The Soft Fork Bulletin Issue #2

NFTs, WTF? DIY!

“I didn't have time to write a short letter, so I wrote a long one instead.” — Mark Twain (disputed)

After drafting the body of the newsletter below, in which I try to answer the question, "Will NFTs revolutionize the music industry?", I did a quick Google trends search based on a hunch, and here's what I discovered:

Google searches for "NFT" peaked in late January of 2022, and for a brief period of time, they were actually more common than searches for "Cryptocurrency." They've declined a lot since then, and they're back to 2021 levels, and that could mean the world is moving on, that the NFT hype is dying, and that what follows may be a classic case of striking after the iron has cooled. Dead horse!

But since I care a lot about both music and blockchain, and since I am interested in analyzing fundamentals rather than trends, I decided to persist, to finish writing down my thoughts, and to share them with you, dear reader, in this, the second installment of the Soft Fork Bulletin. 

So… will NFTs revolutionize the music industry? TL;DR: I'm skeptical. I think NFTs work great on a virtual merch table, but I don't think they're sufficient to save struggling artists, to topple streaming platforms and major labels, or to upend the status quo. 

My argument, in 5 points: 

1. NFTs aren't a new recording format

Each new recording format introduced over the past few decades has made it easier and cheaper to release and distribute music.

• Vinyl records allowed artists to use a single master recording to mass produce copies and sell them to fans, but creating vinyl records requires massive lathes and presses, which means you have to pay a plant to do it, and vinyl is heavy, fragile, difficult to ship, and relatively expensive. 

• Cassette tapes were cheaper, smaller, and lighter, and more importantly, you could buy blanks, and dub onto them. Anyone could make copies of a master recording, no pressing plant involved. That said, dubbing (even "high-speed dubbing") was a slow, slow process, so it was hard to scale production in your bedroom.

• CDs were cheaper still, and quicker to burn, but like records and tapes, they're physical objects and there's still an overhead cost to produce them, and once you do, it can be hard to get them out into the world. 

• mp3s solved the scaling problem, and eliminated the need for physical distribution entirely. They opened the door for streaming, which we'll get to in a minute…but first, 

In addition to making it easier and cheaper to release and distribute music, each new recording format also democratized access to the production of music.

• To record Abbey Road, the Beatles used 1-inch 8-track reel-to-reel tapes, which required a desk-sized recorder, a two-ton console, and walls of gear to shape sound. Expensive! Generally, out of reach!

• In the 80s and 90s, consumer cassette tapes led to the creation of 4-tracks, which provided budget access to a rudimentary tabletop recording suite. Bruce Springsteen used a 4-track to record Nebraska in his living room; punk rock bands in Nebraska used 4-tracks to record songs about Reaganomics and skateboarding in their living rooms. Lo-fi, but pretty accessible! 

• In the 2000s, digital audio workstations, which write data to hard drives, eliminated the need for tape at all. Over the years, computers improved, writing data to drives got cheaper and cheaper, and more and more of the recording process was handled by software rather than hardware. 

Today, everything artists need to create and release high-quality and/or innovative recordings is highly available in a single, internet-connected box. You want to track a song about skateboarding inspired by the Nebraska hit "Johnny 99"? You can do it on your laptop! You want access to all the gear the Beatles used at Abbey Road to make it sound like "Come Together"? Just download an Abbey Road plug-in! You want to get it out there so your fans can sing along? Upload it to your website, to Bandcamp, to Youtube, to Spotify. Instant worldwide distribution! 

The distribution of recorded music is already wide open, and the means of production become more accessible every day. But I realize I am writing this from a position of relative privilege, and that there is still room for cost barriers to come down. Do NFTs help make that happen faster? In a word, no.

Here's a fact that you, dear reader, are likely aware of, but that comes as a surprise to many casual observers with limited understanding of blockchain: audio NFTs don't actually store audio. They live as data entries on a blockchain, but blockchains are distributed ledgers, databases duplicated across dozens, hundreds, or thousands of independent computers, and they require complex consensus mechanisms to allow those computers to validate and agree to changes to that database. They are, by necessity and design, relatively inefficient for data storage, and the reason to write to them is to create a censor-proof, trustless record of transactions when a censor-proof, trustless record of transactions is absolutely necessary. 

Generally, the data stored on-chain is optimized to be as small as possible because of the cost and complexity involved, and…media files are too big. Way too big. So you can't actually listen to an NFT.

2. NFTs are a new form of merch

When a fan buys an NFT from a recording artist, what they are actually getting is a transaction, programmatically signed by the creator, that says "you have purchased this small data entry on a blockchain from me." That transaction is public and irreversible, and so it does prove a commercial relationship exists between the artist and the fan. As an added bonus, that transaction can contain some metadata that links to a non-blockchain media file, like a song, but that off-chain content isn't censor-proof, trustless, or irreversible. 

The NFT you buy from your favorite artist will persist as long as the blockchain network it's issued on does, but in 5 years, or 5 months, or 5 minutes, if your favorite artist decides they hate the song and want to take it down, or they sell their catalog to a major label, or they forget to pay their hosting service, the link it contains may 404. Generally, the audio linked to is also available in the wild, independent of the existence of the NFT, and the link you click doesn't provide a different level of access or experience. The NFT, in other words, doesn't impact the existence or availability of the recording: it's just an extra layer, imposed on top, tenuously connected at best.

That said, maybe the proof of a commercial relationship it provides is worth something to you? It shows that you have interacted with an artist, or least with a blockchain account that you believe is associated with them somehow. Maybe you get some shine off of that; maybe it allows you to publicly demonstrate your support. If so, then NFTs do in fact represent something new that artists can add to their arsenal: an additional kind of merch.

Merch is important! For about 15 years, I was in bands that drove vans to tour small clubs all over, and that whole lifestyle was largely supported by selling t-shirts. I learned, as many do, that adding variety to the merch table always helps: augment t-shirts with 7-inches, stickers, patches, whatever, and your biggest fans will double, triple, quadruple down. They want to show support! Branded headbands? Sure, why not! Coffee cups with your logo printed on them? Might as well! NFTs? I'll take one! For artists, all those little pieces of merch can add up to survival. 

3. Fan clubs don't require blockchain

That said, I have now placed NFTs squarely beside coffee cups on the merch table, which hardly seems revolutionary. Is there more to NFTs, something about them that would distinguish them from, say, hand-drawn, one-of-a-kind show posters?

One argument people make has to do with the potential for NFTs to have a social utility: you buy an artist's NFT, you get privileged access to their community channels, or a chance to win a backstage pass in a raffle, or early access to new songs or special merch. Those things are great, and they can help cultivate a special relationship between an artist and their fans. But what exactly do NFTs add to the equation? Nothing. Maybe less than nothing.

Fan clubs for musicians have been around since the 1840s, and I've been a member of more than a few. When I joined the Alvin and the Chipmunks fan club, I got cool stickers and a letter from their manager, Dave; when I joined the Strokes fan club, I got a signed poster and a letter from their manager, Ryan. These days, "fan club" may sound archaic, and you may instead be a patron, or an underwriter, or an official stan, but the idea is the same: you give an artist some money, you get special perks, access, and opportunities. Today, I became a Patreon sponsor of the Underunderstood podcast, and what did I get? Access to 92 extra episodes and a special community Discord server. Granted, it's a podcast and not a recording artist, but the principle is the same. It was all done without blockchain, no NFT involved.

If you are cultivating a fan club, or a fan community, or whatever you want to call an aggregation of people who appreciate your work, creating your own database makes a lot of sense: you can collect birthdays, ages, and locations. You can use that information to send out birthday messages, understand the demographics or your audience, and decide where to stop on tour. If an NFT is the key to access your special social sphere, and you've decided to grant access based on anonymous transactions, you don't know anything about who your fans are. Is that what you want? Is that what they want?

4. NFTs don't eliminate intermediaries

Of course, for the hopeful who see revolutionary potential in NFTs, they aren't akin to coffee cups or an inefficient database for fan club management. They are keys to unlock the shackles of streaming platforms. They are slings to give independents a chance to slay the Goliath of major labels. There is a need at the heart of that hope, and it's very real. Two quotes to show what I mean… 

The first is from a Li Jin essay called "The Creator Economy Needs a Middle Class." It's from 2020, but the logic still stands:

…for content platforms, the move to digital content hasn’t been correlated with a burgeoning long tail: the top creators are massively successful, while long-tail creators are barely getting by. On Spotify, for instance, the top 43,000 artists — roughly 1.4% of those on the platform — pull in 90% of royalties and make, on average, $22,395 per artist per quarter. The rest of its 3 million creators, or 98.6% of its artists, made just $36 per artist per quarter.

The second from a Water & Music study called "Music NFT sales in 2021: What we learned"

Across the year, indie artists accounted for the majority (64%) of NFT sales, while major-label artists accounted for the minority (36%)

In section 1, I pointed out that new music formats have tended to empower recording artists, and while it's true that streaming services make it easy to upload and distribute music, it is also true that those streaming services don't pay many people, and they don't pay fairly. Everything goes to the 1%. Meanwhile, the explosive NFT markets of 2021 favored independents. So based on empirical evidence from 2021, NFTs could change things for good! Down with Spotify, up with…non-custodial crypto wallets? Not so fast.

Already, artists can bypass Spotify, and sell music (along with any and all that merch mentioned above) directly to their fans. They can record, mix, and master a song in their bedroom, upload it to a server they control, and use a credit card or crypto payment processing system to collect payments. Many do! But most end up putting their music on Spotify anyway because they feel they don't have a choice. It's where the listeners are (over 350 million of them), and it's where those listeners choose to spend their money on music. In 2020, streaming services accounted for 83% of U.S. music industry revenues. Even Taylor Swift, an outspoken critic of streaming revenue models with hordes of dedicated Swifties at her back, couldn't stick by her guns when she tried to ditch Spotify. Currently, she has 56,805,518 monthly Spotify listeners! 

NFTs may be a new kind of merch that can offer a new revenue stream to augment income from streaming platforms, but they don't move music listeners off Spotify, and they don't prevent consolidation of users around a similar platform to buy and sell NFTs. The current music NFT landscape is fragmented across competing platforms — Nifty Gateway, OpenSea, Sound, Pianity, Nina — but if the market persists, and continues to grow, then it is likely that a dominant platform will emerge. Some service somewhere will concoct the perfect mixture of user experience and acquisition strategy to kick off a virtuous cycle — fans will favor the platform, so artists will offer their NFTs there, which will draw more fans, then more artists, then more fans, etc. — and what we will likely end up with is, essentially, Spotify NFT. Same problem, new market. (Please, please, if you disagree, dig into Ben Thompson's excellent explanations of Aggregation Theory). 

The current edge NFTs give indie artists over major labels is also unlikely to last. Today, most NFTs are created by early adopters, motivated musicians with a ton of hustle who are fighting to survive, and willing to try new things to succeed. But if NFTs prove to be a consistent source of revenue, major labels, who are in the business of making money, will put more effort into minting and selling them. They will do exactly what they do today: handle whatever logistics they can on behalf of an artist, leverage their resources to make that artist as popular as possible, and take a cut every step of the way. And it is likely those tactics will help them dominate the market. 

There will be a Madonna NFT! Madonna won't set up an Ethereum account to mint it — someone with the title "Product Manager, NFTs" will — so it may not provide, you know, a direct connection to the Mother of Creation herself, but after negotiating and signing commercial agreements with Warner Music Group, Spotify NFT will feature it on the front page, add it to all kinds of curated lists, and suggest it in every feed. As it picks up press, and competes for attention with all the other NFTs in existence, the NFT marketplace will start to look more and more like the status quo. Will Kitten Dojo, the band I plan to start next week, have a chance to outearn Madonna selling NFTs? I mean, I intend for it to be a killer band, but still… 

5. NFTs are for speculators

Wait…there already is a Madonna NFT! A collaboration with Beeple no less! Sure, it's connected to a 3D rendering of her vagina, and not to a new hit single, but still, an iconic, major-label artist has entered the fray, and the headline from the NY Post article about how it's going is telling: "High-profile NFT auctions from Beeple, Madonna flop amid crypto crash."

Because in fact, there is something about NFTs that distinguishes them from coffee cups: they are designed to be bought and sold on secondary markets, just like other cryptocurrencies. In a way, they're similar to other music-related collectibles — boxed sets, limited-edition Japanese imports, Grateful Dead bootlegs — but when you issue an NFT on a network that supports smart contracts, you can actually program it so that every time the NFT changes hands, a portion of the sale goes back to the originating account. A royalty on secondary market sales! Pretty neat! 

Some view the ability to resell NFTs as a chief selling point: you can identify a recording artist you love, one whose star you believe is on the rise, and you can purchase a proof of relationship from them, and as interest in the artist grows, you can sell it, cash in on your bet, and kickback some cash to support the artist, all in a single transaction! You may even be incentivized to help spread the word about the artist in order to profit from your immaculate taste. Win, win! 

The issue with turning fans into speculators (or what I've heard called patrons plus), is that, as the headline suggests, a crypto crash can happen at any time, and when it does, it's likely to annihilate interest in NFTs, at least for a while. That seems to be what's happening now, in this crypto winter. From the Wall Street Journal, May 5, 2022: 

The sale of nonfungible tokens, or NFTs, fell to a daily average of about 19,000 this week, a 92% decline from a peak of about 225,000 in September, according to the data website NonFungible. The number of active wallets in the NFT market fell 88% to about 14,000 last week from a high of 119,000 in November.

If you're a recording artist that sold an NFT to a fan when the market was hot, you may have made enough money to keep you going, in which case congratulations! I understand how that's good for you, maybe even necessary. But what about the fan? If they spent a lot on the purchase based on a belief that they could resell the NFT, and the market dries up because of broader adverse conditions, what happens to them? I suppose you can opt not to worry about that, say it's a buyer-beware situation, maybe tell your fan to hang on until the market recovers. But at that point, are you forging a deeper connection with your fans? Or are you exploiting them? If I were an artist, I'd think long and hard about that.

So where do I net out?

• NFTs won't change the way recording artists manage communities, 

• Won't free musicians the tyranny of platforms

• Won't topple major labels

• And may turn fans into speculators, which could do some real damage

• But they are a new kind of collectible, and if you're an independent artist, you should consider adding them to your merch table! 

END!