Blockchain & The Music Industry

By Nick Pollock, Senior UX Designer

Being a musician has never been an easy way to make a living.

These days, artists are more unable than ever to earn a living off of their work, even though they are the ones who create what the industry sells. The music business (consisting of record labels, publishers, performing rights organizations, et al.) have been infamously resistant to technology and change. It has lost over 50% of its annual profits in the last two decades due to an inability to change with the digital world. Disruption has come in the form of the internet and peer-to-peer sharing, which has (literally) freed up the way fans get their music.

**Editor’s note: Nick Pollock is both a musician and a UX designer. He and Layne Staley were founding members of Alice N Chains, the precursor to Alice in Chains in 1986. In 1988, Nick formed My Sister’s Machine with Owen Wright, Chris Gohde, and Chris Ivanovich. They released two albums, toured heavily around the US and Europe, and produced multiple videos for MTV until 1994. In 2001 he partnered with Michael Wilton of Queensryche to form the thinking-man’s metal group, Soulbender, which saw success with an album released which was remastered and re-released in 2014. Currently, Nick is fronting a new band called The National Guard, set to release their first record in early 2018.

 

Who’s who in the music industry

The content creators of the music industry are typically performing artists, composers, lyricists, and producers. The business side is made up of record labels, music publishers, performing rights organizations, and many other middle-man organizations, and licensing agreements are struck by record labels with artists. Prior to the digital revolution of the mid 90’s, physical products like vinyl records, cassettes and CDs were a commodity sold to the music-buying public via retail stores (through distributors) and promoted primarily by radio.

Record labels require artists to sign exclusivity agreements (recording contracts) that bind their works to the label. Labels negotiate a small royalty share (10-15%) to the artist. These contracts often require artists to pay back all money advanced to them (for recording, marketing, etc.) before they see any profit, and this remains the case today. Here’s an example: let’s say an artist is given an advance of $100,000 by a label to make a record that will be sold for $10 a piece. The artist makes 10% off of each sale based on the contract signed. The artist must pay the label back the $100,000 advance out of their 10% royalty share, meaning they have to sell 100,000 copies to break even. If the record sells 100k copies, the record label walks away with $900k in profits and recoups the $100k advance from the artist out of their share of the proceeds.

The average number of record sales for a major label release is arguably somewhere between 10,000-12,000 units sold. Coincidentally, that is enough for a label to recoup the advance they gave our hypothetical artist in the example above. The artist doesn’t get a thing until the record sells in excess of a 100k, but the odds are that it will only sell 10-12k. Labels bank on this with the acts they sign and allocate monies to the ones that show the easiest path to breaking. What does it typically take to break an artist? Traditionally, it takes 3 records to develop an artist in the market to any meaningful awareness and adoption by the public. Should a label not see a profitable future in an artist in the first or second record, they can drop them. Of course, they still own the artist’s works so this leaves the artist with nothing, not even the rights to their own creation.

How do artists ever survive financially? Touring is often cited as an alternative but realistically, that ends up being a break-even scenario at best. The costs for touring for a new artist are billed back to the artist as part of their advance against royalties.

With the advent of CDs and digitized music, the internet and peer-to-peer file sharing (Napster, etc) became the greatest threat to the industry’s bottom line. The record label’s response was to sue their customers instead of changing with the times. This, of course, did not stop file sharing and further disruption to the industry. Streaming music services like YouTube, Spotify, Pandora, and iTunes Music became the public’s preferred method of accessing music. For the first time, in 2017, digital streaming surpassed traditional brick-and-mortar revenue streams in the music business. But the huge costs associated with licensing music, middle men, and accounting inefficiencies are why streaming companies haven’t managed to turn an enduring profit so far.

 

A shift is needed

Opacity with accounting practices have plagued the industry, and, as there are often thousands of ways for a hit song to generate income, and as many middle men stand between royalties and artists being paid in a timely (and fair) way.

Looking at the illustration shown above, it is sobering to know that there is no interoperability between the various entities. And this diagram is only showing the largest organizations who collect monies within the industry. Even artists who own the rights to their material can’t get straight answers. Before the mid 90’s all the intermediaries, outlined in the illustration above, were necessary to ensure payments/trust/etc., in the music ecosystem. But none of the intermediaries shared data openly. This caused long delays (years, in fact) in artists getting payed. It was highly inefficient and completely opaque.

 

Blockchain: Distributed ledgers, smart contracts, and getting paid

Here’s where a new technology called blockchain shows great promise for artists, the business, and music lovers. You may have heard of blockchain technology as the foundation of bitcoin in particular, and cryptocurrencies in general. At its most basic form and function, blockchain technology can be understood as a highly-federated means of establishing the identity and authenticity of things, both physical and digital. It can also facilitate secure online transactions, automate contracts, and generally add much-needed transparency to the music business.

Here are a few scenarios that might help you see how blockchain technology could help artists and the music business:

Suppose an artist uploads a song or album to a new streaming/for-sale service that is built on blockchain technology. Each sale or stream pays out immediately to the band, performers, and producers with no middleman services impeding payment or taking a bite of the profits. All of this is based on a smart contract at the time the band publishes their work. A smart contract is a feature of blockchain that allow rules to be written into how something functions on the blockchain. In this case, it would include who did what and who gets what, with regards to the stream or sale of a song or record. This same scenario serves to create the opportunity for more direct relationship between artists and consumers mainly because of blockchain’s elimination of the middlemen taking hefty sums to broker transactions. This would allow artists to get paid directly by fans.

Now imagine the same band has a hit and wants the marketing support a label provides to try to break into the mainstream. The terms could be written up and added to the existing smart contract on the blockchain licensing the artist’s work and govern payments per the deals the band establishes with the record label, publishing company, and Performing Rights Organization. As a bonus, all could share equally and transparently in the data gathered to better target market segments so all could benefit from a collaborative effort.

Publishing music on a blockchain is essentially publishing it on a ledger with a unique ID and time stamp in a way that is effectively unalterable. Music streaming services, record labels, publishers, and PROs would be given a tremendous amount of control over how music is monetized, insight into consumers and their segments, and the power to market much more effectively.

The Open Music Initiative (OMI for short) is a non-profit group that is making the above scenarios a possibility through the creation of an API for attribution throughout the industry. They identify having a universal attribution of content creators and license holders as key to solving the problems with the music industry. “A main aim of OMI is to develop an open source protocol that will enable interoperability among systems and platforms to facilitate transparency and seamless payment flows within the industry.” This will, in OMI’s view, “…create conditions for a robust, for-profit ecosystem of products services and applications to be built and thrive on top of the protocol.” What’s remarkable about OMI is over 190 leading media companies, technology startups, and music industry trade groups have joined the initiative, from practically every facet of the music industry, including the three major labels and major streaming services like Spotify and YouTube.

With OMI’s attribution framework, blockchain technology could be added to realize an ecosystem promised by the diagram above. It would streamline the flow of money throughout the industry. Adding transparency, blockchain would establish much-needed interoperability between the business ecosystem as a whole.  Well-designed, scalable solutions would allow artists to flourish as entrepeneurs, while enabling equitable partnerships with labels when the time comes.

And I for one would love to be part of, and transact in, that music business.

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