The New Era of Creator Economy: Why Music NFTs Are Rising

Author: Chloe@IOSG Ventures

The Music Industry Stuck in the Mud

Aside from eating and sleeping, music should rank in the top three ways for people to relax both physically and mentally. Humanity's love for music is almost ingrained in our DNA. From a biological perspective, listening to music can reward and create pleasure in brain circuits (such as the nucleus accumbens, ventral tegmental area, and amygdala), while also regulating the production of the neurotransmitter dopamine. This is also true from the perspective of "the world is right next to us": there are many people around us who do not play games, but it is quite rare to find someone who never listens to music. The music industry should inherently have the broadest market.

In our previous article "P2E is Unsustainable, How to Find the Next Axie Infinity," we mentioned Maslow's hierarchy of human needs. Music, like games, is essentially a consumption of the superstructure in the music industry. However, data from the two industries shows that the performance of the music industry is not as satisfactory compared to gaming. The total revenue generated from online music works and live concerts still falls far short of that of the gaming industry. The consumption models of music and games are different, and directly comparing them with data may not be entirely accurate, but we can still see some of the traditional music industry's dilemmas.

Data source: https://www.statista.com/statistics/1132706/media-revenue-worldwide/

From the above chart, it is clear that not only the "creator economy" related industries, whether literature, music, video, or social media, face some dilemmas, which can be considered common issues, such as:

• Insufficient income for creators
• Outstanding works being overlooked
• Normalization of copyright disputes

This article is the first in the "Creator Economy" series, focusing on the music industry, discussing why the traditional music industry is in trouble and how the advent of blockchain can empower the music industry.

The core issue is simply the "people" issue. Music creation requires material support; it cannot be entirely "powered by love." The primary economic model of the traditional music industry is the "streaming model." Simply put, on Web2 music platforms like Spotify or NetEase Cloud, every time a song is played, the creator earns a meager income. According to an INSIDER report, a song on Spotify generates $0.003 to $0.005 each time it is played. This means that a creator needs 250 plays of the same song to earn one dollar. Moreover, this dollar has to be divided among the platform, music companies, and other copyright holders, leaving the creator with an even smaller amount. This makes it very difficult for non-"top-tier" singers and small musicians to benefit from it. Additionally, the promotion and marketing of music require a significant amount of manpower, resources, and finances. Without the help of music companies, individual musicians, even with good works, find it hard to have their "day in the sun." The saying "gold will always shine, and effort will always be rewarded" seems overly idealistic in today's music industry.

Dawn - Music Tokenization

The arrival of blockchain has brought hope to the traditional music industry. The core of the crypto industry is "decentralization" and "ownership." Tokens can reshape production relationships and greatly empower the music industry. Simply put, the creator economy creates value, and there are different roles in the value transfer process: value creators - musicians, value transmitters - copyright companies and music platforms, and value recipients - listeners. The value creator is undoubtedly the most critical link and should receive the most economic returns. However, in the traditional music industry, the vast majority of profits are pocketed by copyright companies or streaming platforms, which is an unhealthy and inefficient production relationship. With the help of tokens, the Web3 music industry has more efficient and reasonable economic models than the "streaming model." It can reshape production relationships, reduce the importance of intermediaries, and allocate more revenue to value creators.

Recently, many music projects have emerged in the crypto industry, and their economic models can be divided into four main categories. Some projects adopt a single model, while others are a mix of several models.

1. Streaming Model, Representative Project: Audius

Audius's economic model is essentially no different from traditional music platforms; it is also a "streaming model." Since streaming is the dominant model in the traditional music industry, it must have its merits. Firstly, it is relatively friendly to musicians with a large fan base; secondly, both music companies and listeners are more familiar with this model. Therefore, platforms like Audius can quickly attract a large number of musicians and listeners. One of Audius's significant breakthroughs is optimizing the revenue-sharing ratio. Compared to the traditional model where platforms like Spotify and copyright companies take the lion's share, Audius has ceded platform profits, returning more revenue to music creators, which somewhat alleviates the issue of insufficient income for creators.

However, essentially, Audius has not disrupted the traditional streaming model nor effectively utilized tokens. Fortunately, Web3 music platforms' exploration of economic models has not stopped there.

Web3 applications share a common core, which is "crowdfunding," and music platforms are no exception. "Crowd" means that musicians and listeners no longer overly rely on "intermediaries." In this framework, musicians as value creators can earn most of the income. Music platforms serve as simple "work aggregators," places where creators and listeners can interact directly, rather than being dominated by industry oligarchs that take most of the revenue. Listeners also have greater choice to support their favorite musicians instead of being dictated by capital on what to listen to.

Around the core of "crowdfunding," three innovative economic models have emerged.

2. Pure NFT Model, Representative Projects: MintSongs, Pianity

Pure NFTs refer to NFTs that do not represent copyright, thus do not generate any income other than secondary market price differences. The essence of pure music NFT platforms is "fan economy." This is my favorite model, but it is also the one that investors find most challenging to understand. Fans are different from investors; investors seek returns, while fans are "powered by love." For tangible financial returns, fans care more about the "emotional connection" that NFTs bring as fan merchandise. Pianity has precisely captured this fan psychology.

This model has many advantages. Firstly, the form of NFTs is unrestricted and very flexible; both quantity and price can be determined by the musician. If a musician has a group of "die-hard fans," and these fans are willing to pay a high price for NFTs, the musician can choose to issue limited high-priced NFTs. If a musician does not have many "die-hard fans" but has high "general popularity," they can issue a large number of low-priced NFTs for casual fans to "tip." This achieves "third-degree price discrimination" in microeconomics—setting different prices based on varying demand elasticities to capture more consumer surplus, bringing more income to musicians. Secondly, pure NFTs do not involve copyright distribution, so they do not directly compete with traditional streaming platforms. Many "top-tier" musicians may be reluctant to disperse their copyrights. Therefore, the pure NFT model has higher operability and feasibility. Most importantly, pure NFTs are the most beneficial model for niche musicians. Imagine a musician with only 10 fans; on traditional streaming platforms, the income generated from these 10 fans' listening volume can be negligible. However, if these 10 fans purchase the musician's NFTs on Pianity, it can bring a more considerable income to the musician without affecting their copyright earnings.

Image source: Screenshot from Pianity's official website, showing musicians who will soon join the Pianity platform. Token holders can vote to decide the order of musicians' onboarding.

Additionally, Pianity can somewhat address the unfair promotion mechanisms of traditional music platforms. On traditional music platforms, the songs featured on the homepage and daily recommendation lists are determined by the platform. Pianity has handed this power over to the listeners. By staking votes, listeners can decide which musicians can occupy more display resources or can join the platform first.

3. Copyright Distribution Model, Representative Project: Royal

As the name suggests, this model uses NFTs or tokens as carriers to distribute copyrights to investors, who gain a portion of the song's ownership. This model has more economic significance. Investors spend money to purchase the future expectations of songs; if a song becomes popular, they can obtain higher future cash flows. Compared to letting music platforms and copyright companies earn the price difference, this model allows musicians and investors to earn most of the income. However, implementing this model comes with more challenges, such as compliance issues related to copyright, how to efficiently pool and distribute profits, etc., which still require further exploration. Royal is the "leader" in this field.

4. Crowdfunding Model, Representative Project: Ocean Floor

With the rise of "crowdfunding economy" in mainstream industries, people's understanding of this concept has become clearer. In simple terms, it means that fans, companies, or the creators themselves initiate crowdfunding to provide financial support for music creation. Creators can choose various ways to give back to listeners, while fans who directly invest in music works can gain a significant sense of "participation." This model places the expenditure upfront and the return afterward; music works can only be heard after completing the crowdfunding, requiring the design of effective incentive and governance mechanisms.

SocialFi - Looking to the Future

Why is the music industry and the entire creator economy crucial? We believe that the creator economy, which carries social attributes and is based on social platforms, presents a significant opportunity for the crypto industry to move towards the mainstream.

• Firstly, traditional industries have many pain points caused by excessive centralization, and blockchain, as a powerful tool with "decentralization" attributes, can genuinely empower industries and achieve transformation in production relationships.
• Secondly, social interaction is an indispensable attribute of humanity. Music platforms can serve as bridges to convert more Web2 users into Web3 users. To achieve this goal, we have higher expectations for Web3 music platforms: they should innovate economic models, reshape production relationships, and solve the dilemmas of the traditional music industry; new music platforms should have unique market positioning and precise target customer groups.
• Finally, a frequently overlooked yet crucial point is optimizing user experience to reduce churn rates. Currently, most Dapps have complex operations and lengthy processes, making it challenging for Web2 users to enter. Only products that are easy to operate and provide a smooth experience can attract a large migration of Web2 users to Web3, pushing the crypto industry towards the mainstream.