The Medium is not the Message

I’ve had an epiphany about NFTs. Like many such experiences you can’t unsee it once you’ve seen it, and indeed you wonder why you ever thought differently. It’s not unlike the picture where you either see a girl turning away or the face of a witch; when you switch it takes real mental effort to switch back, and you can’t see both at once. As such it is a different experience from deduction, where you move logically from thought to thought, each one reliant on all the previous ones, which you can still conceive at the same time. It is more akin to a mild version of Kuhn’s paradigm shift.

As a result it is easy to think that others will either respond that they’ve always known what has just occurred to you, and you’re a fool for ever thinking otherwise, or that it is such a trite point that it’s not really worth stating as it adds nothing to the debate. In this way what seemed like a revelation quickly crumbles to dust and you are left doubting it is anything at all.

This particular change of mind was prompted by various reports on the successful use of NFTs in the music industry. It is a business with its own peculiarities and has a strong, historical relationship with technology.

If we go back hundreds of years music was produced by itinerant minstrels or court composers. The former earned a living by travelling around and being paid for performance. Perhaps if they were particularly popular they may have been employed by a wealthy noble. The latter relied on the patronage of the wealthy to allow them to create and perform. It was not impossible for either to become rich but to do so they would depend on largesse. Both lacked two things that are key to the modern music business.

The first was copyright. Minstrels would play popular songs that were part of the shared culture, or if the composed their own, they would have no means of preventing these also being shared. Likewise composers only latterly gained control of their works and the rewards from their performance through intellectual property regulation.

The difference compared with the present day is clear. Musicians now have rights to the reproduction of their songs extending over decades. It has become not only the primary source of earnings for original artists but has also created the expectation it should be the primary source. At the same time the importance of performance has declined compared with minstrels, and is more the preserve of unoriginal artists in cover bands who making a living as jobbing musicians. Of course, major artists tour but it is not a necessity and is done as a promotional exercise to sell their music.

To some extent this arrangement which was the convention in the late 20th century has been disrupted by technology. In the 80s we were warned that home-taping was killing music. It wasn’t really, but the emergence of free digital copying peer-to-peer has had more effect, leading to the acceptance of streaming apps, which pay drastically reduced rates to artists for access to their recordings when compared to the heyday of vinyl and CDs.

Which brings us to the other essential feature of the music business, which is scale. This manifests itself in two ways, both the result of technological innovation. The invention of electronic amplification meant that potential audience size grew exponentially. While minstrels were limited by the reach of an acoustic instrument, and composers deployed orchestras partly to achieve the necessary sound level for a concert hall, increasingly powerful PA systems meant major acts could fill sports stadiums.

The other innovation was replication, first in sheet music and then in a variety of physical artefacts such as records, cassettes and compact discs. These all allowed musicians to distribute their work in whatever volume was demanded, at low marginal cost, with the same unit price for the first as the millionth. The massive income accrued by the biggest sellers was justified on the grounds that prices were necessary to support smaller artists. This technology-driven spike in wealth for popular artists has become the accepted norm, in the same way that actors have been able to exploit the scale dynamics of film and television.

OK, OK, but what about the epiphany? Oh yes, the epiphany. It was also triggered by a remark by Daniel Neilson in his newsletter, where he said:

My baseline view remains that innovations arising from crypto will find permanent homes inside the regulatory perimeter, likely on permissioned blockchains and with a less ostentatious ecosystem.

It might not be what Daniel had in mind but it suggested to me that if we set aside all the debate around the meaning of NFTs and their revolutionary potential, if we ignore the fact NFTs aren’t essential to the sales process even for digital art, or even if we accept the most optimistic case for their transformative potential — the empowering of artists, the elimination of middlemen, the incorruptible attribution of digital ownership — if we do all that, we are still faced with the reality that what really happened with the Beeple sale was that a piece of art was sold. The NFT wasn’t sold, that is just a distraction.

Someone made a piece of art and they sold it. Same as they always have. An NFT was the mechanism but the assessment of value was of the art. It was not more valuable as art for having an NFT attached. The NFT may have enabled it to have value by providing proof of ownership, but the value itself was that of the artwork alone. If we strip away the technical hype, the first question is whether the art in question is really worth that much, just in artistic terms. I’m no expert but I sincerely doubt it, even if we use the broad, modern definition of art to include all the attributes pertaining to its creation and existence, not just the piece itself.

Looking at it in this way makes it clear that NFTs and much of the crypto ecosystem are tools. As such they can simplify or facilitate existing behaviours and products, or allow the creation of new ones. In some cases this will have an effect on the value of existing products, most likely in a downward direction, just as file sharing drastically reduced the value of recorded music. They have allowed the trading of video clips of sports action in a similar way to our grandfathers trading baseball cards, but again the value is associated with the clip just as it was with the player on the card, not with the NFT.

In music the value is in the recording or in whatever bundle of special features or access is sold to hardcore fans in whatever limited number. NFTs mays imbue some spurious rarity, but no more than special edition blue vinyl releases did in the 80s and they never moved beyond novelty value to become a significant revenue stream. There is no real difference from these past attempts at special editions but for some reason NFTs have served as a catalyst in stimulating new ways for musicians to extract revenue from their work and recover the income lost due to streaming. Technology giveth and technology taketh away, and the hope is that technology will giveth again.

But even if NFTs were to solve the problem of free replication and restrict access to purchased digital copies only, it couldn’t do more than return income streams to the level of CDs. It would just be the latest in a line of technical innovations which allowed scalable replication and sale of recordings. The point is that the work is what counts and what is being bought, not the mundane technical plumbing. The wealth accrues to the artist. There is no more value to the consumer in buying an NFT than there is in buying a vinyl record. When it comes to NFTs, the medium is not the message.

Similarly in finance, digital tokens can simplify the payments infrastructure and speed up processing by removing the need for some verification, and smart contracts might remove the need for manual intervention in triggering financial events, and in doing so they will create value by making existing processes more efficient, but that will not give the artefacts themselves value. That will be retained by the payment being processed or the product described in the contract.

Perhaps the connection back to Neilson’s remark is that it is possible to respect the technical benefits crypto could bring without believing the purchase of tokens can and should be a path to wealth in and of itself.

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