and comments to visiting shows, buying merchandise, or any other myriad of ways that show support for the artist.

The key difference is that a true fan engages with the artist in ways beyond just listening to the music.

And.

The number of true fans is growing.

We need not look any further than the vinyl market to make this determination. Per Billboard, U.S. vinyl sales grew for the 17th year in a row in 2022. That means even in some of the worst years for the music industry (mid to late 2000s), vinyl sales grew.

True fans are loyal and continue to buy collectible music.

Rather than replace or even disrupt streaming, we think of music NFTs as their entirely own segment of the music industry. In the same way that a fan may subscribe to Spotify and buy their favorite artists’ limited run of vinyls, they will buy music NFTs.

Whether or not music NFTs will disrupt the music industry as a whole is inconclusive, at this stage. The research on that point is beyond the scope of this article - we will come back to it in a future post.

The primary takeaway is that given how nascent the sector is, music NFTs don’t need to disrupt the entire industry. In fact, music NFTs don’t need to disrupt anything at all to be useful for artists (as a monetization and community building tool) and enjoyable for true fans.

We find that much of the crypto space has an incorrect barometer for success. A successful music NFT doesn’t have to mean a scarce collection sold for 8 figures. When artists are creating music NFTs and their community is purchasing and using them (art, access, features, etc.), that’s a success. It’s not about the ability to speculate but rather finding a sustainable use case that is beneficial for both creators and users that will define success for music NFTs.

This is a free post. We are having a Q&A for paid subscribers on the state of the crypto market on Saturday. Next week we’ll continue the series on music NFTs with 1-2 paid posts on projects we’re interested in.

Until next time!

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Disclaimer: None of this is to be deemed legal or financial advice of any kind. These are opinions from an anonymous group of cartoon animals with Wall Street and Software backgrounds.

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