The potential of NFT technology for the publishing industry

Originally published in Bound Vol. 3

Over the first half of 2021 the increasing hype around NFTs (non-fungible tokens) has been deafening, with everything from artworks to tweets being sold online for hundreds of thousands of dollars, if not millions. The almost overnight growth of this niche cryptographic token to a multimillion dollar industry has seen many people confused about what exactly an NFT is. But with millions of dollars being made from this venture, many businesses are wanting in on the action, and while it’s a little late to the party, the publishing industry is no exception.

There’s undoubtedly a lot of money to be made from NFTs. However, this digital asset also presents the publishing industry with potential opportunities to resolve its existing issues. Since the turn of the millennium, substantial technological disruption has radically challenged the traditional business model of the publishing industry. The advent of Amazon’s Kindle and their subsequent ebook market took the world by storm, with Amazon becoming the lead online retailer for both print and online books (Clark and Phillips 2019). This was closely followed by Apple with the release of the iPad accompanied by their own ebook store. Alongside the rise in ebooks is the more recent growth of audiobooks, which is expected to supersede ebook sales after a successful 2020 amid the global pandemic (Ahaskar 2020). Over the past two decades, Amazon has proved that it is willing to sacrifice book sale profits with heavy discounting (Davis 2013) in its bid to become the top tech giant against the likes of Apple and Google, leaving publishers to either get on board with slim profits or be left behind. The current state of the publishing industry is precarious, with publishers beholden to the monopoly of Big Tech and the whims of their market games.

In response to this centralisation, the publishing industry has had no choice but to alter their traditional business model in favour of Amazon, and more recently, partly as a result of the COVID-19 pandemic, take a digital-first approach to publishing (Guren et al. 2021). In the face of these challenges, the industry has continued to cut overheads to stay profitable in an ecosystem that predominately relies on breakout bestsellers to turn a profit (Davis 2013). Unfortunately, publishing workers tend to take the brunt of these cutbacks, leading to fresh calls for wage transparency within the industry (Books+Publishing 2020). Nicola Solomon, the Chief Executive of the Society of Authors, has stated that in 2021 the society will be lobbying the industry ‘for transparency in contracts, in royalties, in how credit is given and work exploited’ (2021, p 8). So, with all this in mind, how exactly can NFT technology remedy this myriad of issues?

NFTs and virtual scarcity

First and foremost, it’s important to understand how NFTs are being used in adjacent markets before they can be applied to publishing. The New York Times describes NFTs, or non-fungible tokens, as ‘an asset verified using blockchain technology, in which a network of computers records transactions and gives buyers proof of authenticity and ownership’ (Thaddeus-Johns 2021). There have been many notable sales within the NFT market already, most popularly that of the 2011 Nyan Cat meme selling for 300 ether (Morse 2021), which, at the time of writing, exchanges for around AUD$1 million. Many digital creators, artists and celebrities have been backing the technology, and the momentum continues to build.

What makes NFTs so groundbreaking is their ability to make something as ubiquitous as digital artworks unique, and therefore sellable. So, while many people can own the Nyan Cat file, only the person who holds the NFT for that file truly owns it. While that logic may seem injudicious, it is markedly similar to how the art market already works. For example, consider one of Australia’s most recognisable artworks: Max Dupain’s 1937 photograph, the Sunbaker. Prints of this photograph, identical in quality, can be easily found both online and in gallery shops for around $30. However, if someone were to buy one of the 200 copies that Dupain printed and signed before his death, they’d be looking at a bill of up to $105,000 (Eveson 2016). By applying this concept to a digital artwork, NFTs can be understood as an artist’s signature, creating a virtual scarcity that encourages the collectability of their work.

As the publishing industry has staggered into the digital landscape, the pricing of ebooks and audiobooks has been vexed. When Amazon’s ebook market first came on the scene, it was demanding a 50% discount on ebooks and pricing bestsellers for $9.99, well below the recommended retail price (Donoughue 2013). The publishing industry was naturally dismayed by the predatory pricing that threatened both brick-and-mortar booksellers and publisher profits, until Apple jumped in and changed the landscape again with the iPad and a 30% discount deal with publishers. This led to a complaint of collusion by the US Department of Justice against Apple and five of the biggest publishers. The deal with Apple was inevitably broken, with publishers today still seeking out ways in which ‘to diminish their reliance on Amazon…as both publishers and retailers seek higher profits from the sale of digital books’ (Gilbert 2015).

The technology of NFTs can enable publishers to take the pricing of ebooks and audiobooks into their own hands with a range of new methods. Currently, when an ebook is created it is highly fungible in the sense that infinite identical copies can be generated and sold. If publishers were to mint their ebooks with non-fungible tokens they could feasibly create a ‘digital scarcity’. Much like the traditional print-run of the trade publishing industry, a publisher could conceivably make a limited edition ebook of only 500 copies, or they could release a special edition audiobook with personalised bonus content for loyal fans of the author. The possibilities of new digital business models for publishing can be left to the imagination, as NFT technology is intentionally programmable. Importantly, what this offers the publishing industry is a profitable alternative to the Amazon book market.

Smart contracts and wage transparency

Beyond the ability to make digital items like ebooks non-fungible, and therefore collectable, NFT technology is powered by ‘smart contracts’ on the Ethereum blockchain. As stated earlier, there has been recent discussion around wage transparency within the publishing industry, culminating in the creation of a spreadsheet for Australian publishing workers to publicly share their salaries and positions (Books+Publishing 2020). Furthermore, with the centralisation of sales records, accessible only to retailers and publishers, there is a denial of access to true sales data afforded to authors (Nizamuddin et al. 2019, p. 3849). This lack of transparency creates issues around book contributors receiving their fair share of royalties. A solution to this issue comes in the form of smart contracts, which the Queensland University of Technology (QUT) describes as:

an automated computer protocol that digitally enacts and verifies the conditions of a rules-based contract between two or more parties. As a self-executing script, it allows for transactions without third parties (Ryan et al. 2020, p. 11).

 ‘The self-executing process of smart contracts eliminates the need for third parties like Amazon, but also automates the transaction of royalties from publisher to author’ 

In other terms, the self-executing process of smart contracts eliminates the need for third parties like Amazon, but also automates the transaction of royalties from publisher to author. As a simple example, a smart contract could be programmed to automatically transfer the publisher 85% of a book sale and 15% to the author at the point of sale. It could also be programmed to automatically transfer a predetermined sum of money to the author when they reach a certain amount of book sales or could automatically change the percentage of their royalties received based on the rules set out within their contract. Ultimately, this process removes the reliance on human parties to transfer royalty funds, who undoubtably have a vested interest, and replaces them with a disinterested computer network.

In addition to the benefits of a self-executing smart contract system, the publishing industry can find a remedy to its wage transparency problems in the key principle of blockchain itself:

Blockchain is an immutable and decentralized public ledger of transactions where transactions are recorded and added in chronological order … As a publicly accessible and decentralized database that is distributed across the Internet all the transactions that happen within the blockchain are broadcasted to all the active participants (Nizamuddin et al. 2019, p. 3850).

The immutability of the blockchain means that each transaction recorded is detailed with what was sold, how much for, and the timestamp of purchase. This datapoint can never be edited. Moreover, every transaction on the Ethereum blockchain is publicly accessible, meaning all book sale records are accessible to all stakeholders and author royalties are protected.

Furthermore, the smart contract can be programmed for more than just paying the author and publisher, allowing for the monetisation of the drafting and editing phases, giving visibility to work like copyediting, illustrating and translating, and paying royalties to all creatives involved in the publishing process. For example, the QUT and Tiny Owl Workshop developed a publisher-centred blockchain model to release Samuel Maguire’s 2018 novella No Point in Stopping. The aim of this project was to publish a digital version of the original novella, accompanied by supporting ancillary text that could be purchased separately as bundles. These bundles included ‘the edits’, ‘the readers report’, and ‘illustrations’ as pedagogical tools for interested readers and aspiring writers. When one of these bundles are purchased, all contributors of the given bundle are automatically paid based on 'the individual contributor’s stake in the ownership of intellectual property and the agreed share of royalties’ (Ryan et al. 2020, p. 27) that was coded into the smart contract.

Decentralisation

The used book market is a contentious part of the publishing industry’s sales channels. The centralisation of the internet has seen a rise in the second-hand market and unsurprisingly Amazon has taken the monopoly. While the impact of the second-hand book market is hard to track, there is concern about its effect on the sale of new books and the lack of royalties given to contributors after the initial purchase. While textbook publishers approach this problem by regularly releasing new editions of their publications in an attempt to deter the second-hand market (Clark & Phillips 2019, p. 339), this approach can generally only work for the educational sector of publishing.

NFTs present the industry with a unique solution to the secondary market, allowing for its continued activity and expanding it in a way that benefits publishers. First, to combat the secondary book market, both the physical and digital worlds need to be linked. The QUT’s No Point in Stopping project attempted to use blockchain to track the sale of physical copies of their book as well as digital. To accomplish this, the print books contained a branded bookmark featuring a QR code which allowed the reader to freely download the ebook online, including the added educational bundles mentioned earlier. At the same time, the QR code has another benefit as ‘each customer who purchases a physical copy and connects to the website via the QR code is timestamped, identified as a physical book purchaser, and logged on the blockchain’ (Ryan et al. 2020, p. 32). Beyond QUT’s project, if these books were minted as an NFT, digital ownership would be given to the purchaser, who could now theoretically sell this NFT and book on to others. Arguably, the greatest advantage of NFTs tracking capabilities is that it allows for royalties to be paid back to the publisher, the author and other contributors whenever a book is resold, using the smart contract system.

Additionally, perhaps the largest shake-up to the established publishing model that NFT allows for is the expansion of the second-hand market from print books to digital books. This new second-hand market would need to extend the principle of exhaustion to a principle of digital exhaustion, stipulating under copyright that ‘once the right holder has placed on the market his/her protected work, the right to control the subsequent distribution of that work is “exhausted”’ (Gonçalves Marchione 2018, p 12). This allows for tangible goods, like print books, furniture, clothing and so on, to be sold in a secondary market, encouraging products to move freely around the community after they have been put into circulation. This principle is easily applied to tangible goods, but its application to intangible goods, like digital files, has been challenged. Copyright holders have argued that as ebooks can easily be reproduced endlessly, it is too difficult to track and the secondary user may not be receiving the original file.

  ‘This new digital exhaustion means that consumers could buy an ebook or audiobook and then sell it onto a friend for their own agreed price'

Nevertheless, NFTs can enable the principle of exhaustion to be extended to intangible goods. As the technology creates scarcity and non-fungibility in digital files, this new digital exhaustion means that consumers could buy an ebook or audiobook and then sell it onto a friend for their own agreed price. The smart contract system ingrained in the NFT can also stipulate percentages of royalties, so that the second-hand digital book market will continue to benefit authors and publishers.

Sustainability issues

It would be remiss not to mention the current sustainability issue within the industry of blockchain. Ethereum uses a proof-of-work algorithm to create these non-fungible tokens, which is notorious for its energy consumption. When making any Ethereum transaction, users are required to pay gas fees that subsidise the ‘computational effort required to execute specific operations on the Ethereum network’ (Ethereum 2021). These gas fees are paid to the miners who process and validate transactions on the blockchain, which requires a large amount of computational effort. This process is incredibly energy inefficient, using excessive amounts of electricity to complete the transaction. At its current state, this cryptocurrency uses more energy than many countries in the world, and the energy consumed by just one NFT transaction could power 2.3 US households for a full day (Digiconomist 2021).

Ethereum has long promised for a set of upgrades that will ultimately reduce electricity consumption, under the banner of ‘Ethereum 2.0’ (Eth2). These upgrades are being implemented to improve the scalability, security and sustainability of the platform, by transitioning from the proof-of-work algorithm that is currently utilised, to a proof-of-stake algorithm. This process relies on ‘validators’, as opposed to ‘miners’, who are responsible for creating, checking and validating the blockchain, and it doesn’t require large amounts of computational effort to be performed, therefore, making it more energy efficient. However, this mechanism is still in its infancy and has not been as widely tested. Currently, the long transition to Eth2 feels more like a pipe dream—it’s clear that a lot needs to change before this technology is sustainable.

Conclusion

The global publishing industry has been through major disruption over the past two decades with rapid technological advancements and Amazon’s digital monopolisation of the industry. As the popularity of digital books continues to grow, the industry is facing an increasingly centralised platform that fosters slim profits for publishers and authors alike and threatens the viability of the industry as a whole. What NFT blockchain technology offers the publishing industry is an opportunity to minimise its reliance on platforms like Amazon and Apple. The technology has the ability and potential to stimulate fresh and exciting business models for the industry, create scarcity and collectability in digital books, underpin an innovative second-hand book market for ebooks and audiobooks, revamp the process of royalties to book contributors, and build a traceable network of transparent sales for both new and used books. Nevertheless, the technology is still in its early stages and while all eyes are currently on NFTs and the Ethereum blockchain, this holds the prospect to all come crashing down. While Eth2 is in the works and promises huge sustainability improvements, the current technology practically guzzles energy, to the point where any Ethereum transaction requires a gas fee. Despite this, the technology undoubtedly offers incredible potential for the decentralisation of the internet and therefore the Australian and global publishing industry, but there’s still a few kinks to figure out first.

Reference list

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Bound Vol. 3Bowen Street5 October 2021