NFT. A mere three letters with enormous impact and potential. At its core, an NFT, or non-fungible token, is a digital asset whose authenticity has been certified on a blockchain.
The term “non-fungible” translates to one of a kind; in other words, an NFT is a unique asset that cannot be replaced. Think of it like this: If you own the original painting “The Old Guitarist” by Picasso, only you can own it. Other people can own a print, but only one person can possess the original.
NFTs work the same way. Only one person can be the owner of a specific NFT. Take for example, the sale of Beeple’s Everything: The First 5000 Days, for a whopping $69.3 million. Only one person owns the NFT—here, cryptocurrency entrepreneur, MetaKovan.
You might be asking why someone would be willing to spend millions of dollars on an intangible, essentially “invisible” asset. Answer: Exclusivity and fan loyalty.
If you’re a die-hard Kings of Leon fan, you can now own their NFT album, When You See Yourself. But you had to act fast. Artist Grimes recently sold $5.8 million of NFTs in just 20 minutes, and DJ 3LAU sold an NFT album for $11.6 million. American DJ and music producer Steve Aoki also got in on the trend and it’s not stopping there.
NFTs can essentially be anything—their potential seems limitless, but most recently, NFTs have been associated with digital art, music, and tweets. An artist can create multiple NFTs of a work, or one.
NFTs are bound to have massive monetary and social impacts on the entertainment world, but how a work’s intellectual property will be affected has yet to fully be developed.
What is certain is that this novel digital world has the potential to provide artists with more control over their creations and build a platform to better track music royalties. Artists are using NFTs to monetize their craft. This is just the beginning.
Music Copyrights and Royalties
Before diving into NFTs, it’s important to understand how music copyrights and royalties work. Here are some fundamentals:
Songs have two copyrights—one for the composition (i.e. lyrics and melody) and one for the sound recording (i.e. the “master”). Traditionally, although not always, composition copyrights are managed by publishing companies and sound recordings are managed by record labels.
In a standard music publishing deal, a songwriter assigns their copyright in a song to the publisher, who allocates a portion of royalties to the songwriter and keeps a portion as compensation for licensing the works, registering the songs with performance and mechanical rights organizations, and more. Sound recording copyrights are typically controlled by a record label, which may promote the song, collect and distribute royalties, and provide an advance to the artist, among other things.
But often artists only get a small fraction for their creations. While artists earn a percentage of their song royalties, they usually don’t own the copyrights outright, limiting their royalties. Also, there are several hundred million dollars in unclaimed royalties (i.e. “black box money”) because of the inability to trace a publisher or songwriter.
This happens when DSPs (digital service providers—think, Spotify) cannot find the artists to whom these royalties belong. In February, the Mechanical Licensing Collective (MLC) announced it had received over $424 million in accrued historical unmatched royalties from DSPs.
Now that the MLC has tracked unmatched royalties, they are better equipped to compensate artists. This is a huge accomplishment for the music industry—although it was a months-long effort to get there.
But NFTs are catching up and changing the landscape. They not only provide artists more control, but also the ability to track where royalties should go—and perhaps more quickly.
NFTs Are Saturating the Music Space
Music recently earned itself a front row seat in the NFT game. In March, recording artists Kings of Leon released the first-ever NFT album, which in the first week of its release generated upwards of $2 million.
Profits included album sales and sales of audio-visual tokens like “Cherry Echo.” Shawn Mendes also recently sold virtual NFT “genies” of himself. Artists are not only monetizing their songs, but also digital “merch.”
Additionally, NFT companies are forming whose sole mission is music sales and copyright tracking. Bluebox uses blockchain to manage music copyright information. Its mission is for artists to “reclaim missed monetization opportunities…and sales of future royalties.”
Bluebox allows creators to register copyright, publishing and mechanical splits at the time of creation using smart contracts, which instantly copyright the content. Bluebox will divide each song “into 100 NFTs, representing 1% split of that song’s copyright and half of them will be sold to the public.”
Lee Parsons, Bluebox’s CEO, told Music Business Worldwide that Bluebox could “spark a copyright sale revolution amongst fans, who will be able to buy pieces of songs and recordings before their favorite artist hits the big time—and then reap the rewards of this investment down the line.”
Artists are already in on it. Taylor Bennett, brother of Chance the Rapper, and UK artist, Big Zuu, are selling 75% of the copyrights to their upcoming records on Bluebox, keeping 25% of the copyrights for themselves. This platform allows artists to take more control over their IP and allows fans to own a piece of it. Bluebox appears to be the first of its kind but it’s likely more companies will follow.
NFTs could become the new industry norm, as artists will be incentivized to use the marketplace as a way to capitalize on their craft. But record labels and publishers will likely still have an important role to play. We’ll all have to stay tuned to find out.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Carly A. Kessler is an attorney with Robins Kaplan LLP in New York. Her practice focuses on entertainment and media, intellectual property, and business litigation.