# How exactly do music NFTs plan to change the music industry?

By [LazzarEnne](https://paragraph.com/@lazzarenne) · 2022-01-18

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The thread of [Mac Budkowski](https://twitter.com/MacBudkowski) is simply to great to leave on a centralized platform. It needs AR to store it for at least 100 years!

What’s the problem with the music industry? Well, artists don’t make enough money. Over 7.000.000 artists published their music on Spotify. Only 0,19% of them made more than 50k$ - a median annual US wage - from the platform’s royalties in 2020.

![Artists don’t make enough money](https://storage.googleapis.com/papyrus_images/d8bc7e8d8a8f1e9d1dc7093aa3361a0037066f266f0a54617801c755eb89141b.png)

Artists don’t make enough money

Here's the distribution of artists' Spotify earnings. Bear in mind that more than 95% of artists haven't even made $1K a year. And if that chart looks familiar, it's because it's the same Power Law that determines the popularity of books, Twitter posts, and YouTube videos.

![Distribution of artists' Spotify earnings](https://storage.googleapis.com/papyrus_images/b954a0322e5cc1f87e7b325c4797b8dde25e4f080d8cdfeb8f94ad5beca13de9.png)

Distribution of artists' Spotify earnings

Is it because of the greedy Spotify? Let’s get some numbers. In 2020 Spotify generated around $8B in revenues. And over $5B from that went to record labels & artists as royalties. When you add other costs, it turns out that Spotify is still not profitable.

![](https://storage.googleapis.com/papyrus_images/9988a096b711a807f5af8e6d79ecfce0d452b561e78b4d81e5e64bab5e0f74ac.png)

Okay, now it sounds as if record labels were the greedy bad guys. But are they? Well, they definitely have a lot of power. TOP3 labels (Universal Music Group, Sony Music Entertainment, and Warner Music Group) hold a 68% share of the music recording market.

![Music industry marches to universal beat](https://storage.googleapis.com/papyrus_images/fbc3c67470774385496fab9c910eff3f4232f4b2a5922836e8227106a3690a97.png)

Music industry marches to universal beat

How do labels exercise this power?

Through:

*   Taking 76-85% of all artists’ royalties,
    
*   Multi-album exclusive deals that tie artist to the label but let label exit the deal anytime,
    
*   360 deals that give them a share of other musicians’ gigs e.g. acting, modeling, merchandising
    

So imagine a VC comes to you and says: “You do the product, I give you some funding and take care of the marketing. And I take 76-85% of your profits”. Seems like a lot, doesn’t it?

Especially if they also say: "I want an exclusive right to invest in all the future startups you might start in the next 10 years". "And btw give me a share of your consulting and public speaking gigs as they happened thanks to my work on the startup's marketing."

Okay, but if record labels are so bad, why do even artists sign contracts with them? To better understand this situation, we need to go back to pre-2001 times.

In pre-Napster times labels:

1.  Gave you an advance to record an album.
    
2.  Organized the studio & people to produce an album.
    
3.  Manufactured the CDs.
    
4.  Distributed CDs worldwide.
    
5.  Used their relationship with the radio, magazines, and TV to make you popular.
    
6.  And they also utilized their lawyers to make sure you get paid as copyrights & relationships between different entities in the music industry have been pretty complicated.
    

So record labels had the power over the whole value chain. They were power brokers - in the era of radio, music magazines & MTV 99% of musicians couldn’t become a star without a label.

![Labels' power over the value chain](https://storage.googleapis.com/papyrus_images/0f13952616f7ee66500af0a907c52099398ffb5d26a3688a065aa70a97e2024d.png)

Labels' power over the value chain

### Then the Internet came, and labels experienced 5 big revolutions.

1.  **Napster** We knew from the past that most people wanted to listen to singles, not the whole albums. So when the 1st Napster revolution came, fans started to download songs for free like crazy. Despite lawsuits and fighting back from the labels, the trend prevailed.
    
2.  **iTunes** Steve Jobs came to the rescue and basically ended music piracy in the western world. His deals with the biggest labels let people buy songs on iTunes for 0,99$. As iPods were overtaking the portable mp3 players market, it was the most seamless way to listen to music.
    
3.  **Spotify** Daniel Ek gave the Spotify users the “All you can eat” offer where they paid 9,99$ to stream as many songs as they wanted. He also offered a free, ad-supported Spotify version, so many people who haven’t listened to the music legally now started to do it.
    
    All these 3 revolutions changed the way people consume music. But what about the music production?
    
4.  **Hardware & Software** prices going down The 2000s made almost all high-quality hardware 10X cheaper. Digital cameras, flat TVs, smartphones - all of them got insanely more powerful while keeping the price pretty low.
    
    The same happened to the music equipment & software, so musicians didn’t need 100.000$ to record an album. They could record good quality music for 5.000$. It gave musicians freedom, as they no longer needed to rely on the label's money to produce the songs. It came hand in hand with musicians sharing their know-how with the community. If artists wanted to learn more about the best hardware set-ups, software features, or the latest plug-ins to get some cool effect, they could find help on forums, Google, and YouTube.
    
5.  **Social Media** The younger generation wasn’t watching MTV, reading magazines, and listening to the radio anymore. They were discovering music on the Internet. Not only on Napster but also on this new weird thing called Myspace.
    

One of the biggest stories of that time was Arctic Monkeys that, thanks to Myspace, made their song “_I Bet You Look Good on the Dancefloor_” a #1 hit in the UK. Today Facebook, YouTube, and SoundCloud let artists grow their audience without relying on ads, radio, and magazines.

So as artists could produce music cheaper and promote it almost for free, it seems that everything should be fine, right? So how did we end up in the place where we are?

![Today value chain](https://storage.googleapis.com/papyrus_images/43639375ccd008b2dc0bc49f5fec39306b775ac79e08938982f32f489d12d873.png)

Today value chain

It turns out these 5 revolutions weren’t that good for some of the artists. Why? Here are the 5 main trends that limited the benefits generated by the revolutions.

*   Because it’s so easy to produce & publish music, artists create more songs than ever. In 2000 ca. 1.5M new songs entered the market. In 2020 ca. 22M new songs were added to Spotify. It’s 14X more songs to listen to. And the attention of the listener is limited.
    

![Too many songs entered the market](https://storage.googleapis.com/papyrus_images/49327583b32394443aecf8254aeb1fa0786ed86d300c1d887aab76ca6cf6901e.png)

Too many songs entered the market

*   People spend more time listening to music, but it’s not enough to match the growing supply. In the US, time spent by people on music grew by almost 30%. And this is data from 2017, so today, it might be even more. But it can't match the 1400% increase in the number of songs.
    

![Avera hours spent per week listening to music](https://storage.googleapis.com/papyrus_images/3bc843bf404a647746dd603e30fc4d3dd7c095a5347a34ff32c1db3791b5e7c1.png)

Avera hours spent per week listening to music

*   Music consumption is recurring, limiting new artists' opportunities to enter the market. When you watch a movie, you typically do it once. So after you see the end titles, you have the room to explore a new film. Music doesn't work that way.
    

According to Spotify, I played “Dreams” by Fleetwood Mac over 300 times last year. Every time I listen to “Dreams,” I don't test new songs. So even if I spend a lot of time listening to music, I might spend 60% of my time listening to the old hits and only 40% on the new songs.

*   Most of the music that people play isn't new. In the US, 64% of the streaming comes from the catalog - databases of songs older than 18 months. Many of them are much older than 18 months - think about the 70s/ 80s/90s bands being played by the radio and your parents.
    

![](https://storage.googleapis.com/papyrus_images/9b6636365e9e899899f1c4e4a82fccbfa2156a700666ae71957694a27d4abe82.png)

*   Music got more global than ever 20 years ago, what really counted were BIG 5 markets - US, UK, Germany, France & Japan. They were responsible for around 75% of the label's revenues.
    

In the last two decades, the music got more global and cheaper, which limited the problem of piracy around the world. Today Big5 is responsible for around 60% of the labels' revenues. On the one hand, it's good news, but it has significant consequences that I'll explain later.

So the ability to produce and promote music is both a blessing and a curse for artists. When you look at the situation in the music market, it looks like that:

1.  Almost infinite supply of the new songs.
    
2.  Demand growing much slower than the supply.
    
3.  Recurring music consumption means fans are ‘locked down’ by the older songs.
    
4.  So only 36% of the consumed music is new music.
    
5.  And your fans are dispersed around the world.
    

And here comes the labels who ask you: “Do you prefer this wild west competition and fighting for 100% of a small pie, or would you like our help and get 14-20% of a much bigger pie?”

So what do labels really offer? They help artists to cut through the noise and become famous.

Labels use their:

*   Negotiation power to include musicians on the Spotify’s homepage or the top playlists,
    
*   Global reach & market data (as markets gone global),
    
*   Marketing support (so the artist can focus on music and not manage the website, social media, and e-mail list).
    

Labels also help with complex legal deals. Music always has been used in movies and ads. Today music is also used in video games (GTA), apps (TikTok), or devices (Peloton), and labels’ lawyers can help you with the deal.

These kinds of deals are known as ‘Synchronization.’ And although it’s a small part of the music industry’s revenue, it can be a game-changer for individual artists who can get even 100-500k$ from the song being used in a movie, game, or ad.

![Global music revenue](https://storage.googleapis.com/papyrus_images/2aee015e4d0942501f4d7facfc6769e8d5454c226f2c2bb883a2c47afdbcdb62.png)

Global music revenue

Of course, labels take an absurdly handsome cut for this help. So artists tried to cope with labels’ take rate in numerous ways. Radiohead released the “In Rainbows” album in the pay-what-you-want model. According to Wired, they raised around £3M.

Wutang Clan released only one copy of “Once Upon a Time in Shaolin“ and sold it for $2M. (btw [@PleasrDAO](https://twitter.com/PleasrDAO) bought it for $4M to make it accessible to people though it cannot be commercially exploited until 2103).

Big stars made money by using their fame to promote different products. Diddy promoted his Ciroq liquor, and Kanye promoted Ye Sneakers he designed with Adidas. Some musicians went through independent labels and took the risk of getting a much smaller pie. Some musicians used Patreon but without such spectacular success. And although some of these methods worked, most of them are not available to smaller artists. If you’re not a headliner, you won’t sell your 1/1 album for 2M$, sell it in a pay-what-you-want model, or promote your products because you don’t have enough fans to buy your stuff.

So some artists tried BandCamp & SoundCloud. These platforms let smaller artists reach their audiences and get money directly from the fans. BandCamp is more prevalent among indie musicians, while SoundCloud is a place to go for rising DJs & hip-hop artists. And although BandCamp & SoundCloud have millions of users, they still can't let many artists make a living. (It's also worth noting that some artists go full guerilla, have their own e-shops and go directly to playlist curators to put their songs there). And these solutions seem okay. But this whole situation gets more confusing when you think what’s the real role of streaming for most big artists. And it’s not making money.

Most artists get around 0.004$ per stream on Spotify. But can get even 50$ per concert ticket. So artists treat streaming as a marketing machine. They want to reach as many fans as possible so they can sell the tickets and fill their arenas.

![Revenue pie for music artist](https://storage.googleapis.com/papyrus_images/f125cb72ba512cf4528e5e56f308da9b5c1b09e069ff168fe1e193a8527347f1.png)

Revenue pie for music artist

It’s a reverse of the previous models. In the past, concerts were used to promote CDs. Today it’s CDs (well, mainly Spotify) that promote concerts. That’s why artists signing exclusive deals with Tidal or Spotify haven’t prevailed. Artists want as broad a reach as possible.

But if you’re a smaller artist with a 10.000 fanbase that’s globally distributed, you can’t fill the arena. Even if you made concerts every week, most of your fans wouldn't attend them 52 times a year. Also, if your fanbase is globally distributed, you might have 1000 fans in NYC, 2000 in London, 4000 in Tokyo, 1500 in Sydney, and 500 in Cape Town. So you can’t even organize the concert for all of them. That’s where the global reach of music starts to become problematic.

And now imagine a pandemic that results in concerts being canceled. Musicians lost their primary source of revenue. Some artists had to change their jobs. Some started exploring different models, such as online concerts, but we all know it's not as cool as a live concert. But… why do artists even struggle to make money if almost all 7 Billion people on Earth listen to music? It seems like a giant market. But it’s not. The music industry is supersmall compared to tech.

The entire music label’s revenue is less than the revenue generated by AirPods. So the headphones producer gets more money than labels whose music gets streamed via these headphones. I know it sounds absurd, but here’s the chart:

![The entire music label’s revenue is less than the revenue generated by AirPods](https://storage.googleapis.com/papyrus_images/3948dfa5861ae644ff2453eafe1392aa2d6901ddccbe8029752464e666c20af3.png)

The entire music label’s revenue is less than the revenue generated by AirPods

And music industry generates little money despite the fans' love for music. Fans travel around the world to attend concerts, wear t-shirts with the band's name, buy autographs, vinyl, and play the best songs to their friends. And listen to music all the time.

![](https://storage.googleapis.com/papyrus_images/d55b9c21657ea1dd0e6c85e23a09995894d2ba7ae4ddbfbad65a0654d6caea0d.png)

So why do musicians - and the whole industry - earn that little? I believe that’s because of the poor monetization. Chris Dixon calls it the “enthusiasm gap.”

[https://twitter.com/cdixon/status/1468258841422823427](https://twitter.com/cdixon/status/1468258841422823427)

Using different terminology, music’s value staircase doesn’t have enough steps. With every step on the staircase, you should pay more and get more value. But if you’re the world’s biggest music fan, there are almost zero options to spend more than a few hundred bucks.

![](https://storage.googleapis.com/papyrus_images/010458e4e91e2e372f3e4ec0f8db351b13402496d41cbb33534412ec7e8a03fa.png)

And it matters a lot, especially for the smaller creators. If you were a blogger in 2005 and had 1000 true fans, it was hard to make a living. In 2022 you can start a Substack, charge them 10$/month and earn 10 000$/month. And the main reason why you can make money on Substack is that it’s given a super easy opportunity to monetize your readers. But Substacks don’t work in music because artists don’t publish new songs every month. And fans can get access to the whole Spotify for 9.99$.

So artists needed to find a way to deliver more value to their fans while reviving the way music was bought in the CDs era.

And here comes web3 and music NFTs that give fans unique experiences & feelings of ownership. This is one of the reasons why [@3LAU](https://twitter.com/3LAU) has earned $11M on his Ultraviolet album NFTs.

If he wanted to earn that much via the record label and got a decent royalty rate, it would mean around 8 M albums sold. To give you a perspective: Ed Sheeran’s “Divide” album that had a top hit, “Shape of you,” had 6.1 million copies sold. But isn't it strange that the artist might make more from NFTs which are some weird digital merchandise than from music itself? Not that much if you look at the movie industry. I might surprise you, but most of the money generated by blockbusters doesn’t come from movies.

When a big hit like Avengers, Harry Potter, or Star Wars hits $1B in the box office, the merchandise - toys, books, apparel games - typically brings $2-4B. And there are even more extreme examples like “Toy Story 3”.

![](https://storage.googleapis.com/papyrus_images/9608d5f5269d110e1812147a6b5cc969292370d6a0c6a215797458e3a9b116cf.png)

But why would anyone even buy a music NFT? Because it’s a digital ticket to unique musical experiences. And music is about experiences what’s pretty clear when you look at the growing concert ticket sales.

![](https://storage.googleapis.com/papyrus_images/0d2967a32a1b85e5167c1e3fee6b1e89c6c1f4c76b18c475a95dd595918c3bf4.png)

And NFTs give true fans unique experiences. Both digital and in real life.

As a holder, you can:

*   Prove that you’re a true fan (NFT in your wallet may scream, “I listened to them before they were mainstream!”).
    
*   Invest in an artist you believe in and sell the NFTs for profit.
    
*   Feel co-ownership of the first edition of the album (“Darling do I like them? I own their NFT of their first song!”)
    
*   Talk on the private Discord channel with the band.
    
*   Attend collectors-only AMA with musicians.
    
*   Listen to demos of the new songs.
    
*   Get discounts on concert tickets
    
*   Get on backstage after the concerts.
    
*   So it’s a Fanclub 2.0 (thanks Frota for this name).
    

**And it’s just the start of the exploration phase of music NFTs.**

And there are also royalties. Record labels get 75-85% of the music royalties revenue. But thanks to NFTs, artists can raise money for the album by selling the NFTs and skip g the label. And then share % of the royalties with the fans instead. They become this big music family that works hand in hand to make the songs popular. It’s like a record label but without a record label.

And even if artists miss record labels' help, they can sell some % of royalties to labels. The difference, though is that here the artist has more power than before, so he can get a better deal. And at least some % of the royalties will go directly to the fans. And royalties have already been explored from the investing point of view by big funds. Hipgnosis Songs Fund, founded by Merck Mercuriadis, a music-industry veteran who has managed artists including Beyoncé and Elton John, pays over a 4% dividend yield. And they can do it because royalties bring stable cash flow independent of the market behaviors. People don’t limit the amount of music they listen to when the economy is bad.

Funds also promote their songs to make more money. Round Hill fund bought the rights to a catalog by American Authors, partly because management thought one song’s title—”Best Day of My Life”—would lend itself well to use in films, advertisements, and videogames. The song has since been used in ads for Apple and Hyundai, among others. Bought for a mid-six-figure sum, the catalog is now worth more than $4 million.

How much can the royalties be worth? A few years ago, Bob Dylan sold his song catalog to Universal Music for $300 million. Of course, he’s an outlier, and his music is timeless, contrary to most hits. But it shows how big of a market it can be. So with music, NFTs fans act like a mix of a record label, exclusive fan club, and royalty fund. They crowdfund the new albums. They get exclusive experiences with their favorite artists. And they can promote the music and earn royalties when the songs get popular

And they’re not a “one day it may be possible” thing. Music NFTs already work. Here’s an example of [@soundxyz\_](https://twitter.com/soundxyz_) summary of their first collaboration with artists.

[https://twitter.com/Gigamesh/status/1477854860921896966](https://twitter.com/Gigamesh/status/1477854860921896966)

Here’s an example of [@join\_royal](https://twitter.com/join_royal) drop with [@Nas](https://twitter.com/Nas) that has broken Royal’s servers:

[https://twitter.com/3LAU/status/1480955256578228234](https://twitter.com/3LAU/status/1480955256578228234)

The idea of music NFTs have even been tested by Royalty Exchange - a more traditional royalties marketplace for professional investors (hence the big sums that go hand in hand with bigger catalogs).

![](https://storage.googleapis.com/papyrus_images/ae7d6d2ee9f219c1d7d3e78a87d449b8d7c6062bb6bd767113fbaf52749c256d.png)

And the scale of music NFTs can become 10X bigger than the traditional visual art NFTs. Visual art NFTs already got big. But how many people buy physical art in the real world? Not many. Very few even attend galleries.

Now compare it to music. Billions of people bought a song or streaming subscription in their life (even if it was a pirate CD sold for 1$ on the street). So there’s a multi-billion Total Addressable Market. Ofc, not everyone will buy an NFT and it’s tied to the adoption of crypto that’s still pretty limited. But it shows the potential scale of this business. Also when it comes to digital art, art can become a part of music NFTs. Like album covers or posters. So you get 2 in 1.

So how does it solve artists’ problems with oversaturated music markets? Music NFTs lets fans pay more for unique experiences with their favorite artists. So instead of paying artists $1, they can pay them $100-$10k and get something extra. From the artist's point of view, that’s revolutionary because they don’t need to have 100.000 fans to make it. 1000 true fans willing to buy a 100$ NFT once a year would be enough.

And as fans, collectors & investors have incentives to promote the music (they get royalties and they want the NFT price to go up), they might take some part of the marketing out of the artist’s shoulders. And it’s a big thing. It also helps build a more direct relationship with the fans, investors & collectors. And here lies the opportunity to get more independent from the labels.

**So, all in all, I’m very bullish on Music NFTs. I think they can grow the music industry, help the smaller and bigger artists make more money, and change the way fans interact with their favorite musicians.**

If you share my vision and would like to follow this subject, here’s the list I recommend: Services:

[@join\_royal](https://twitter.com/join_royal)

[@catalogworks](https://twitter.com/catalogworks)

[@soundxyz\_](https://twitter.com/soundxyz_)

[@AudiusProject](https://twitter.com/AudiusProject)

People:

[@3LAU](https://twitter.com/3LAU)

[@Cooopahtroopa](https://twitter.com/Cooopahtroopa)

[@Gigamesh](https://twitter.com/Gigamesh)

And if you want to read other deep dives on web3, you can follow me as well.

[@macbudkowski](https://twitter.com/MacBudkowski)

Or listen to my podcast where I talk with web3 builders about their projects: [https://anchor.fm/mac-budkowski](https://t.co/CjBicv21xB)

Sources: Information about the music industry & artists-labels relations:

[https://amazon.com/Need-Know-About-Music-Business/dp/1501122185…](https://t.co/uHNfNks2iA)

[https://open.spotify.com/episode/5nzBhhlkS1LrCD5yKSfWuy?si=O2TNmRDrTRO7rSpweaHBuw…](https://t.co/mZt1sYRYap)

Big3 market share:

[https://musicandcopyright.wordpress.com/tag/market-share/…](https://t.co/PzLnGrAzQg)

Music industry report:

[https://gmr2021.ifpi.org/report](https://t.co/0TS9AhHFNf)

Royalty funds:

[https://wsj.com/articles/investors-in-search-of-yield-turn-to-music-royalty-funds-11569204301…](https://t.co/Amv2kGBJud)

Hipgnosis dividend yield:

[https://hl.co.uk/shares/shares-search-results/h/hipgnosis-songs-fund-ltd-ord-npv…](https://t.co/3KEPt96xFO)

Bob Dylan Catalog:

[https://nytimes.com/2020/12/07/arts/music/bob-dylan-universal-music.html](https://t.co/S6YPBa9zjO)

PS: Thanks to Frota & Maciej Zielinski for reading the early drafts of this gigathread

PS2: The part about the % of the money going to the labels has been simplified as, in fact, more entities are typically involved in this process (publishers, producers, etc.). In some cases, though, labels provide all these services for the artists, so all money goes to them.

PS3: Okay, I've spent 20 minutes looking for this link, but it was worth it. For those who want to learn more about this space, here's an ultimate mindmap with web3 music initiatives created by [@Mighty\_33](https://twitter.com/Mighty_33)

PS4: If you'd like to have more nuanced web3 conversations, you're welcome to join my Web3 Talks Discord channel. At this point, it's mostly me sharing interesting stuff I read/watch/listen to, but it's going to evolve this year. Here's the link:

[https://t.co/CkmFyhIcF2](https://t.co/CkmFyhIcF2)

PS5: I've found that [@cdixon](https://twitter.com/cdixon) was calling out music NFTs in 2018 [https://medium.com/south-park-commons/measures-of-decentralization-with-chris-dixon-88c12ee36c49…](https://t.co/uWUTr5tZ7V)

![](https://storage.googleapis.com/papyrus_images/9f15fe15dc44031c4f7f8e10dc429f701e5656dc9fc42b85a568b3113e3fe757.png)

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*Originally published on [LazzarEnne](https://paragraph.com/@lazzarenne/how-exactly-do-music-nfts-plan-to-change-the-music-industry)*
