Four challenges record labels face in web3

This is part two of an explorative essay on the evolution of record labels and the role they play in web3. It was written with the expectation that the reader has a basic understanding of web3 and music industry terminology.

Music NFT platforms which have come online in the last year have been developed extremely fast, and generally prioritize a direct-to-artist approach which aligns with the core values of web3. Labels and their traditional business models are often not considered in these platforms’ development, partly by design because the platforms seek true creator ownership over their content, and partly due to what feels like ignorance on the developers’ parts. In this article, I will explore some of the challenges that record labels currently face in their adoption of NFTs as a new format for music, as well as some paths towards finding solutions for them.

1. No multi-channel distribution

The way things currently work for digital music distribution is that once a label submits a song to their distributor, the distributor packages up the sound file + metadata by following a delivery standard known as "DDEX" and sends a copy to each DSP on their delivery list for them to ingest. Each DSP stores a copy of this information, and should the label need to change something like a typo, the distributor needs to re-deliver the package, the DSP has to re-ingest the files, and in theory the update should reflect on the DSP in ~24 hours - except there are ALWAYS problems with this process and it rarely goes fast nor smoothly in my experience. It’s not a lot of work on the label’s part, but it’s a pretty clunky process for digital distributors.

This could be optimized by using blockchains - imagine the song is stored on one decentralized blockchain and every website/DSP accesses that same file - instead of each DSP having their own copy of it. No more issues with a song displaying differently on different DSPs, and a label could simply update the source file for the changes to be automatically reflected across all platforms. The artist or label could mint it themselves and have full control over the content. Doesn't that sound great?

In theory, it would be possible for music NFTs to be platform-agnostic. But in the current reality, music NFT marketplaces like Catalog only display NFTs minted through their own smart contract, for better or for worse. This means that for total representation, a label currently has to mint NFTs on each platform individually - which is too time-consuming for them. Label managers have enough on their hands already, setting up the product only once and having the distributor take care of it being displayed on multiple storefronts is the industry norm they’ve gotten used to.

Beyond platforms using their own contracts, the elephant in the room is that different music NFT platforms tend to use different blockchains - so which blockchain should you mint your song onto in order for it to be the most widely accessible? While discussing this topic with a friend, he brought up an interesting solution; for someone to develop a blockchain specifically for music, with the end goal of it being adopted by the majority of the music industry. It could be an on-chain database of all recorded music, detailing the rights holders of each song and the preset license fees for their commercial usage. Any user or platform could freely access it and easily pay a set tariff of their use of the music on it. Wouldn’t that be something?!

Because this is so new and so complex, no distributor has stepped in yet to say “we’ll deliver your music as NFTs to all the music NFT platforms out there”. It’s part of the roadmap of some web3-minded music distributors such as Unchained, but I’ve yet to see it in action. The good news is that it’s possible, and I’m excited to see how this develops as it’s currently a barrier to wider industry adoption. Meanwhile, most treat NFTs as experiments that sit outside of their usual DSP deliveries, and don’t mind doing exclusive drops with certain platforms - perhaps even striking lucrative partnerships with the platform for doing so…

2. On-chain split mechanics are limiting

The advent of smart contracts makes music royalty accounting a breeze - up to a certain point. When an NFT sells, its revenue can be split up according to predefined rules in the smart contract (for example: 50% to X, 25% to Y, 25% to Z) - see 0xSplits. The payouts are automatically calculated and deposited into each beneficiary’s account almost immediately and in full transparency - no spreadsheets, no third party software, no invoices, no wire fees, no audits necessary. The most work one may have to do is to simply connect their wallet and claim the funds owed to them. This is an incredible breakthrough for the music industry! Gone are the days of waiting 6-12 months to get paid, shady accounting methods and lawsuits.

But what happens when a label needs to bundle the NFT sales with other sources of revenue like licensing, merchandising or other physical/digital sales, in order to present a global sales statement to the artist? The NFT payouts are often in cryptocurrencies whose value fluctuates vastly by the minute, so it’s hard to merge it with traditional currencies. On top of that, no existing music royalty accounting software has provided a solution for integrating crypto/NFT revenue into its system… Yet.

And what if the label needs to collect sales income first in order to recoup costs, as per most artist deals? It’s common for labels to receive money first in order to reimburse the production & marketing expenses they’ve sunk into the project before sharing a portion of the profits with the artist. If they let the artist receive money right from the first sale, they won’t be able to do so. The label could collect 100% of revenue by not having any splits in the smart contract, but that would defeat the purpose of smart contracts themselves and go against the core values of web3; transparent & fair on-chain accounting. Should the labels re-think their business models with this in mind?

The good news is that this can all be fixed, and some bright minds are currently working to solve this problem as we speak. As someone who’s lost a lot of hair trying to untangle complex and archaic royalty accounting systems & deals, I’m very excited to see how this space develops. I’ve read that “hurdles” and “expiration dates” are coming next to Sound’s new protocol for music NFTs, which should solve these issues . In the meantime, what I’ve seen are 50/50 splits between label & artists with the expenses recouped some other way (off of other formats, for example).

3. Lack of metadata standard

The current ERC-721 metadata standard used for most NFTs was not created with music in mind at all. It was deliberately made simple, and lacks pretty much all the important information you would expect to find in song metadata such as title, artist, ISRC, etc.

You can build upon the ERC-721 standard and add your own metadata, for example the OpenSea standard (which has been largely adopted by the wider NFT community) adds fields for various attributes, which are better suited for visual art and PFP projects. Since I began working on this article, two leading music NFT platforms - Mintsongs and Catalog - came together and designed a new standard for music NFTs featuring a massive array of metadata fields that go well beyond the current DDEX standard currently used in web2. Serenade also recently proposed a new standard designed to handle album releases.

But there is no one enforcing that these new standards should be established across the music industry. Without an globally agreed upon industry standard for music NFTs, you end up with different metadata sets for each NFT which websites may or may not be programmed to read. This creates a series of problems, like improper indexing and display of the music’s relevant information, which can lead to relevant rights holders not getting paid or the music not appearing on certain platforms at all. Consider the idea of NFTs as “media legos” and the ability to build rich internet experiences with them. A lot of people see interoperability and composability as being core to realizing the potential of NFTs as a new format. But in order for music NFTs to be interoperable, we need shared standards and shared infrastructure. Without shared metadata standards, we'll end up with siloed platforms that do not interact with each other and limit how music NFTs will evolve.

Accuracy and accessibility of music metadata is crucial for the survival of NFTs as a format for music. For music NFTs to be interoperable, a metadata standard must be adopted by the industry. Furthermore, this metadata should be stored in a decentralized manner (as to not disappear if a private server or company goes down), it should only be editable by certain people (the owners of the smart contract, perhaps), and it should avoid using too much gas on the blockchain.

It’s not an easy issue to resolve, but I’ve been watching very smart people work together on developing a new dedicated standard for music NFTs. A lot of the conversation surrounding music NFT metadata is happening in a Telegram channel started by Water and Music founder Cherie Hu. I can’t tell you how exciting it feels to be part of that conversation and to have a chance to shape the future of digital music consumption - right out in the open, and free of gatekeepers!

4. Lack of expertise

Last but not least, the biggest challenge labels are facing right now is their own lack of expertise with web3. In my opinion, slow-movers and non-believers are going to get surpassed by those who adopt NFTs as a format for music early on. We’ve already seen the headlines of artists earning millions in music NFT sales, and although that initial hype bubble has now popped, the movement is in full swing and the rising stars of web3 are not the rising stars of yesterday (besides Snoop Dogg, perhaps). This is why we founded Mega Labs - to guide artists & labels who are ready to make the jump into web3, allowing them to reach their revenue and fan engagement goals while avoiding common pitfalls.

I wrote this piece for record label folks, artists, and artist managers who are curious about web3 but don’t know what to make of it yet. So many of the music industry people I’ve talked to about this are either secretly feel threatened or are skeptically waiting on the sidelines for the format to take off in a big way. I’m here to tell you that it’s going to be OK, and I’d like to end this by reminding you of a few important features of NFTs that in my mind outweigh the short-term concerns. After years of doing business within a set model of diminishing returns plagued with deeply-rooted distribution and monetization issues, a digital revolution is upon us. NFTs create a new revenue stream with virtually no ceiling that allows artists & labels to have more control over their art, forge deeper connections with their audience, and capture more value from recorded music. All of this in a fully automated & transparent manner, thus solving many of the music industry’s current problems. That alone should be enough for us to embrace change and move forward into web3. If you’re still not sure, give us a shout, let’s talk about it!

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