MarkIt to Market® – May 2022: Web3 Encourages Spotify to Try NFTs | Sterne, Kessler, Goldstein & Fox LLC

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

For example, Spotify recently announced plans to add NFTs as well as blockchain technology to their platform. Spotify is one of the biggest music streaming services, with over 406 million monthly active users in 2021. Spotify’s plan comes as no surprise, as famous musicians such as Snoop Dogg, Steve Aoki, Grimes and Kings of Leon have already enabled listeners to perform NFT transactions. . Currently gauging interest from a number of users, Spotify’s move would allow artists an additional revenue stream by linking their third-party NFT platforms (e.g., OpenSea) to their profiles, similar to by linking a goods store. This follows announcements that Meta, Instagram, Twitter, and Reddit may be adding 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 plans last year to collaborate with artists in order to give fans digital collectible NFT ticket stubs. – a digital touch in the era of collectible heels.

But is the interest in NFTs, the Metaverse and Web3 here to stay? If so, how should companies prepare for this market? Although numbers vary, an estimated $17.7 billion to $41 billion worth of NFTs were traded last year, ranging from visual art to games to collectibles. These figures represent only 10% of traders, who account for 85% of all NFT transactions. While this online market is highly volatile, similar to cryptocurrency, the art world has capitalized on the sale of NFTs to niche consumers willing to pay high prices for collectibles. The companies behind famous brands like Converse, Nike Inc., and Mattel Inc. have already filed trademark applications for NFTs. So while no one can fully predict the trajectory of Web3, one thing is clear: this new phase of the Internet and the seemingly limitless marketplace has big implications for property 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 song streams where musicians don’t make a lot of money from coins, with NFT sales, fans increase an artist’s value with every transaction. This means that the more sales an artist makes, the more valuable the NFT will be. NFTs (and the idea of ​​Web3) have the potential to bring artists and brands even closer to their fans. But consumers need to make sure they understand what rights they’re buying with NFT – if any – while artists and brands need to decide which rights to keep and what creative changes to allow fans to make to their content.

Flexibility of NFTs

There are different types of NFTs, such as Smart NFTs, which contain additional programming options that allow an artist to control which ownership rights to retain on their token. Smart NFTs with embedded contracts can allow artists to communicate their rights reservation in the NFT so that the fan does not own the token. This then involves the secondary NFT resale market – a market that is growing exponentially. With resales, the artist receives a commission or royalty each time the NFT is resold, even if the appearance of ownership changes “hands”.

Another feature is limited-time NFTs, where a fan can purchase an NFT for a limited time until the token returns to the original owner. The best example of how useful this feature would be would be a concert ticket, which retains its value and can be re-sold as a souvenir in a secondary market, even if the purpose has changed. Similarly, an emerging concept of Smart NFTs is that of scalable NFTs, where users can “sample” an original work and add elements to it, such as a song remix. Such a derivation from the original work would typically have heavy legal implications of intellectual property rights infringement, but with evolving NFTs, creators can choose to allow collaboration and creativity.

Take away food

Web3 is a phase of the Internet with unlimited programmability regarding transactions and ownership, especially between brands and artists to their consumers and fans. Using NFTs and entering the metaverse with blockchain technology was a hit in 2021, and now Big Tech is thinking about ways to integrate visual and audio NFTs into their platforms and functions. But before embarking on the metaverse experience, artists and businesses need to determine what content or works are best suited for this technology and what ownership rights they are willing to sell with. While a business filing a trademark application for its marks on an NFT can help protect the brand online, if a business then relinquishes that control in an evolving NFT, or fails to incorporate a contract or rights, a downstream user can potentially argue that the company has waived its intellectual property rights and control. Yet the sheer flexibility of NFTs can also be a strength in that tokens are adaptable, reprogrammable, profitable in various markets, and enable new experiences between different types of people and across industries.

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