How NFTs Will Disrupt the Music Industry

By: Jason Levine  |  December 19, 2021
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By Jason Levine

Record labels have long been criticized as manipulative for their treatment of young musicians, often offering flashy upfront payments to distract the artist from the lopsided deal they are usually signing. In 2019, the Taylor Swift masters controversy brought this issue to the headlines, and artists like Russ and Young Dolph received attention due to their independent come-ups. While there is little incentive for the record labels to change their contract structure, non-fungible tokens (NFT) may offer a new way for artists to finance their career advancement and earn a living.

First, let’s understand how an average record deal works. A label provides an initial signing bonus and fronts the money for recording and marketing. They usually give the artist between 10% and 25% of the revenue from album sales and streams, called a royalty payment. However, these royalties must pay back the label for the money provided upfront before it reaches the artist’s pocket. This balance also rolls over to other projects in multi-album deals. In return, the label gets the remainder of play revenues, often the right to demand more projects in future years, and full rights to the master recordings, or “masters”. 

Ownership of masters is the most controversial aspect of the contract. The owner of a master recording has full rights to sell, license, and reproduce the music. The owner also has the right to prevent others from using it, including the original artist. For example, when Scooter Braun purchased Taylor Swift’s masters from her former label, he prevented her from using the material at the American Music Awards and in her Netflix Documentary. Swift lacked this right despite being the performer and songwriter of all her music. Since this story was released, other artists have revealed similar problems, and the public has repeatedly spoken out against record labels’ behavior. 

So, what is an NFT, and how can they provide new artists another avenue to raise capital? An NFT is a unique, digital asset with proof of ownership stored in a public digital ledger. NFTs offer artists the opportunity to crowdfund their careers while retaining ownership of their music and rewarding early supporters.

Here is how new artists with small followings can independently fund their careers: artists can  release a limited number of NFT collectibles to their fanbase for $10-20 each. This collectible could include album artwork, a copy of the album, or a small royalty. By selling 10,000 of these collectibles, six figures can be quickly raised to invest in recording and marketing. There is no need to make connections, negotiate contracts, or sell your masters. Instead, the fans become the record label, and the artists retain all their rights. 

Furthermore, artist-to-fan distribution strengthens fan support. Instead of streaming on Spotify or buying a concert ticket from Live Nation, one can purchase a song or concert ticket directly from their favorite artist. The artist can also capitalize on this bond by including access tokens in a few random NFTs. These tokens could grant access to a private Discord chat with the artist, VIP concert tickets, or a meet-and-greet. This offers an additional incentive for fans to invest and would generate a lucrative secondary market.

Now, why would an artist care about secondary market sales? One of the most valuable aspects of NFT technology is the ability to include a royalty clause in the NFT code. This means an artist can specify that they will receive a specific percentage of all revenue from the secondary market sales of their collection. Since the NFTs cannot be counterfeited and royalty payments are forced by a public computer code, the ability to generate value as an NFT creator is much higher than the alternative of physical goods. 

Even for those without access tokens, the value of original NFT collections will presumably rise, like any collectible, when an artist reaches celebrity status. This generates value for the artist and their early supporters. Buyers of the first collection will own valuable collectibles, and the artists will earn royalties when they are sold. Record labels thrive by finding the next big artist early, but now, this role is transferred to fans. NFTs incentivize music consumers to find new artists to invest in and promote. Since the investors are also consumers, the NFT sale is a form of marketing itself. 

However, there are some potential issues. NFTs may eventually become the perfect solution, but the technology is new and still has much to prove. Some NFTs provide exclusive access, but today, most are nothing more than an image or song that anyone can access. Therefore, they only offer virtual bragging rights and are often bought by wealthy enthusiasts. One could argue that many people spend time and money earning virtual bragging rights such as Fortnite ‘skins’ or MyCAREER upgrades in the NBA 2K video games. However, it is difficult to separate the signal from the noise during the blockchain revolution of the past few years.

As the music business is publicly disparaged and the blockchain industry continues to flourish, we are in the midst of a perfect storm for industry disruption. NFTs have serious potential to change how music careers are started and how musicians are paid. The increasing number of functions that NFT technology provides make NFTs the best alternative to traditional music contracts and may eventually render them obsolete.

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