Will Music NFTs initiate mass adoption?
Before we jump into today’s topic, I would quickly like to highlight one of the most recent investments we have done, where especially i am super proud of. Remember, a couple of weeks ago I wrote about “What can Healthtech learn from Fintech”? We have invested in Medoma, who is touching base on several of the points discussed. If you are interested in reading about Medoma and its mission, just check either the latest Sifted article or our announcement.
Recently, I had an interesting group conversation with a couple of Web3 - founders from the states & Europe about the latest development and trends in the crypto & NFT space, concerning mass adoption. All stated, that a lot of the NFT culture is still driven by the crypto culture with an increasingly maturing adoption curve.
This is pretty much aligned with my observation and reminded me of the “Hype Cycle” graph for Emerging Tech, published by Gartner.
Compared to their model of 2021, Gartner reports that NFTs are reported as having just passed the hype, but actually, we are now into the “crypto winter”, so in my opinion, they are more in the trough of disillusionment, also driven by the ongoing discussion of their long term evolvement towards real-life use cases.
🚀 NFT market skyrocketed to a +€40bn market
However, NFTs have been the talk of the town in the crypto world for a couple of years and went full-throttle like Lewis Hamilton in 2021. Knowledge and interest in it have now largely transcended the crypto world. NFT sales volume totaled $25 billion in 2021, compared to just $95 million in 2020! But where does this development come from?
Among others, celebrities like Jay-z, Paris Hilton, Serena Williams, and Justin Bieber have their NFT collections as profile pictures and are actively driving the funnel towards mass adoption and mainstream. Some are going even one step further such as Eminem & Snoop Dog have done their VMA live gig with their Bored Apes in a metaverse adjacent infrastructure…
Despite that, we are still in the very early stages of mass adaption (as illustrated above), NFTs are mostly associated with algorithmically generated JPEGs, other graphics, or similar, with some utilities. But, one industry that seems to have seen a slight impact of disruption in the past year is the art industry. In March 2021, Christie’s sold an NFT of a collage by an artist named Beeple for $69m. In addition, by the end of the year, the entire entrance to America’s biggest art fair, Art Basel, was an ode to NFTs.
The current market downturn as a signpost for stronger use cases? 🤔
As the market refines itself in light of the market downturn, projects without a real sustainable intrinsic value or utility are being more and more wiped out of the market. Also driven by maturing market and the profile of investors tapping into it.
I am observing the market quite closely for two years and have seen a major shift in the last 12 months. The pure technology of NFTs can become a game-changer if applied in the right way and perspective. Cross border bank records, ownership management, electronic medical records…we have a large magnitude of amazing use cases, ready to be disrupted by NFTs. But to get there, we surely need to build trust, transparency, and value, to drive mass adoption.
Music NFTs as a catalyst for mass adoption…⭐️
One ecosystem that showed rather a countermovement than a slowdown in the current market was the Music NFT space, they have been growing in popularity.
🎧 What are music NFTs?
We are already seeing significant traction with music NFTs and many believe, this will be the catalyst for the next generation of use cases and also a run towards mass adoption.
But what are they? NFTs give artists a novel way to monetize their content at scale and circumvent incumbent systems. Record Labels controlling go-to-market, the music industry is notoriously difficult for emerging & indie artists (also to a wide extent of existing artists, depending on their label contracts) to break into.
One of my portfolio companies is tackling exactly that problem → anotherblock, is a marketplace where you can buy NFTs which represent fractional ownership in a song - by holding the NFT, you get a share of future royalty streaming revenue (a concrete use case of token-based utility & value beyond speculation). They successfully launched their platform in September and managed to sell out both drops at lightspeed, which is in this market quite extraordinary but also underlines my thesis on that.
What is the big potential? 💫
Music NFTs offer something more sentimental in value, they allow fans and listeners to own the tokenized works of artists. Think of them as extremely rare digital collectibles, with huge sentimental and also secondary value.
There is usually a claim on royalty rights, or licensing abilities attached. So as a collector of your favorite artist’s music NFTs, this is the best way to build a relationship with them and participate in the monetary value of the songs, through royalty payments.
An indicator of how large the potential of music NFTs is, is shown by the Private Equity’s (i.e. KKR, General Atlantic, Blackstone, etc.) which are increasingly tapping into the music space, by buying major catalogs of superstars like Pink Floyd or John Legend. They have understood the large magnitude of the so far “illiquid” asset class of music rights & ownership, which looks great in their discounted cash flow models…
But...
Music NFTs might sound counterintuitive: You already have access to all the songs you want on the DSPs. Why buy the music you can already listen to? The answer to that question is the same as buying JPEGs anyone can right-click and save. Markets, or people, find value in holding rare collectibles, including musical works.
That value is also driven by the artist and the utilities they assign to their collector fanbases - access to concert tickets, special areas at concerts, merchandise or meetups with the artist, and so on.
The innovation in the industry to date has been focused on creation and distribution, steering clear of the last frontier is what happens between them: ownership - Michel, CEO of Anotherblock
This just might be the dawn of a new era in the NFT space, serving as a home run for all stakeholders in the music industry, from labels to artists, to NFT holders, to investors - the chance to redefine ownership or artist intellectual property.
As stated in TIME magazine, “Before, your fanbase could not be in the label meetings with you. But now we all are the label together.” There is still plenty of room for disruption for music NFTs.
Considering all the opportunities that have yet to be tapped, we have barely scratched the surface of the potential of music NFTs.
But what excites me the most are the emerging opportunities for consumers and artists in web3, disrupting power away from large music labels and decentralizing music ownership. This will enable consumers to own their digitally-scarce assets with more control over their digital environment– and even a possibility to earn money along the way. On the other hand, artists can program NFTs to benefit from future transactions of their intellectual property, be even closer to their communities, and cut out intermediates capturing margins. Lastly, creating a liquid market for an asset class that so far was stamped through its illiquidity and perpetually royalty payments.
🕹 Additional use cases for Music NFTs
I wanted to go one step further and broadly think about potential use cases apart from the aforementioned structures, as music is influencing so many structures of our lives, even though it gets sometimes wrongly neglected…such as in gaming.
As we all know, the GameFi (Gaming & Decentralized Finance) surged as much as Crypto since 2020 and is now estimated to be worth more than ~€60bn. However, one aspect is getting increasingly neglected in the equation of gaming parameters → Music!
Talking to successful Gaming Developers in 🇫🇮 (European capital of gaming), music is only the last priority behind storylines, gaming infrastructure, IPs, technical utilization, or imagery. This always puzzles me, given that my personal belief is that music makes the general in-game experience more tangible and memorable, leading to larger engagement.
Thinking about “Jerk it Out” from Caesars which let me through my endless FIFA nights, or the sheer playlist of Final Fantasy VI from Nobuo Uematsu…
However, one of the main problems gaming studios face is the ROI of music purchases. They usually purchase sample packs, or aggregated audio files and modify them if they see the use and fit of those songs/snippets, etc...
But why do they do “bulk” purchases? Simply because they usually get the spot price at a discount, which represents the upside for gaming studios. This comes at a cost of not directing the search for specific audio’s, or from the artist's perspective, they are rather compensated by landing in a random aggregated package of files instead for their brand and work. This leads to an unaligned incentive structure on how music is getting sourced for games…
Change the way to source the music 🔄…
Here is the beauty of music NFTs. They have the potential to transform the curation process of music for games.
Instead of proceeding with the aforementioned process of purchasing those files, GameFi studios can simply purchase individual music NFTs, or catalogs of music more directed and tailored through music NFT marketplaces such as anotherblock. Developers could then easily plug the NFT and smart contracts into the game and the artists could receive their compensation for their curated content based on the popularity of the song in form of “streams”. This could be implemented through digital service provider mechanisms (DSP), where royalties getting collected per stream and redistributed to the artist, rather than just getting compensated for the initial purchase.
Lastly…❓
Will NFTs truly disrupt the music industry? As mentioned above we are still in the very early days, and it has to be said that a lot of “hype” around music NFTs is a direct effect of the exponential growth of algorithmic JPEGs in the last year. Yet, music NFTs provide some real value and disruption to a traditionally repressive and underserved industry. There is the unfair margin disruption and distribution of revenue, ownership of artist works held by the large music labels, uniqueness of the artist, connection to fans and so much more.
Slowly but surely decentralized music rights players will empower artists and reward them with a larger share of the pie. This solves the institutionalized imbalance of power within the industry - Michel, CEO of Anotherblock
As we have seen, there are lots of different players tackling these problems from very different angles and it yet remains to be seen which one of these platforms will find its edge to tackle the main problems of an old-fashioned industry. I am quite excited and “bullish” that we will see a major shift in the next couple of years, which will sustainably shape the next generation of the music industry.
See you in two weeks 🦄
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