In the following MBW Op/Ed, Gregor Pryor, Head of Entertainment & Media at law firm Reed Smith, explores the future of Web3 investment in the music industry using insights from the second edition of his firm’s legal whitepaper, the Reed Smith Guide to the Metaverse.
The Web3 community’s continued interest in the music industry shows little sign of waning, and the love affair is starting to feel mutual.
Whether it’s Crypto.com signing a deal with Fantagio, MTV creating a virtual space in Roblox as part of a whole new category of awards, or the new Muse album, Will of the People, being released as a chart eligible NFT, it feels like we still only have our toe in the water of the vast pool of potential use cases for blockchain, the metaverse, cryptocurrency and decentralised organisations.
A few years ago, we were learning about Web3 and how it could influence the future of the music industry. We now know better the answer to that question. What everyone now wants to know – particularly those who have been spending huge capital on music rights acquisitions – is how big will it get?
Some commentators disagree about what Web3 even is. Elon Musk thinks it’s ‘more marketing than reality’, while Jack Dorsey tweeted that the space will ultimately be owned by VCs who don’t favour new business models.
Those who view Web3 dogmatically believe that these next wave of online technologies have the potential to heavily disrupt and disempower ‘big tech’ companies, giving control back to users and the Internet community.
This is interesting not least because the traditional music industry has a love/hate relationship with big tech.
Some would say that the positive vibes derive from the vast sums of money injected into the industry, while the root of the negativity arguably derives from the lack of rights holder control of the distribution network. Does Web3 amplify or change those sentiments?
So, what at do we mean by Web3?
The era of ‘Web1’ consisted of a network of static pages where the vast majority of users were consumers, not creators.
‘Web2’, the version of the web we are familiar with today, is largely based around the idea of ‘the web as a platform’ and heavily relies on user-created content (think YouTube, Meta and TikTok). Large swathes of Internet properties are controlled by large, international, ‘centralised’ entities; Web3 has the potential to be decentralised.
This means that ownership of property, environments, communities and even currencies can be distributed amongst builders and users. There are a number of other core principles that have guided the creation of Web3. For example, many applications are permissionless, with everyone having equal access to participate and no one getting excluded. Web3 can also be ‘trustless’, meaning that it operates using incentives and economic mechanisms rather than relying on ‘trusted’ third parties. Perhaps most potently, it has a native payment structure – cryptocurrency can be used for spending and sending money online rather than relying on the outdated infrastructure of banks and payment processors.
The core innovation that underpins Web3 is blockchain. A blockchain is stored collectively and updated by all participants (each a ‘node’) on the network. Using cryptography, each data block of transactions is linked, forming a chain of records, making them secure and difficult to change.
This technology also facilitates smart contracts. These are not contracts as lawyers typically describe them; rather, they are programs stored on a blockchain that run when predetermined conditions are met. In other words, if X occurs, then Y happens. Blockchains underpin cryptocurrencies. They also underpin NFTs. The ownership of an NFT is recorded on a blockchain, and subsequent owners can be recorded each time the unique digital asset is bought and sold.
Web3 and the music industry
The potential of these technologies is vast – transferring control from centralised entities to builders and users can act as a democratising influence on content consumption.
In the music industry, this can manifest in various ways. Some believe that it potentially creates more sovereignty for artists and greater opportunities for fan-to-artist engagement. Rather than relying on intermediaries, such as distributors, managers, digital streaming service providers and accountants or lawyers, artists can interact and transact directly with their fans. Dropping NFT bundles of content with exclusive recordings, digital artwork and lifetime concert passes can be done with the click of a button.
Others believe that Web3 can cause catastrophic damage to the digital models that have created huge value for the industry, driving soaring valuations in copyrights and dramatic growth in revenue for labels, publishers and PROs.
Some believe that one of the innovations that has the potential to truly disrupt the industry is tokenised ownership of royalty streams. Web3 companies are exploring tokenising the underlying copyright or royalty income streams and allowing fans to ‘invest’ in new music in return for a fractionalised share of the royalty revenue received when the music is exploited.
Commercial and legal challenges
Of course, with these technologies still at a nascent stage, there are a number of obstacles to their widespread application. Accessibility is a key limitation, with transaction costs (known as ‘gas’) being prohibitively expensive to many. Education is also needed to help consumers learn new mental models than those they are accustomed to with Web2. And, most critically, the goldrush caused by cryptocurrency speculation has caused volatility and uncertainty for many. Certainly, there is plenty of criminality in the Web3 world – regulators and lawmakers are rushing to keep up with development.
This leads us to the legal challenges in this space. With vast sums at stake, and confusion about the responsibilities and duties owed by different players, Web3 matters are becoming the subject of extensive litigation. The Web3 world is undeniably riddled with cybersecurity and fraud issues. Only this month, Solana, a public blockchain used by a number of Web3 music platforms was hacked. Thousands of Solana wallets were subject to the attack, estimated to be worth between $5-$10m.
“Music rights are inevitably under discussion in the Web3 environment. Many artists will take the view that they have the exclusive right to issue their music as an NFT, for example, while most record labels will have a somewhat different view.”
Music rights are inevitably under discussion in the Web3 environment. Many artists will take the view that they have the exclusive right to issue their music as an NFT, for example, while most record labels will have a somewhat different view.
Decentralised technologies challenge the way we conventionally protect IP. Add in AI-generated music, for example, which further stress tests our existing copyright laws, and you have a heady mix. Whilst traditional laws were developed to protect the personal expression, authorship and originality of works created by humans, the metaverse perhaps offers an entirely new format for creativity with a new distribution network.
Further concerns relate to the fluctuating value of cryptocurrency and the general public’s lack of understanding of the risks. As one example, are NFTs considered legally to be investment products or securities? If so, anyone offering them will have to comply with stringent financial regulation. It is clear that regulators consider investment in crypto-assets to be highly speculative and are watching this space carefully. Companies that are operating in Web3 therefore need to ensure they are aware of the evolving regulatory landscape.
These issues serve as a reminder of the risks that are inextricably connected to the opportunities of Web3. Whilst the potential is apparent to the music industry, offering a welcome alternative to a model dominated by big tech, to realise that potential, players – whether artists, streaming platforms or Web3 companies – need to carefully assess their approach before diving in, avatar-head first.
Music Business Worldwide