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MarkIt to Market® – May 2022: Web3 Inspires Spotify to Try NFTs | Sterne, Kessler, Goldstein & Fox P.L.L.C.

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Non-fungible tokens (NFTs) and the metaverse are the latest buzzwords online, including in the legal industry. But have you heard about Web3? Web3 is a tech buzzword for a blockchain-powered phase of the internet (different from the current internet state of user-generated media in Web 2.0); in other words, Web3 is a network powered by blockchain where NFTs signal ownership in the online world, which some bloggers hope will decentralize the internet to put power in the hands of consumers. But companies are already selling NFTs and branding for the metaverse, and Big Tech is already brainstorming ways to tap into and transform interactions on Web3.

For example, Spotify recently announced plans to add NFTs along with blockchain technology to its platform. Spotify is one of the largest music streaming services, with over 406 million monthly active users in 2021. Spotify’s plan isn’t surprising, as famous musicians including Snoop Dogg, Steve Aoki, Grimes, and Kings of Leon have already allowed listeners to transact NFTs. Currently gauging interest for a select number of users, Spotify’s move would allow artists an extra source of income by linking their third-party NFT platforms (e.g., OpenSea) to their profiles, similar to linking a merchandise store. This comes on the heels of announcements that Meta, Instagram, Twitter, and Reddit might add visual NFTs (think profile pictures) to their platforms. Not to mention that some companies, like Live Nation Entertainment, the company responsible for concert tickets with an estimated net worth of $19.83 billion as of May 2022, announced last year its plans to collaborate with artists in order to give fans digital collectible NFT ticket stubs – a digital twist to the era of collectable stubs.

But is the interest in NFTs, the metaverse, and Web3 here to stay? If so, how should companies prepare for this market? Although the numbers vary, it is estimated that $17.7 to $41 billion of NFTs were traded last year, ranging from visual artwork to games to collectibles. These numbers represent only 10% of traders, which account for 85% of all NFT transactions. While this online market is highly volatile, similar to cryptocurrency, the art world has been capitalizing on selling NFTs to niche consumers willing to pay steep prices for collectibles. Companies behind famous brands like Converse, Nike Inc., and Mattel Inc. have already filed trademark applications for NFTs. Thus, while no one can fully predict the trajectory of Web3, one thing is clear: this new phase of the internet and seemingly limitless marketplace poses great implications for property ownership rights.

For example, when Snoop Dogg sells an NFT of his music, the transaction between Snoop and the fan is recorded on blockchain technology in a primary market. Unlike with song streams where musicians don’t make much money off of the plays, with NFT sales, fans are increasing an artist’s value with each transaction. That means that the more sales an artist makes, the more valuable the NFT will be. NFTs (and the idea of Web3) have the potential of bringing artists and brands even closer to their fans. But consumers should make sure to understand what rights they are purchasing with the NFT – if any – while artists and brands should decide what rights to retain and what creative changes to allow fans to make to their content.

Flexibility of NFTs

There are various types of NFTs, like Smart NFTs, that contain additional programming options that enable an artist to control what ownership rights to keep in their token. Smart NFTs with embedded contracts can allow artists to communicate their reservation of rights in the NFT such that the fan doesn’t own the token. This then implicates the secondary market of reselling NFTs – a market that is growing exponentially. With resales, the artist gets a commission or royalty each time the NFT is resold, even as the appearance of ownership changes “hands.”

Another functionality is time-limited NFTs, where a fan can buy an NFT for a limited period of time until the token returns to the original owner. The best example of the usefulness of this feature would be a concert ticket, which retains value and can be re-marketed as memorabilia in a secondary market even though the purpose has changed. Similarly, an emerging concept of Smart NFTs is Upgradeable NFTs, where users can “sample” an original work and add to it, like a song remix. Such a derivation of the original work would typically carry heavy legal implications about infringing intellectual property rights, but with upgradeable NFTs, creators can choose to allow collaboration and creativity.

Takeaways

Web3 is a phase of the internet with limitless programmability regarding transactions and ownership, particularly between brands and artists to their consumers and fans. Using NFTs and entering the metaverse with blockchain technology was a success in 2021, and now Big Tech is brainstorming ways to incorporate visual and audio NFTs into their platforms and functions. But before jumping into the metaverse experience, artists and companies should determine what content or works are best suited for this technology and what ownership rights they are willing to sell along with it. While a company filing a trademark application for its marks on an NFT can assist in protecting the mark online, if a company then relinquishes such control in an upgradeable NFT, or fails to embed a contract or any rights, a downstream user can potentially argue that the company waived its intellectual property rights and control. Yet the very flexibility of NFTs can also be an asset in that the tokens are adaptable, re-programmable, profitable in various markets, and allow for new experiences between different types of people and across industries.


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