The disruption of the musical industry and tokenization

The last decade drastically changed some of the key internal machinery of the musical industry and while it was felt by the general public, some of the change impacts remained invisible, unless, of course, you are among the impacted. Obviously few are buying records nowadays ( although there is a clear vinyl revival) and streaming services are the default consumer media, but there are implications of that.

First, while you may call this ol' geezers talk, but I suggest to have a nice evening drink and look at this conversation of two seasoned veterans of the US music production industry, named The Death of the Middle Class musician.

But I will summarize it for you gladly - the streaming services essentially are splitting the industry on two categories - top shelf start and almost non-paid hobbyist ( and your humble servant as a musician belongs to the latter category ). But the core of the industry - all of those middle class musician, who either serve top shelf stars or have a somewhat satisfactory ( albeit local) career, this profession is disappearing as people are not able to sustain themselves.

A good, but heavily biased description of the change one can find here :

The rise and fall of music formats over the last half-century for vinyl records, 8-track tapes, cassette tapes, CDs, digital downloads, and now streaming music is a good example of the economic concept of “creative destruction” in the recorded music business. According to economist Joseph Schumpeter the “gales of creative destruction” describe the “processes of industrial mutation that continuously revolutionize the economic structure from within, incessantly destroying the old ones, incessantly creating new ones.” Physical music formats (LPs, tapes, CDs) have been “destroyed” and have now pretty much all been replaced with streaming music. And in each successive destruction and mutation, the music formats got better, cheaper, more widely available, and more convenient.

Source : The American Enterprise Institute

But the reality is that the music industry is doing quite ok, selling global arenas and producing hits and stars. But behind the glamour, the middle class musicians are Not doing ok. The steady record stream that was their bread and butter is not swallowed by the streaming. The intellectual property, that was generating steady income even for the one below the stardome level is not reliable anymore. Looking at another area - photography. After few drinks in a nice jazz bar in Sofia, a friend of mine, prominent photographer and business owner said: "Paper! Paper was key in our business, as in the 90s newsletters were paper, they are being sold physically and for each photo - on paper- you were receiving small, but enough cut from the revenue. And that was steady and something you can rely upon".

Well, paper is gone. Now what? Well, the usual answer is "creator economy". That is the compound name for what stand behind making YouTube gaming or musical videos or custom dog collars on Etsy. Let me make a statement here - creator economy is not bad, but it is much better for the people, that actually provide the infrastructure for the creator economy, than for the creators themself. Creator economy is certainly not new, there are creators living their earning from it for the past 10-15 years. But there is also a small but noticeable trend very recently - major Youtube starts are reducing their footprint on the platform or even quitting. There are various reasons cited - but the there is common motives behind them - the working model is not sustainable over a long run, it burns out the creator as there is constant push to be actual, copycats are behind the corner and most importantly - something that is often stated by the musicians on Youtube - the quest for being always preferred by the algorithms of platform really turns you from a musician to publicity stunt actor. The impact? As one of the prominent Youtube musical content creators Adam Neely said in his video -" I cannot imagine doing YouTube videos when I am 85 years old, but I can imagine playing music". It is simply not sustainable to make your living this way on a long run.

Feel free to replace YouTube with Apple music or Spotify - yes, there are people monetizing the stream, but the majority of the creators are on the platform just as a way to popularize their art and the few dollars they usually receive from them, are not really making a difference.

Let me add to the mix the impact the upcoming AI on the intellectual property rights. AI has no inherent understanding what is good or bad, what is ugly or beautiful - it should be taught, as with any human child. And training can be achieved only by using a real world created examples of what is good or bad. There is a philosophical debate whether listening to the 9th symphony of Beethoven and reading its harmonic analysis is the same as feeding it into an AI model so that it can break apart the harmony and create something similar to that. But the perception is that whatever goes into the human cognition system, should be perceived as new product, even if the underlying inspiration and structure is based on another human product, but if that inspiration was used to train a machine - than the originality of the resulting product is to questioned as inherently the machine are (may be) not capable of true creativity. In short the if your song, poem, painting or photo is used to train AI models, so that those models can grow knowledge and creativity capabilities - then (potentially) you should be entitled to some compensation - this is all still far being solidified as a practice, but instead is a subject of an ongoing lawsuits.

But AI is here to stay - the Pandora box is open and AI generated art is real. You may called it plastic, not real art, missing the vital imperfection - but that doesn't matter, for the majority of the consumers is as good as any human created material, but cheaper. Why cheaper - because AI generated art is not containing intellectual property built-in - at least for the time being. When you are buying a record, you are paying a fractional share of the price to the intellectual property holder, when you are listening to an AI music, you do not ow anything.

What is the moral of the story - well, AI created product will eat up a lot of the market share of what used to be a creators territory. As with the creators economy, the one selling the tools (the AI models) will benefit most of this setup. The ones, whose data is used for training those models, might get some. The ones, that are using AI models to generate conceivably creative content, they may get some direct reward based on some form of bilateral contract, but by itself they do not hold copyrights. That essentially means a lot of (almost) free content, which in that would have been a steady revenue source for the creative creators.

Well, grim future it is. As said above - "paper is gone" and there is no turning back. At the bottom of the problem is not the replicability of the product - bootlegging, pirate records, unauthorized use of photos and pictures were part of the context. The real danger comes from the potential replicability of the creative process itself. If your model can replicate with believable for the non-expert eye of the common public quality and success, than the only incurred cost is the cost of the tool, namely the AI or the cost of using it.

That, of course, is an extreme statement and probably too generalized. True creativity is true creativity - with some background one can clearly understand the harmonic structure and laws behind the Beethoven 9th Symphony, but there is something more than that. Below is a recollection of the violinist Joseph B?hm, who was part of the 9th symphony premiere in 1824:

"Beethoven himself conducted, that is, he stood in front of a conductor's stand and threw himself back and forth like a madman. At one moment he stretched to his full height, at the next he crouched down to the floor, he flailed about with his hands and feet as though he wanted to play all the instruments and sing all the chorus parts."

This is how a Maestro feels about his music, this is what takes to create a masterpiece. And no, AI probably will never create a true masterpiece, a true uniqueness.

But then - lets admit - 90% of the art we consume of on a daily basis is not 9th symphony and not really creativity showcase. The wizards the musical industry, the producers, they figure out the rules of the successful hits through trial and error and what you hear now on radio, even if not publicly admitted, is generated from clear and structured rules. What you or your kids will find likeable, can be described as a set of rules (I am sorry). Even more - thanks to the advanced data analytics of the streaming platforms, one can measure the degree how likely will be for you personally to like the next song. Other words, in the foreseeable future, you personal AI music record producer in your smartphone will produce and create a personalized music to your taste - that will be Your music:

"Your blood pressure is high today - why not listen to some soothing Portuguese fado, but mixed with some marimba lines, because last month your trend on listening to music, that includes marimba went from 12.12% to 19.87%", and we will also include gentle ( at 65% of gentleness) female vocals for obvious reasons, that we wont disclose, but could be related to common among the age and sex group syndrome, called midlife crisis"

Would it be the musicianship boiled down to producing the leggo bricks of music like Fado vocal phrases or middle eastern darbuka maalouf rhythm - and then the trained AI model just combine them? Up to certain extent, probably yes - if you look at the modern electronic music for example, it is mostly created by combining a prerecorded phrases, called loops. All is digitalized, all is available under the "fingertips" of the AI model to use and combine and create.

And I will repeat my statement again - AI, digitalization and streaming will be eating more and more out the ability of the artists to sustain themselves. This is driven by the popular public demand, by the business rationale of the industry and it is an irreversible trend. That is sad.

Consumer grade art will be AI-lised. What we enjoy as mainstream music, graphic art - that probably will be cheaper to be produced by few knowledgeable professionals, equipped with ingenious AI tools. The end of the art?

Probably not. Look at another area - food. Food production is so industrialized nowadays that literally the industry is producing huge surplus and without a hassle all of the western society ( lets leave aside the obvious paradox between that and the rest of the world) only via industrially produced food. Yet, in parallel to that, there is a whole plethora of small organic farms, responsible food production organizations, (pricey) farmers markets and so on.

Generally consumer behaviour is driven seemingly by the path of least resistance and should follow the general rules that if something is cheaper and more abundant, than that's the choice. But that's on the surface - below that there is always a fraction, that goes against the general trend. Not necessary a rebellion attitude, but there the many buying the 4.99$ per pound parallelepiped shaped ham, produced by literally gluing many things, generally going under the concept of "meat" and there will be others (considerably fewer) looking for the 12.99$ box of organic lavender bee pollen infused tea, responsibly produced by LGBT friendly farm, located in Eastern Europe.

Yet another example closer to the art is the vinyl revival. While I am writing those lines, I am sitting in a lovely bar, listening to the immortal sourdine sound of Miles Davis in the album Sketches of Spain on a high end audiophile setup, which inevitably starts with vinyl.

Vinyl is a technology more than a century old and from convenience and abundance is inferior to any of the modern streaming platforms. Should dead and obsolete by know, similar to how VHS is dead. Yet, the sales of vinyl is multiplying every year for the last decade (by all honesty the numbers are still fractions of what they used to be in the 80s).

If you ever swam or paddle in a river, you probably were confronted with logical, but a bit unexpected situation. There is the main current of the river, that is amid the river and it is dominant and strong. But then near the shores of the river or close to an obstacle, i.e. a big stone, there is a small, but noticeable current that goes in exactly the opposite of the main current direction ( among white water kayakers is know as the "eddy" or "the lift" as even small, it allows to go upstream).

My point: there will be always a demand for things, which are more artisan, creative and less mainstream. The real question is how to monetize that, provided that the usual ways are falling apart, but also the answers is not social media as explained why. But beyond selling the actual art or making short clips on TikTok, there is more than just the art and may be more alternatives.

Any successful artist understands the power of community. The aura of the artist, the feeling of being exclusive, to feel belonging ( and that is an extremely powerful force) to likeminded people, even to be recognized as Fan Of based on badges, clothing and what not, that has always been an integral part of the art, stronger in the performing arts and a bit less, but still there in the visual arts. There are all type of good instruments to create and manage those communities and the most prominent is the Patreon, where all types of tools and exclusivity levels are available to the community leader. Up to certain extent, those communities work - the estimated monthly income of an average Patreon creator ranges anywhere between $315 to $1,575, but some top Patreons are getting much more than that.

But even that - participating in the community or buying merchandise can be great, but it is most unidirectional investment of money into the love of art and the artist. Could be that investment as any other investment give something back?

Back in the 2000s, the poster rock start David Bowie showcased his creativity in yet another way, by issuing to so call Bowie Bonds ( detailed information available here.

The story:

"On January 31, 1997, David Bowie broke a new frontier in financing by selling $55 million in bonds backed by future music royalty payments and copyrights. Music royalties and copyrights had never previously been securitized due to the uncertainty in predicting future cash flows."

David Bowie’s bond offering represents a “brand new beat,” a novel and innovative financing method for any individual or entity with intellectual property rights. The concept of intellectual property securitization resolves the dilemma of inexpensively raising a large amount of money while still retaining ownership in the underlying intellectual property.

The David Bowie securities (“Bowie bonds”), offer a 7.9% interest rate with a 10-year average life and a 15-year maturity. The bonds are backed by royalties on a twenty-five album catalogue consisting of about 300 songs of Bowie’s recordings and song copyrights.”?

EMI Music provided the credit enhancement necessary for the securitization, resulting in an A3 investment grade by Moody’s Investors Service. The bonds were “snapped up” by Prudential Insurance in a traditional private placement.?

As a result of this deal, David Bowie has topped the charts as the richest British rock star with an estate worth an estimated $917 million.

Bowie Bonds were a good, but unfortunately not really further followed example of art content securitization. That did not take off further in the financial industry for various reasons. That kind of a financial engineering usually targets institutional investors and follow a complex issuance and management model, not really suitable for the retail investors. But retails investors in art - well, those are the same fans and collectors. I still recall that in the first few years of my first employment ( that was in the last millennium) I was spending 15-20% of my salary on records alone ( by all honesty, it was not a lavish salary). What if I was not only buying records, but also somehow investing in art?

Financial manufacturing nowadays really moved on from year 2000. And while it is still a territory of the regulations and a lot - a lot - financial law, there is a noticeable trend in democratization in the form of the cryptocurrencies. Now there is all types of feelings towards crypto, mines included, but what has been stated by key players in the industry ( like the trillions worth hedge fund Blackstone CEO Larry Fink) is that out of the somewhat controversial and polarized world of crypto, a new financial mechanics will be born.

"We do believe that if we can create more tokenization of assets and securities - that's what Bitcoin is - it could revolutionize finance....I really do believe this is where we're going to be going. We have the technology to tokenize today....I don't believe it's ever going to be a currency. I believe it's an asset class."?

Larry Fink, Blackstone CEO

In short tokenization refers to using blockchain technology or a digital token to represent real-world items. Tokenization is a much larger topic to be covered here - but it is generally believed it will be a revolutionary improvement in two areas:

• Streamlining the financial instruments manufacturing and the "friction cost" - this is the total direct and indirect costs associated with the execution of a financial transaction.
• Unlocking the investment potential of new untapped asset classes where a new asset class is "tokenized" and by that receiving all the qualities and advantages of a digitally native asses - for example fractional ownership of real estate assets and built in settlement scenarios in the form of smart contracts. Asset tokenization involves representing the ownership rights of real-world assets as digital tokens on a blockchain

The idea that you can invest easy, fast and cheap into anything-turned-to-be-an-investment-asset differs from usual understanding of investment by the general public. Lets leave aside the friction cost, but the idea of opening new assets for the investment opportunity both for the retail investor and institutional investor is appealing. Now - by all honesty tokenization is not new, technically it exists for years, there a number of proof of concepts projects accomplished, but it did not deliver the promised financial industry disruption - an excellent explanation why you can find in the whitepaper here.

Tokenization is way larger topic to be covered here. But there is a prospect to be expored in how tokenization can help in the creative disruption of the art industry. Adopting Web3 technologies (allthough the author is very sceptical to whatever goes under this name) in art and tokenization of art related artefacts is also something ongoing. Platforms like Revelator and Mastercard Artist Accelerator are targeted at independent artists, enabling them to "receive blockchain-based payments through smart contracts" and "transforms creative IP into digital assets and offers modern protocols for fractional ownership, smart contracts and real-time on-chain settlement of music royalties to individual rights holder’s digital wallets."

You cannot reduce art to digital tokens. It is more than that. But you can certainly reduce intellectual property to a digital footprint as even without any talks about tokenization, intellectual property is being sold and bought since ages. It is usually done via heavy billateral contracts and certainly not open to the general public.

What if the it is open to the general public and allows the digitally native ergonomics of the tokenization to be in service of the community around the artist? What if there is a way for the fans to support the artists, to unlock exclusive content - but also to get a return on it, as the popularity of the artist grows?

Lets take a very oversimplified example. Lets imagine a local, independent artist called John. John usually plays in front of audience of about 50 people. He is good in managing his small, but devoted community of fans and usually knows almost anyone by name on his performances. John releases a new album - usually sold by hand to the community - and this album is tokenized into 100 JOHN coins. He decides to keep 50 of them to himself and but gives the other 50 for free to 50 of his devoted fans. That means they own collectively 50% of the IP of the record (lets imagine the legal mechanism for this exists). Not a lot is accomplished so far. Every time a record is used in some context, a royalty is paid to John and the group of fractional owners (lets imagine the technical infrastructure for this exists). Still nothing even worth something, as fractional royalties for a local artist probably will be fraction of cents. Stay with me. John's popularity grows. He is now playing with his band on larger venues, hitting national TV shows etc. Now he decides to host a very private show for only 20 people - an insight into the artist performance and intimate thoughts on music in a nice and cozy venue with an exclusive cathering. The entrance is worth 100 USD, but only accepted in the form of 1 JOHN coin, that you can buy via John website. Now, I am know that it is not that simple, but this is how a classic example of demand and supply for limited availability asset is created. Because John is doing a good work , there are more than 20 people willing to join the exclusive party. Some of them are with deeper pockets and they put a buy order for JOHN coin at 200 USD. If you think that is not possible, think about the ticket black market and people willing to overpay to the speculants. Now your JOHN coin, that you received for free in the initial days of John's career, is worth 200 USD. You can sell it - and still remain John devoted fan - or you can keep it hoping for price increase in the future.

This is one specific use case and as I said - it is an oversimplified example, where a lot of the underlying legal and even technical infrastructure didnt exist. But that was the case for mobile applications or phone cameras. It takes time to build the relevant technology, but also legal foundations. Lets not forget that in few years the dominant in the society will be Gen Z - and they are digitally native. They find paying for

You may disagree that as said earlier in the article, AI will eat a lot of the art teritory. But what AI wont eat is a) a good art :) and b) the power of personal touch, community and belonging. That b) is extremely strong - and it is manifested in the same formula from Sons Of Anarchy MC to BlackPink teenage K-pop fan club. And that is loyalty - loyalty that is lasting, deeply rooted in the social and cultural context of a person. Everyone is saying "loyalty is the new money". But thats not true - so far loyalty is bringing money only to the loyalty recipients. My point - how we can foster the loyalty further by rewarding the loyalty? How we can monetize further the love for art and the aura of the artist ( feel free to hate me, but my motives are good)?

Would love to hear your thoughts and opinion.