The Advent of Music NFTs

A promising new format for artists, but will more price-conscious music fans buy in? Do they even need to?

It has been inspiring to see a wide variety of artists have success through music NFT drops. Shout out to the Web3 native platforms - Sound, Royal, Decent, Opulous, Catalog, Mint Songs, etc. - currently enabling this, especially for the emerging artist tier. Many emerging artists are making more in one music NFT drop than they would in over a year of streaming. RAC, both an artist and web3 pioneer, makes a strong endorsement for this new format in a recent impassioned Twitter thread.

Web1, which occurred as physical distribution boomed, completely devalued music copyright as Napster and LimeWire facilitated rampant file sharing. Web2 Digital Service Providers (DSPs) (e.g., Spotify, Amazon Music, Apple Music), with their paltry per-stream rates, ironically saved the industry as physical sales waned…while simultaneously doing very little for the artist long tail. Streaming income distribution tells a bleak story with 99% of artists on Spotify making less than $5k annually.

Web3 is swiftly shifting the narrative with a crystal clear artist value prop in the form of meaningful upfront earnings and a cut of secondary market sales in perpetuity. What we’re now seeing is a re-rating of music copyright that’s perhaps more in line with its actual cultural value. And, most importantly, we’re seeing a dramatic pendulum swing in favor of artists.

This is in contrast to the fan-favorable $10/mo. ‘all-you-can-eat’ environment borne by DSPs. Uncapped monthly music consumption - albeit totally disconnected from the artists we’re consuming - for the price of a burrito (not inflation adjusted): that’s a criminally good deal for fans. Compare that to the physical distribution peak in ‘99 when music fans paid, on average, $20 for an album ($34 today, inflation-adjusted) with 10-15 tracks. That’s a criminally bad deal for fans relative to streaming.

This begs the question, will music NFTs permeate beyond the crypto (rich) crowd? If so, what will the traditional, more passive music fan’s propensity to pay 0.1 ETH (~$300 today sans gas), or ~30x their monthly consumption budget, for a music NFT be?

Time will tell, but I think the answer rests on artists and their willingness to provide fans/NFT owners what DSPs don’t: More proximity to them; creative input and interaction; and potentially, an ongoing connection. In my view, the NFT needs to extend beyond Web2 royalty streams, the value of which can easily be ‘back of the napkin’ calculated by buyers.

Royalty-Based Music NFTs

Take Big Boi’s recent “Kill Jill” drop on Royal, for example, which sold $173k worth of NFTs in minutes - right on par with the cumulative streaming earnings since its April 2017 release. According to Royal, the track has “been a lasting club hit, consistently generating around 10 million streams per year across platforms into 2022.” As a purchaser in either the Platinum or Diamond tier, priced at $299 and $4,999 respectively, you’re entitled to a share of streaming royalties associated with the master recording. These rights, however, do not extend to other exploitations of the recording (ie., synchronization license in a commercial or movie), nor do they include a share of publishing royalties. This is an important distinction from catalog buyouts where acquirers obtain a more expansive set of rights that make for easier governance and active management of the catalog. Catalogs acquired outright are typically valued based on a multiple of historical annual average or last twelve months (LTM) earnings (sometimes characterized as Net Publisher’s Share - NPS - or Net Label Share - NLS - depending on the type of rights); valuations vary based on a variety of factors including catalog maturity, artist stature, and revenue stream diversity. As of 2021, Billboard reported that the most valuable catalogs were selling for ~17x earnings.

The below excel output is an overly-simplified breakdown of the ‘back of the napkin’ valuation behind the “Kill Jill” drop. Overly simplified in the sense that it doesn’t consider any decay rate, rather it just annualizes cumulative streams. Given the 5-year life of the track, my oversimplification likely ascribes a premium to the actual LTM earnings as tracks typically “enjoy prime earnings windows 18 months to 3 years after release, after which royalties begin to fall,” according to Royalty Exchange. In any case, fans on Royal are paying a ~25x multiple for a subset of the rights and income streams that catalog acquirers are buying.

It begs the question of whether the value of a royalty-based music NFT is capped by the mere fact that there is transparency in its underlying value. Whereas NFT values associated with popular PFP collections (ie., Bored Ape Yacht Club) are largely driven by their perceived cultural cachet and potential future utility in developing ecosystems, there is a tangibility to royalty-based music NFTs - for better or worse.

I recognize it’s early in Royal’s evolution, but I think fans deserve more clarity around how tracks offered on the platform are being valued so they can make more informed investment decisions. Fans don’t have the luxury of accessing and analyzing an artist’s earnings data directly from DSPs and other sources like catalog acquirers do ahead of making an offer. Royal, as the broker of these new deal types, has a responsibility to both sides of the market, and the sustainability of royalty-based NFTs depends on more transparent pricing.

That said, the value here extends beyond just the copyright as Royal Co-Founder Justin Blau says in a recent Tech Crunch article:

“First, they represent the intrinsic value of copyright ownership, and second, the emotional value of owning something scarce that’s associated with your favorite artist.”

Perhaps the multiple premium that fans are paying on Royal can be attributed to this emotional value, and is further warranted by the fact that Royal bundles additional ‘easter egg’ benefits into the NFTs. These benefits include things like virtual meet-and-greets, studio tours, and access to unreleased music. It can be argued that these items are truly priceless depending on one’s level of fandom for the artist. The artist, however, is not obligated to fulfill these additional benefits, as stipulated in the contract:

That’s not to say that artists will blatantly ignore additional responsibilities associated with their NFTs simply because they can. If anything, we’ve seen the opposite thus far as artists embrace this new model as a welcomed alternative.

Building Ecosystems

Take RAC’s meticulous and ongoing construction of his web3-fueled fan club - racOS - as an example. What began in 2017 with an experimental release of a tokenized album, Ego, has evolved into a holistic offering that provides his fans with layers of both proximity and opportunity. In late 2020, the artist launched $RAC, an ERC-20 (fungible) community token that underpins his growing ecosystem with a currency that can be used as an access key for perks, exclusive content, and direct interactions. Upon the token’s release, RAC allocated portions to his community based on their prior demonstrations of fandom (ie., merch purchases, Patreon subscriptions, and content purchases).

After multiple successful art-oriented NFT drops in 2021, RAC did his first music NFT drop in February 2022 on Sound.xyz. Whereas Royal features more major label artists and royalty-based listings, Sound predominantly services independent artists with an edition-based format that doesn’t offer ownership in the royalties of the track. The platform has quickly built real cultural resonance in pioneering a new debut window that enables artists to sell 10-100+ music NFT editions in conjunction with a listening party. These editions are uniformly, and somewhat arbitrarily, priced at 0.1 ETH, with all proceeds going to the artist. NFT owners have the ability to leave a comment on the song (similar to SoundCloud); if the purchaser sells their NFT, the comment disappears. This core mechanism appeals to certain types of fans in their desire to discover and support artists at an early stage. In essence, the NFTs on Sound act as cultural artifacts, or fandom mementos, that publicly validate this discovery and support. But will these mementos sustain their value in secondary markets, and does that even matter to collectors? I think the answer varies.

RAC’s “Sinners” music NFT drop sold 100 editions in minutes, earning him $30k+ in sales that were paid instantly. That same $30k would’ve required over 8M streams on DSPs; therein lies the potential value prop for artists that embrace web3. As an added bonus for “Sinners” collectors, RAC airdropped 50 $RAC to each holder which could be used for the aforementioned perks, thus connecting the drop to his overall ecosystem.

We’ve seen a similar mechanism from PFP collections, albeit in a reversed sequence (NFTs first, then fungible token airdrop). The connective tissue here is that there is a clear intention to build enduring ecosystems beyond just a single NFT drop. That, in my view, is a key piece of criteria when evaluating music NFTs. Does the music NFT fit into a broader ecosystem? Is there a commitment from the artist to create enduring value for the asset and its holder(s)?

Some collectors will disagree with me on this point and that’s fine. Those that view NFTs solely as cultural artifacts might say that I’m putting too much emphasis on utility and monetization potential when that’s not the point. To each their own. I wonder if Sina Estavi regrets his $2.9M purchase of Jack Dorsey’s first tweet as an artifact?

This speaks to an interesting dichotomy of thought emerging in the broader space as to where NFTs get their value, and one that’s discussed by RAC and Sound Founder David Greenstein in this thought-provoking episode of Unchained.

Catering to Superfans

Circling back to our initial question, and rephrasing it slightly: does this new format require adoption from the majority of broader music fans, which I would quantify as the 520M+ global music subs that have demonstrated a willingness to pay for music, to sustain? In short, I’m not sure it does. Rather, maybe music NFTs appeal predominantly to a smaller, more impactful subset of music fans: top-of-the-pyramid fans (ultimate and superfans). These fans are rabid consumers of anything and everything their favorite artist puts out, with their demand typically being more price inelastic.

Source: Music Biz Weekly podcast

In the continued case of RAC, his “Sinners” drop was purchased by 35 (ish) unique collectors which equates to a mere 0.00083% of his ~4.2M monthly Spotify listeners. This new model is being fueled by a fraction of the ‘users’ that web2 models rely upon.

Music NFTs represent an exciting new opportunity for artists, but with great opportunity comes great responsibility. I’m looking forward to seeing how they evolve and potentially redefine the artist-to-(super)fan relationship.