How Blockchain can Revolutionise the Music Industry
An investment thesis for blockchain and music.
Introduction
The music industry faces numerous challenges in the digital age, including fair compensation for artists, complex licensing issues, and changes in distribution models. Blockchain technology could revolutionise the music industry and address some of these long-standing problems. This thesis explores how blockchain can transform the industry, examining the different stakeholders, their challenges, and the practical applications of blockchain in areas such as intellectual property and copyright management, content distribution and monetisation, fan engagement and rewards, and collaborative music creation. We’ll also discuss the opportunities, limitations, and potential for a more equitable and transparent decentralised music ecosystem.
Understanding the Music Industry
A thesis on how blockchain could be applied to the music industry needs to begin with an understanding of the music industry and its current problems, so let’s start with an overview of the different stakeholders in the music industry value chain.
Artists and Musicians are at the centre of the music industry as the creators of music. They compose, produce, and perform music, making them the originators of value in the industry’s value chain.
Music Publishers protect and manage copyrights of musical compositions. They serve as intermediaries between songwriters/artists and those who wish to use their musical compositions, negotiate licenses for the use of music in recordings, films, advertisements, and digital platforms, collect and distribute royalties earned from these licenses to songwriters, composers, and rights holders, facilitating music distribution and monetisation. They often offer creative and promotional support to songwriters, helping to develop and market their works.
Record Labels sign artists, produce and distribute albums, and promote music. They are vital in marketing and driving artists’ commercial success and usually own or control the copyright in the recording of a music track, meaning that their permission is needed if someone wishes to use that recording.
Music Distributors act as intermediaries between record labels/artists and outlets/platforms where music is distributed and sold. They manage tasks like licensing, manufacturing, promotion, and delivering music to various channels such as physical retailers, online platforms, and streaming services. They ensure efficient, widespread music distribution, helping artists reach their audience and generate revenue.
Streaming Platforms have revolutionised the way music is consumed. Companies like Spotify, Apple Music, and Amazon Music provide a platform for users to access and stream music online.
Each stakeholder currently faces specific challenges.
Artists and Musicians: One of their biggest challenges is getting discovered and building a strong fan base in a highly competitive market. With the rise of music streaming, they must rely heavily on digital platforms for exposure. Additionally, the shift towards streaming has led to concerns about fair compensation, as streaming revenue is often insufficient to sustain an artist’s career. Artists also face challenges in protecting their intellectual property rights, as copyright infringement remains a significant issue.
Music Publishers: The rise of music streaming and online platforms has increased the complexity of licensing and copyright issues. Tracking and collecting royalties across various platforms is challenging for publishers. Furthermore, the rise of independent artists and self-publishing has disrupted the traditional role of music publishers, requiring them to adapt to new business models and find innovative ways to add value to songwriters and artists.
Record Labels: The decline in physical album sales and the shift towards digital distribution have impacted their traditional revenue streams. Streaming platforms have become dominant, leading to changes in how music is marketed and consumed. Record labels now need to focus on digital promotion and curating playlists on streaming platforms to drive engagement and increase revenue. Additionally, the rise of independent artists has decreased reliance on record labels, making it necessary for labels to provide additional value and services to artists to stay competitive.
Music Distributors: The rise of digital music consumption has sharply reduced physical sales, pressuring distributors to adapt their business models and strategies. The proliferation of streaming services has intensified competition and fragmented the market. Distributors must navigate complex licensing agreements and negotiate deals with multiple platforms to maximise their artists’ reach.
Streaming Platforms: While streaming platforms have revolutionised music consumption, they face challenges such as fair compensation for artists and songwriters. Many streaming platforms have faced criticism for paying low royalty rates, hindering artists from earning a sustainable income. Additionally, they must navigate complex licensing agreements with record labels and music publishers to secure streaming rights. They also need to innovate and adapt to shifts in consumer preferences and technological advancements to remain competitive.
These real problems plaguing music industry stakeholders aren’t easily or quickly solved by introducing music NFTs as a new asset class or format for musicians to “sell music directly to fans, cutting out intermediaries,” as early blockchain music experiments have tried. Mostly, these problems affect music content that’s already in the market, and as long as the majority of listeners’ music consumption comprises the existing back catalog of musicians, stakeholders have little incentive to shift to a new paradigm while these problems remain unsolved for current music assets.
Use Cases of Blockchain in the Music Industry
With an understanding of the challenges, let’s dive into the practical use cases of blockchain in the music industry.
Intellectual Property and Copyright Management
The most common challenge for all stakeholders in the value chain is rights management, and blockchain potentially offers a practical solution for automatic rights management. By using blockchain-based solutions, artists can timestamp and authenticate their work, creating an immutable record of ownership, which helps ensure they are credited and compensated for their creations.
The next stage is to track the usage of their copyrighted works. Where usage occurs on non-blockchain platforms, this may require oracle-based or song recognition solutions. With accurate usage data, self-executing smart contracts (with licensing agreement terms coded directly into them, and running on a decentralised and transparent blockchain) can automatically enforce licensing agreements by executing royalty payments based on predetermined conditions, such as the number of streams or downloads, and distribute royalties to appropriate stakeholders, ensuring all rights holders, especially artists, receive their fair share of revenue generated from music sales or streams, potentially even in real-time.1
Even without cutting out intermediaries, managing music rights with blockchain could significantly reduce administrative costs associated with rights management and royalty distribution, streamline payment collection, and minimise uncollected payments (i.e., money left on the table).
That said, this is still a difficult problem to solve, because managing copyrights and royalties is a complex process, and implementing such a system requires collaboration and consensus among artists, music publishers, record labels, and other rights holders. Yet, hard problems present attractive opportunities for investment, and companies like Copyright Delta are working to solve this in a practical manner.
Content Distribution and Monetisation
A second broad challenge relevant across the value chain is content distribution and monetisation beyond licensing. Blockchain presents an opportunity for tokenisation of music content (e.g., tracks and albums) and enabling micropayments for artists through sale of this content. Here, ownership of digital music content can be securely recorded on a blockchain, allowing fans to buy, sell, and trade songs as they would physical vinyl records, treating music NFTs as a new medium or format for music content (like vinyls and CDs) that fans can own and consume. This differs from prevalent digital music formats such as mp3s because NFTs can represent ownership of the digital assets, and by tokenising these assets, artists can create scarcity and exclusivity, offering unique NFTs to fans, akin to fans searching for and owning limited edition or rare vinyl records.
Perhaps because the existing music rights landscape is so fraught and complex, many blockchain music companies have attempted to make headway with this second angle. Examples include:
LGND Music has partnered with Warner Music Group to release “Exclusive Music Collections” or “virtual vinyls”, unique and limited-edition digital music track collectibles, such as unreleased singles, acoustic versions, and remixes by Warner-signed artists.
Sound.xyz enables musicians to sell NFTs tied to their songs, which allow fans who own those NFTs to leave comments on the new song, in a model more akin to patronage, where fans can “discover new music and prove you were there first, and support artists by buying their NFTs,” since the songs can still be streamed for free.
Catalog, a platform for artists to mint and sell one-of-one music record NFTs akin to collectible NFT art, based on the belief that verifiable ownership of the original one-of-a-kind digital asset matters to collectors, even if the music can be streamed for free.2
But in the age of music streaming where ownership is secondary and utility comes from listening and not owning, do we really need or want to own digital music tracks? This mirrors how public art galleries provide free or affordable access to great art, and where the art world and artists are sustained by a relatively small population of wealthy art collectors instead of the mass market. While the art world has set a precedent for this, this isn’t yet the case in music, so offering one-of-one or limited edition collectible music tracks seems like trying to sell a new behaviour that wasn’t there to begin with.
Furthermore, the problem with NFTs (and tokens in general) is their use as speculation tools. While some purchase with speculation in mind, the idea of speculating on music content doesn’t naturally fit the music industry, except during the funding or investment stage, where fans fund music creation and share rewards. Here, separating ownership from music consumption could make sense. A track can be free to listen to, but owning it grants rights to valuable benefits like revenue, creating a market to get those rights into the hands of people willing to pay to own them and possibly even contribute to driving said value/revenue. (More on this later.)
Fan Engagement and Rewards
Musicians are experimenting with blockchain to create unique fan experiences and loyalty programs that offer token-gated content, benefits, and privileges. Models observed include:
Digital collectibles like virtual trading cards or limited-edition merchandise that can be owned and traded by fans. Authenticated and verified on the blockchain, these collectibles ensure scarcity and authenticity. But do fans truly desire digital merchandise, and are NFTs really solving an existing industry problem?
Tokenised loyalty programs allow fans to earn digital tokens by streaming music, attending concerts, buying merchandise, or sharing content on social media. These tokens can be redeemed for limited edition merchandise or benefits, rewarding fans for their support. Using blockchain technology, loyalty tokens can be securely stored and transferred between fans. But what advantages do tokenised loyalty programs have over traditional ones, and is the concept of selling loyalty tokens between fans meaningful in the context of music3, where loyalty and fandom have different dynamics than reward redemption systems like air miles or credit card points?
Fan token offerings such as those offered by artists like RAC, can be considered an extension of loyalty programs, letting fans buy tokens to access unique experiences like exclusive content, early access to music, limited edition merchandise, discounts on merchandise or tickets, exclusive chats, live Q&A sessions, behind-the-scenes content, fan-curated events or collaborations, and even participation in voting or decision-making processes, allowing fans to directly support their favourite artists and supposedly strengthening the artist-fan relationship and engagement.
Despite these potential (though somewhat imagined) use cases, we’ve yet to see meaningful utility that truly requires blockchain (as opposed to a traditional centralised loyalty point system) and meaningful traction from these offerings.
Collaborative Music Creation and Management
Blockchain offers the opportunity for decentralised music creation and collaboration, including funding of music creation by fans, by extending the first use case on IP and copyright management to secure and transparent rights management and royalty payment for multiple artists and contributors.
A specific collaborative use case is crowd-based music financing through the tokenisation of music rights, where artists create NFTs and semi-fungible tokens representing ownership of licensing rights to music tracks or albums. Fans and investors can purchase these tokens, providing upfront funding while artists retain ownership and control of their work. Such fractional ownership opens opportunities for fans to become stakeholders in the music they love by investing in a song or album, potentially earning royalties from its success. This enables crowdfunding and micro-investing in artists’ projects, fostering a closer connection between artists and their audience. Tokenised music ownership can be traded on decentralised marketplaces, allowing for a secondary market where fans can trade shares of their favourite songs, introducing a new revenue stream for artists from secondary sales and adding a new layer of fan engagement. This novel model could make music financing more accessible, enabling artists to fund their work without traditional record labels.
3LAU’s Royal music platform is just such an example where fans can buy NFTs to share in royalties earned by their favourite artists, positioning Royal as both a music publisher and a music rights marketplace.
“Instead of trying to cram the music industry’s tortured legacy of contracts onto the blockchain - a task so large it may be impossible - (3LAU) thinks it makes more sense for musicians to focus instead on using blockchain to distribute their new songs. ... Anyone will be able to purchase NFTs on the Royal platform that give them a partial stake in new songs - a stake that could result in royalty payments at a later date, or that could be sold to another fan or an investor. Selling those rights in the form of an NFT means musicians can sell to a much broader field of investors - especially their own fans - and also use blockchain to effectively track ownership and royalty payments.”4
Looking beyond financing to collaborative production, decentralised platforms can facilitate global collaborations among artists, producers, and creators, and enable artists from around the world to collaborate seamlessly and fairly on music projects, sharing royalties and credit in real-time. Artists can grant access to their tokenised stems and tracks (or other atomic music elements) through smart contracts, enabling creative collaborations and mashups while ensuring fair attribution and compensation by attributing royalty share based on usage in the creation of subsequent musical works. Smart contracts automate royalty distribution, ensuring contributors receive their fair share, perhaps even leveraging the composability of these tokenised music elements and introducing a new model of open-sourced music creation.
Some indie and major artists have begun experimenting with this mode of collaboration, even taking it a step further by using AI to offer their voice and other music elements as part of the mix.
Holly Herndon’s “Holly+ (launched in July 2021) offers a ‘deep fake’ vocal model of Herndon’s voice for fans to create and compose with. Alongside this is a DAO (Decentralised Autonomous Organisation) that is incentivised to curate fan-made content: works approved by the DAO can be minted as an NFT, with 50% of profits going to the creator, 40% to the DAO members, and 10% to Herndon.”
Grimes followed in May 2023 with “Elf.Tech, using AI to allow users to generate a Grimes-style work with their own inputs. In return, all Grimes asks is for tasteful use of their now-open-source talent and a 50% cut on any master recording royalties, using blockchain to help enforce the royalty split.”
Wen DeMu?
Attempts to create a new decentralised platform and paradigm for music production, distribution, and consumption often ignore or sidestep the current problems of the music industry, hoping to “reset” or disrupt the industry by creating a parallel music ecosystem (like how DeFi attempts to create a parallel financial system) that a pool of consumers who believe in decentralisation can participate in.
The crux is that crypto is about decentralised ecosystems - a different kind of industry structure. So in the same way DeFi has shown what’s possible with an alternative decentralised financial ecosystem5, can DeMu (Decentralised Music) provide an alternative decentralised music ecosystem for musicians to thrive? What might this alternate music industry look like?6 How do we move beyond the individual use cases like those illustrated above to an ecosystem with composability?
The fourth use case discussed above on “Collaborative Music Creation and Management” could be a starting point, with the participants collaborating on music creation extending to a broader set of ecosystem participants that could provide the kinds of services that traditional music publishers and record labels might offer to musicians, such as access to collaborators, vocalists, lyricists, producers, recording studios, A&R services, etc. Enabling access to these services for musicians who might otherwise lack access to them could prove incredibly valuable for the entire music industry.
We see early signals of this in blockchain record labels like Probably A Label, a collaboration between Probably Nothing and Warner Records, and Snoop Dogg’s Death Row Records, but I’d like to see this concept expanded into community music publishers, record labels, and new kinds of music companies as on-chain organisations and DAOs.
With the transformation of music companies involved in the production and management of music content and assets, other ecosystem components that could be built around this include:
Decentralised music marketplaces where artists can list their music for sale and these marketplaces can use DeFi protocols for transparent and fair revenue distribution among creators, collaborators, and investors.
Decentralised music streaming platforms that use blockchain to let artists upload and distribute music directly to listeners, granting them greater control over distribution of their music, and eliminating the need for centralised streaming services like Spotify with their complex licensing agreements and revenue distribution models. Users can directly stream music from artists, knowing that their streams are contributing to fair compensation through automatic micropayments for streaming music, allowing artists to receive fair compensation for each play.
Tools to take advantage of data ownership and transparency so that artists can access detailed analytics about their audience, streaming patterns, and revenue streams from the blockchain without relying on intermediaries, enabling artists to make data-driven decisions about their careers.
Protocols and tools for interoperability and composability of music assets so that artists can publish their music once and have it available on multiple decentralised platforms and streaming services without exclusive agreements or restrictions.
Conclusion
The true potential of blockchain to revolutionise the music industry lies in establishing a new model for music creation, publishing, and distribution through a decentralised music ecosystem. This transformation could provide artists with more control, transparency, and fairness, creating a more equitable industry.
It may not need to happen to the whole industry at once, but you do need a sizeable island of participants (as seen in DeFi) for the ecosystem to be sustainable and to generate sufficient momentum. This is also why it’s much harder for the music industry, which is much more consolidated, with vested interests more concentrated, than finance or games.
One key difference between finance and music (also relevant to games) is that the nature of consumers in music is different from that in finance. Music consumers primarily want to listen to music. Finance consumers want to make money, and this is an important distinction when considering how DeMu (and GameFi) ecosystems need to extend to and include non-financially motivated consumers as well, and where such consumers are in fact the vast majority of users.78
Ultimately, for DeMu to succeed, we need music fans and musicians to recognise the potential of decentralised music and an open web for music, and to participate in the ecosystem. We also need to build many of the ecosystem components concurrently for the entire ecosystem to have a chance to “flip” or “change state” from centralised to decentralised, and for participants of the ecosystem to reap the full benefits. If you’re building something in this space, please get in touch. We’d love to hear about it.
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In terms of cutting out intermediaries, who might this disrupt? Possibly collecting societies, and maybe some of the services currently provided by music publishers.
From their FAQ: “The contents of a Catalog record are publicly available on the blockchain. Anybody can stream it for free, and in theory anybody can download it, but only one person can own the NFT. Once a Catalog record is pressed, all other forms, copies, and remixes of that song increase its cultural resonance, driving value back to the original.”
It actually sounds like the opposite of loyalty.
Although too focused on speculation.
If we compare with current webX analogies, web2.5 music is about adding incremental value to current music use cases, while web3 music represents a fully decentralised music ecosystem.
Social is a notable exception because, as an emerging industry, its industry structures haven’t solidified yet, so users may still be willing to switch to a decentralised model.
This could be an interesting angle for another article.