Whatever Happened To NFTs For Creators & The Entertainment Business?

They Held So Much Promise Once, But Where Are They Now?

Image courtesy of Insider

Remember “NFTs”? Those so-called non-fungible tokens, powered by Web3’s blockchain, that were meant to transform the world of entertainment? Two years ago, they were all the rage and did just that, with “Bored Ape Yacht Club” leading the crypto bro pack and Ashton Kutcher’s and Mila Kunis’s “Stoner Cats” in with the more Hollywood crowd. But then, the skeptics and cynics crashed the party and “crypto winter” put much of the NFT market on ice.

So “NFTs” got a bad name, and legitimate players were forced to distance themselves and repackage them as “digital tickets” or “digital tokens.” And then, as 2022 ended, NFTs were left in the dust of the ChatGPT shot heard around the world and AI in general. A majority of U.S. consumers now believe them to be a passing fad.

So where do things stand now for NFTs in the creative community and entertainment industry? The simple answer is that despite all the doom and gloom, the initial long-term promise of NFTs stands strong for those who are willing to believe, lead the way, evolve the transformational opportunity, and do it right.

But first, more recent headwinds hit just last week as the SEC marked its first enforcement action in the entertainment industry. Specifically, the Feds found that “mission-based” media company Impact Theory had violated federal securities laws when it sold so-called “Founder’s Keys” (the name of it NFTs) to the public in its attempt to, in its own words, “build the next Disney.” Impact Theory had raised $30 million via three different tiers of NFTs, each of which gave buyers varying degrees of utility. But the SEC concluded that Impact Theory violated securities laws, because those “Keys” were actually unregistered “investment contracts” that were coupled with an expectation of profit.

In another important recent development, leading NFT marketplace OpenSea radically changed is policies once again to permanently discontinue a creator’s ability to set and enforce ongoing “resale fees” for NFTs sold there, a change that went into effect last week. Such “fees” gave creators the game-changing ability to receive an ongoing royalty for their work in any subsequent sale by buyers, perhaps the single most important incentive for them to play in the world of Web3.

Not surprisingly, OpenSea blamed market dynamics, writing “we’re moving to optional creator fees … in an effort to better reflect the principles of choice and ownership that drive this decentralized ecosystem.” In other words, as I anticipated several months ago, OpenSea cut and run on its sworn commitments to creators, something perhaps seemingly smart in the short-term, but ultimately self-defeating in the long-term for reasons I laid out.

These two major adverse developments, when added to the dire forces noted above, officially sound the death knell for NFTs to the creative community, right? Well, not so fast. Amidst all the negativity, ambiguity and obfuscation, very clear promise exists for those who are willing to take the time to understand them and move forward legitimately to create a true two-way exchange of value. An NFT by any other name – be it, “digital tickets” or “digital tokens” – still can smell as sweet in the right contexts. That means that NFTs, and the promise of Web3, still ring true for the creative community and will ultimately transform engagement and monetization possibilities in the years ahead.

Here’s how.

First, NFTs disintermediate, giving creators a way to cut out the fee-collecting middleman, so that creators can earn more and directly connect with their audiences in a way that benefits both sides more impactfully. NFTs offer exclusive utility – call it membership in a private club - and it’s entirely up to artists, creators and entertainment industry players in general to determine what that “utility” means. For some – like Impact Theory – the SEC concluded that its NFTs were a means to raise capital for its business and, hence, constituted securities.

But for others, that may not be the case. Creators can offer utility in ways that go beyond just financial. NFTs can be used as a way for fans to patronize their favorite artists and support their work for the sheer enjoyment of it. That utility may include early or exclusive access to the artist’s works, bespoke events and experiences, and perhaps even to their innermost thoughts. All of this utility brings emotional value to fans – and direct economic value that supports the artist’s livelihood – but without any expectation of stock market-like profit.

The power of NFTs also lies in the blockchain’s promise to solve generational-long seemingly intractable problems facing artists of all stripes in the world of entertainment. No longer is the reporting and payment of residuals or royalties disconcertingly slow and opaque. Once intellectual property rights are stored on chain, and related royalties immediately and accurately paid on chain, then – and only then – will Hollywood and music industry payments be fully complete and transparent to the creative community.

To be clear, the legal framework developing around the blockchain and NFTs – and which ones are or are not “securities” - is developing as we speak, just as it is in the even more transformational world of AI. So one must tread cautiously (and get great legal advice). But the mere fact that securities laws may be implicated in certain cases doesn’t take away from their potential very legitimate power.

For example, right now, the music catalog acquisition business is dominated by private equity firms backed by billions of institutional dollars. There is very little opportunity for individuals, including superfans, to play in that red hot world of alternative investments. But NFTs now give those fans and the entire retail market – via platforms like Royal - the opportunity to buy fractional shares in songs and earn a continuing fractional share of the royalties generated thereby.

Royal is an early trailblazer in the world of NFTs and, in particular, securitized NFTs. They don’t get nearly the noise they used to, but don’t hold that against them. They are playing the long game here, because the value of NFTs – and what they can uniquely accomplish – doesn’t disappear simply because most casual observers in the media and entertainment world have moved on to other things.

We are fickle people, lemmings who jump ship when “the next big thing” is seen on the horizon, only to try to climb back on when the bold have stayed steadfast and navigated the path forward, properly reaping the rewards thereby.

So while today the OpenSeas of NFTs have been rocked, I continue to expect blockchain-powered Web3 opportunities to be a game-changer. NFTs, no matter what you call them, empower the creative community to engage with fans and audiences in a transformational direct exchange of value that can be both financial and emotional.