Music and entertainment continues to be a huge business globally. 2021 saw double-digit growth for the global music market (18.5%). This growth wasn’t limited just to more established markets in Europe and North America – potentially highly lucrative markets in Africa, Asia and Latin America saw a wave of positive activity, too.
With most industries weathering some form of uncertainty in the last few years, the music industry diversified and grew, with the largest market (USA) growing by 9.1% across both physical and digital music sales according to the mid-2022 report from the RIAA.
As can be expected as the world transforms digitally, streaming now dominates the music market landscape. Total streaming revenue grew by 24.3% globally in 2021. Streaming accounted for 84% of music revenue in the US in 2022 and attracted 39m monthly users in the UK amounting to roughly 138bn individual plays.
Even physical sales such as vinyls have seen a resurgence after the slowdown caused by the pandemic. Revenues from vinyl albums increased by 22% in the first half of 2022 in the US. However, despite these positive revenue figures across the board, an age-old problem continues to persist – artists are still often getting the worse end of the stick regarding royalties and music rights.
How do Music Royalties Currently Work?
Music royalties can be generally described as payments made to artists (and various other parties involved) for the licensed usage of their music in various settings. These are paid by those who wish to utilise that music for commercial gain – this includes radio stations, television (in adverts and TV shows), music venues, and the most recently relevant example, streaming services.
The royalty amounts paid to each party depends on the amounts of rights that they own and the category. Rights are split at a high level into two categories:
- Composition Rights – the song lyrics, melody and other elements of a piece of music. The rights to which are automatically given at the point of composition (e.g. when it’s written down as either words or sheet music). Royalties will be paid to these rights owners based on the use of the composition (e.g. if someone uses the melody for another piece of music).
- Master Rights – when the song is recorded to audio. This is then partially owned by the artist and usually by the Record Label to which they are signed. Royalties will be paid to these rights owners when the piece of music is played (e.g. on the radio).
This creates two main sets of royalties – one set for the composition right holders, and one set for masters right holders. However, the above rights are not mutually exclusive. An artist can own the composition rights to a piece of music they made, and part of the masters rights too.
Things tend to get quite confusing trying to determine who exactly owns what rights to a piece of music, and how the royalties are paid out. Laws that govern these rights differ depending on the country, and the music has to be distributed to the various platforms, streaming services and radio stations in order for royalties to be available.
Contracts between the artist and their representative record label will have usually been established up front, but there are still agreements to be made between the Record Labels, the streaming services and other music vendors.
This opens the doorway to further intermediary companies, such as Performing Rights Organisations (PROs) that collect royalties on behalf of artists when their composition rights are triggered. Publishers also act as intermediaries between record labels/artists and the services looking to play their work (on the masters’ side).
With the contracts negotiated, (in a perfect world) the music enters the market via streaming services, radio and other media. The intermediaries (PROs and Publishers) collect the royalties and pay them out to the rights holders based on their contractual share.
All of these parties are supposed to work together to further the music industry through lucrative deals and giving the artists’ fanbase what they want – access to their favourite artists’ music. The issue is, that these parties have their own agendas, and often it is the artist that loses out despite the fact that without them the music itself wouldn’t exist.
Key Challenges for Artists
The complicated nature of music copyrights and royalties tends to benefit intermediary organisations, with artists often receiving minimal payouts for their work. Musicians in general only gained around 12% of the around 50bn in global music revenue in 2020, with the rest going to various other benefactors within the industry.
Prior to the rise of streaming services, one of the main benefactors of musicians‘ talent was the Record Labels that signed them. Through questionable promises and uneven contracts, these organisations were able to legally lock in disproportionate access to revenue generated by their clients.
Streaming services came along and changed the game – but not necessarily for artists. Spotify typically keeps 80% of the revenue generated from music available on its platform. The remaining 20% is shared amongst the rest of the rights holders, which still often includes Record Labels and other intermediaries.
Tom Allen, the Co-Founder of Curve Royalties noted that: “To generate $2 million on a single track, it would take 500 million streams at an average rate of $0.004/stream. If the artist is signed to a label, and receives, say, a 20% royalty, this makes it more like 2.5 billion streams, of a single recording.”
Whilst artists benefit, in a general sense, from a much higher level of exposure than ever before, the vast majority of them see no additional tangible benefit beyond small incentives given to them by intermediaries.
Beyond the royalties system, there’s another challenge that the whole music industry has struggled to cope with since the dawn of the internet (and possibly before) – content piracy. This affects artists and businesses across the media landscape.
Although streaming services changed the main revenue model from downloads (of MP3s) to a subscription-based system, piracy hasn’t just gone away. This Muso whitepaper claims there has been a 15.2% increase in visits to piracy websites in recent years, with the focus moving away from downloads towards illicit ‘stream ripping’ services that threaten royalty payments across the board.
The Blockchain Difference
The traditional royalties system relies on several parties working together towards a common goal (the success of the piece of music) to be effective, and this requires a high level of trust that each party is acting with this primary objective in mind. This trust can be abused in several ways and has been throughout the history of the industry.
Rather than relying on trust, the decentralised nature of blockchain allows trust to be removed from the equation altogether. A blockchain is a distributed digital database that exists across computing nodes, rather than within a centralised server system. It is not controlled by any central entity and relies on consensus across the network to make changes and updates to the ledger.
Network participants use cryptocurrency wallets to exchange value with each other, and all transactions are secured by cryptography. Smart contracts, made popular by the Ethereum blockchain, are sets of computer code that are executed when specified conditions are met – these can be used to manage transactions between participants without trust or human intervention.
Blockchain technology offers artists the opportunity to bypass many of the traditional intermediaries that exist in the industry by allowing royalties to be collected and delivered directly to the rights holders in real time, using smart contracts that anyone can scrutinise and review.
The immutability and traceability of digital ledger records give concrete proof of rights ownership. These records are updated and added to the blockchain whenever the rights change hands, so any ownership dispute can be solved quickly.
These technologies deliver unparalleled transparency that is almost impossible to achieve within the traditional royalties system. The value chain is altered in favour of the artists, the fans and the businesses that actually add value rather than simply extracting it.
Real-time, Automated Royalty Payments
A key issue with the payment of royalties is how long it takes for the artist to actually receive the money they’re owed. Oftentimes, royalty collection organisations and Record Labels prefer to wait until the royalties build up past a certain amount and pay out a lump sum.
Sometimes artists can be left waiting as long as two years to collect royalties through the traditionally established channels. There are vast amounts of data that need to be analysed to determine who is entitled to how much money, and it is usually down to human discretion when royalties are paid which invites the potential for manipulation.
Instead of relying on human actors, with blockchain-based music royalty programs, smart contracts would replace the traditional middlemen in collecting royalties and distributing them. For example, the smart contract would have, embedded in its code, the rules for execution based on identity information for the different beneficiary parties, the share of royalties, whether they hold masters or composition rights and so on.
When a piece of music is played on whichever platform, the smart contract is executed and the royalty holders each get a proportion of cryptocurrency sent to their wallet by the blockchain-based royalty platform in real-time.
Records of each micro-transaction would be added to the blockchain, creating an unalterable, time-stamped digital audit trail that the benefactors would be able to point to with complete accuracy in the event of a dispute.
NFTs and the new media landscape
NFTs are unique, non-fungible tokens secured on the blockchain that represent digital assets including music files and digital art. They’re being used across several industries to signify digital ownership and value. They can be bought, sold and traded on secondary marketplaces such as OpenSea.
These fully digital products enable revenue to flow directly between the artists and their fans, allowing artists to keep a much higher proportion of their earnings. While the marketplace platforms do represent an intermediary service of sorts, it’s much less convoluted than dealing with several intermediaries in the traditional setup.
Several web3 music studios, artists and businesses have embraced NFTs to signify ownership of royalty rights to their music products. Musicians such as Nas, The Chainsmokers and Steve Aoki have all released NFT-backed versions of their music – and Kings of Leon became the first band ever to release a whole album as an NFT.
Armin Van Buuren, legendary Dutch DJ, has gone as far as to create his own web3 fan-based community. Named ‘Armin’s All Access (AAA)’, purchasers of his NFTs stand to gain exclusive content including unreleased cuts, exclusive DJ sets and even direct contact with the artist himself.
NFTs are beginning to evolve further as Web3 technologies become more developed. Crypto artists are starting to specialise in custom artwork for new media NFTs created by musicians. These can be released as limited edition products and benefit from scarcity-induced value as collectible items, or be given as rewards for exceptionally devoted fans.
Verifying content property rights & immutable ownership details
There are several reasons why people engage in illicit activities such as piracy and intellectual property (IP) theft. For one, the proliferation of piracy sites has normalised the practice in wider society. Also, there’s often an anti-capitalist element – the feeling of ‘beating’ the big corporations that disproportionately profit from media and entertainment content.
The practice of piracy when done en masse does affect the large media corporations. Research suggests that the US alone could be losing up to $71bn in domestic annual revenues because of it. Unfortunately, the effect doesn’t end with large businesses – the artists who create the content are naturally affected, too.
Blockchain helps to offset this issue by providing unalterable digital records. Artists backing up new content by minting it as an NFT, either in part or fully, give them a digital certificate of ownership of the content’s copyright. Being able to prove this in a fully transparent way enables the content to be uploaded to blockchain-based music distribution platforms for sale with less fear of illegal duplication.
Rights can easily be tracked, no matter how many times they change hands as all blockchain transactions are natively encrypted and a copy of the ledger exists across all nodes on the network. The artists themselves can actively manage these rights, and sell fractions of them for profit if they wish without the input of Record Labels or other traditional intermediaries.
Fans can now own fractions of the rights to a track and share in the sales revenue, transforming music into a potential micro-investment vehicle. However, while we may see a boom in fan-funded music projects in the near future, it is unclear how much of a sound investment this is at present.
On-going royalty payments with content resale
This ability to track individual rights via the blockchain means that ongoing royalty payments to the original artist need not be diminished, even with the resale of content (in the form of NFTs).
The metadata contained in the NFT is updated with the record of each sale and the ‘certificate’ signifying rights ownership passes to the new owner. A smart contract can be built into the original NFT so that the original artist continues to benefit from royalties on every subsequent sale.
NFTs allow music artists to sell pieces of original work, such as a set of beats or a riff, with the intention that other artists buy that NFT and build upon the original work. Providing the NFT’s original price is reasonable, this represents a low-cost way for new artists to enter the market.
The original artist can continue to profit from any subsequent usage or sale of the resultant remixed NFT, incentivising them to create and release these smaller, inspirational works in order to further stimulate the creative environment for new artists.
The music and entertainment industry continues to thrive, but the issues of rights, royalties payments, content piracy and intellectual property theft still persist. Web3 technologies such as blockchain and NFTs are helping to rebalance the marketplace in favour of artists and are empowering audience ownership.
Blockchain is providing an immutable, distributed database of copyrights, enabling automated royalty payments to artists, and flattening the management structure of the industry through disintermediation.
NFTs are offering artists the ability to retain more ownership over their work, expand the creative landscape and provide opportunities to budding artists. For fans, NFTs represent the potential to own part of the artistic content they love and engage with and support their favourite artists in a more direct way.
Digital transformation across the industry is picking up a rapid pace. Whilst web3 is a new concept in the music and entertainment industry, and it has yet to topple the existing power structures, the potential to do so is undeniable.