Music industry

HODL the Line: The Future of Web3 in the Music Industry

In the following MBW Op/Ed, Gregor Pryor, Head of Entertainment and Media at Reed Smith Law Firm, explores the future of Web3 investment in the music industry using insights from the second edition of the his firm’s legal white paper, the Reed Smith Guide to the Metavers.

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 signing a deal with Fantagio, MTV creating a virtual space in Roblox as part of a whole new awards category, or Muse’s new album, will of the peoplebeing released as a graphics-eligible NFT, it seems like we still only have our toes in the water of the vast pool of potential use cases for blockchain, metaverse, cryptocurrency, and decentralized organizations.

A few years ago, we learned more about Web3 and how it could influence the future of the music industry. We now know the answer to this question better. What everyone wants to know now – especially those who have spent huge capital on acquiring music rights – how big will it be?

Some commentators disagree on what Web3 is. Elon Musk thinks it’s “more marketing than reality”, while Jack Dorsey tweeted that the space will eventually be owned by VCs that don’t favor new business models.

Those who view Web3 dogmatically believe that this next wave of online technology has the potential to severely disrupt and disempower “big tech” companies, returning control to users and the Internet community.

It’s interesting, not least because the mainstream music industry has a love/hate relationship with big tech.

Some would say that the positive vibes come from the huge sums of money pumped into the industry, while the root of the negativity arguably stems from the rights holders’ lack of control over the distribution network. Does Web3 amplify or change these feelings?

So what do we mean by Web3?

The “Web1” era consisted of a network of static pages where the vast majority of users were consumers, not creators.

“Web2″, the version of the web we know today, is largely based on the idea of ​​”the web as a platform” and relies heavily on user-generated content (think YouTube, Meta and TikTok). Vast swathes of Internet properties are controlled by large “centralized” international entities; Web3 has the potential to be decentralized.

This means that ownership of assets, environments, communities, and even currencies can be split between builders and users. There are a number of other fundamental principles that guided the creation of Web3. For example, many apps are permissionless, with everyone having equal access to participate and no one being excluded. Web3 can also be “trustless”, meaning that it operates using incentives and economic mechanisms rather than relying on “trusted” third parties. Perhaps most powerfully, it has a native payment structure – cryptocurrency can be used to spend and send money online rather than relying on the outdated infrastructure of banks and payment processors.

The fundamental innovation that underpins Web3 is the blockchain. A blockchain is collectively stored and updated by all participants (each a “node”) on the network. Using cryptography, each block of transaction data is linked, forming a chain of records, making them secure and difficult to modify.

This technology also facilitates smart contracts. They are not contracts as lawyers generally describe them; rather, they are programs stored on a blockchain that run when predetermined conditions are met. In other words, if X happens, then Y happens. Blockchains underpin cryptocurrencies. They also underpin NFTs. 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 centralized entities to builders and users can act as a democratizing influence on content consumption.

In the music industry, this can manifest itself in different ways. Some believe this potentially creates more sovereignty for artists and greater opportunities for engagement between fans and artists. 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. Removing bundles of NFT content with exclusive recordings, digital artwork, and lifetime concert passes can be done with a click.

Others believe that Web3 can cause catastrophic damage to the digital models that have created enormous value for the industry, leading to increased copyright valuations and dramatic revenue growth for labels, publishers and PROs. .

Some believe that one of the innovations that could truly disrupt the industry is the token ownership of royalty streams. Web3 companies are exploring the possibility of tokenizing underlying copyright or royalty revenue streams and allowing fans to “invest” in new music in return for a split share of royalty revenue perceived when the music is exploited.

Business and legal challenges

Of course, with these technologies still at a nascent stage, there are a number of barriers to their widespread application. Accessibility is a key limitation, with transaction costs (known as ‘gas’) being prohibitive for many. Education is also needed to help consumers learn new mental models than they are used to with Web2. And, more importantly, the gold rush caused by speculation in cryptocurrencies has caused volatility and uncertainty for many. Granted, there’s a lot of crime in the world of Web3 – regulators and lawmakers are rushing to keep up with development.

This brings us to the legal challenges in this space. With huge sums at stake and confusion over the responsibilities and duties of different players, Web3 issues are the subject of much litigation. The world of Web3 is undeniably riddled with cybersecurity and fraud issues. This month alone, Solana, a public blockchain used by a number of Web3 music platforms, was hacked. Thousands of Solana wallets were attacked, estimated to be worth between $5 million and $10 million.

Music rights are inevitably discussed in the Web3 environment. Many artists will consider that they have the exclusive right to release their music as NFT, for example, while most record labels will take a somewhat different view.

Music rights are inevitably discussed in the Web3 environment. Many artists will consider that they have the exclusive right to release their music as NFT, for example, while most record labels will take a somewhat different view.

Decentralized technologies challenge the way we traditionally protect intellectual property. Add in AI-generated music, for example, that further tests our existing copyright laws, and you have a heady mix. While traditional laws were developed to protect personal expression, authorship, and originality of human-created works, perhaps the metaverse offers a whole new format for creativity with a new distribution network.

Other concerns relate to the fluctuating value of cryptocurrency and the general public’s lack of understanding of the risks. For example, are NFTs legally considered investment products or securities? If so, anyone offering them will have to comply with strict financial regulations. It is clear that regulators view investing in crypto-assets as highly speculative and are watching this space carefully. Companies operating in Web3 should therefore ensure that they are aware of the changing regulatory landscape.

These problems are a reminder of the risks that are inextricably linked to the opportunities of Web3. While the potential is evident for the music industry, providing a welcome alternative to a big tech-dominated model, to realize this potential players – whether artists, streaming platforms or Web3 companies – must assess carefully approach them before diving in, avatar- head first.

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