Blockchain in the music industry, beyond the hype

Hardwell’s Blockchain release

On October 14, 2016, the Dutch DJ Hardwell released his new track ‘Thinking about you’ was released as a digital download through a Blockchain system. Thanks to this technology the copy- and neighbouring rightsholders of this track are immediately and simultaneously paid.[1] Blockchain fans thought it was brilliant but sceptics dismissed Hardwell’s release as a mere marketing stunt. Blockchain is undoubtedly the hype of this moment, but is that justified?

Back to Hardwell. As a buyer of this track, on the front side of this transaction you don’t see anything out of the ordinary. You simply pay with your credit card and then you can download the track. In the backend of the transaction however, there’s a lot happening. Hardwell’s Blockchain platform makes simultaneous horizontal distribution of revenues possible. Thanks to this set-up, team-Hardwell can control the sales of digital downloads and streams. In addition, Spotify and YouTube are paying for the use of the track directly to Revealed Recordings (Hardwell’s label).[2] These revenues are distributed immediately to the right holders, including copy- and neighbouring rightsholders.

What is Blockchain

Simply stated, Blockchain is a chain of transactions through a decentralized infrastructure, meaning that there is not a regular intermediary who approves the transactions between seller and purchaser. The Blockchain can fully be customized to the artist’s wishes. Wishes such as: Between which parties should the transaction take place? Is a license for the sold content given? Who are the rightsholders of the content? There is the possibility of making and receiving of payments in Bitcoin or another cryptocurrency, flexible pricing etc. A custom build Blockchain can allow the artist to control collaborations or administration of tracks.

Blockchain makes it possible to build an infrastructure to execute specific transactions between untrusted parties. The value of Blockchain, is in the specific application. However, there is no ‘one-size-fits all‘ format. Blockchain users must figure out for themselves what their desired infrastructure should look like. There are two main Blockchain types. There’s a public version f.e. Ujo and Ethereum used by e.g. Microsoft, Deloitte and UPS. There are also private blockchains used by e.g. banks.

British songwriter Imogen Heap experimented earlier this year with the Ujo-platform. In the music industry, usually a public version will be used because everyone can build applications for a public blockchain. However, it is not unthinkable that companies with large international networks (e.g. banks) will choose a private version because of privacy issues and, among other things, the need to control transactions. Collective rights management organisations (“CRO”) would also be able to set up a private worldwide Blockchain system, this way they also would have immediately a global rights database in which all the repertoire of all the CRO’s can be linked together.

Since a transaction via Blockchain can be carried out without the intervention of the parties concerned, the details of that transaction are settled automatically. This can be done by linking a so-called Smart Contract to the transaction. A Smart Contract is a software program that imitates the logic of a contract. Certain core elements of the transaction that need to be fulfilled are determined in a Smart Contract. In fact, it is an automated protocol. The execution and enforcement of a Smart Contract is automated. A Smart Contract triggers a particular event, such as the distribution of a royalty payment to the rightsholders.

So far, so good. In theory, it sounds promising. When we look at the practical application of Blockchain and in particular of Smart Contracts, the following questions arise. How do we qualify Smart Contracts legally? Is a Smart Contract like a ‘traditional’ contract or does it contains only the core terms of an agreement? Smart Contracts contain a protocol, and are by its nature very inflexible. This inflexibility can be a problem in particular with regard to music contracts. A Smart Contract, for example, does not adapt to changed circumstances. Suppose that because of legal proceedings the distribution of royalties’ changes. In such a case the existing Smart Contract need to be changed retrospectively, unduly paid amounts should be recovered, the rightsholders need to be adjusted, etc. It remains to be seen whether it is technically possible to reverse transactions in a Smart Contract. I did not found a clear answer to this question in the literature. In some situations, the parties do not wish, for example, a strict enforcement of the contract. For example, because that is in contradiction with the reasonableness and fairness or has unwanted consequences. Several scenarios must be programmed in the software. The question is whether this is technically possible.

In my opinion, a link between Smart Contracts and traditional contract law cannot be excluded. Smart Contracts need to be set-up within existing legal principles as reasonableness and fairness. There are still some legal hurdles with respect to the qualification of a Smart Contract and their enforcement outside the Blockchain to overcome.

The currently used Smart Contracts are not very complex, however the contracts used in the music industry are. This complexity originates from the many right-holders and other parties involved who should receive a portion of the proceeds or the complexity of various music rights. I estimate that we will be experimenting with Smart Contracts for the next 5 till 10 years.

Blockchain as a solution to the current problems in the music industry

The interest in Blockchain technology comes in particular from the group of songwriters and artists. Especially this group of right-holders is affected by the complexity and opacity of the money flows in the current music industry. In addition, songwriters and artists sometimes feel that the content distributors, including iTunes, Spotify, YouTube, SoundCloud, don’t provide access to their data. I understand the need of songwriters and artists to get directly access to data generated by their content distributors. Although this particular issue of data not being available to artists is usually due to agreements between artists and their labels and/or publishers.

Songwriters and artists face several problems in the music industry. I mention only a few:

  • Lack of transparency in royalty pay-outs and the contractual arrangements between content distributors.
  • Low frequency of pay-outs.
  • Error sensitivity of the, often manmade, royalty statements.
  • Some parties in the music industry will benefit from intransparency.

These problems result from the organization of the traditional music industry in which the artist depends on intermediaries regarding, for example, reaching fans, distributing and collecting royalties and releasing compositions.

The distribution models were thoroughly rearranged with the introduction of on-line platforms such as YouTube, Spotify etc. The existing gatekeepers have less control over certain aspects of the music industry because they also depend increasingly on these on-line platforms for among others the distribution of their content. In this digital transformation process, there are ample opportunities for artists to sell their content directly to fans via Blockchain technology.

An artist can sell an intelligent song through a Blockchain system. A Smart Contract can arrange the license and royalty distribution of the song is linked to the transaction. In such a system, each rightsholder is being paid at the same time. In the traditional system, songwriters and performing artists are often only paid lastly by CRO’s or other users of their content. Or what about the merchandise that a fan thanks to a Smart Contract can print at home on the 3D printer?

The application of Blockchain technology in the music industry is still in its infancy. There are still plenty of technical and practical bottlenecks to tackle:

  • The metadata that is processed in a Smart Contract need to be correct. The most logical place to collect this metadata is at the artists themselves, at the time that they create their master in their Digital Audio Workstations. Parties as Logic (Apple), FL studio, Cubase, Native Instruments would have to implement in their software that metadata can be stored in a project. Parties such as Auddly or Ddex offer systems, which make it easier to capture metadata of tracks. My suggestion goes even further, but the question is whether composers will have the discipline to fill in all the metadata upon bouncing their masters. Convenience should be the magic word.
  • It should be possible to correct errors in Smart Contracts and/or payments. Suppose that because of an infringement case, for example, the number of composers and the distribution of royalties changed, then there should be settled on the amounts unduly paid.
  • Data management: What happens to the collected data and who is responsible for the data? What about privacy issues?
  • A Blockchain system should be secure. What about liability issues?
  • How will rights be maintained?
  • Are we creating a black box again but only in a different place?
  • Is it even possible to roll out a large-scale blockchain platform taking in account the necessary computing power?
  • Are the systems sufficiently compatible with each other?
  • How do we qualify legally a Smart Contract?
  • How do we deal with IPR issues?

Blockchain and a new digital ecosystem

Blockchain offers a lot of potential to artists if one implements the system in an artist-centered digital ecosystem. In such a set-up, the instant connection between the ‘artist – fan’ is key. The stakeholders, such as label, publisher and booking office, are positioned around the ‘artist – fan’ connection. The artist is the motor and the brain of his organization, where the remaining players are facilitating.

In addition, the artist can collect data from his transactions with his fans and use the data to have stakeholders undertake specific strategic actions. The Blockchain of an artist can be linked to content distributors. This allows an artist to understand the data, f.e. number of listeners per month, location and growth in the number of streams, of those companies. These data provide valuable information about the fan base of an artist. Critical to the success of this artist centred digital ecosystem is that the core organisation around the artist – mostly management – must have a clear vision and plan for the artist.

Mostly the technology is not the problem, but the perception of the parties involved regarding their own role is. At the time a horizontal decentralised system will become the standard, CRO’s, publishers, labels, etc. need re-evaluate and reinvent their own role. The latter has proven to be very difficult in the music industry. Also, the artists have to re-evaluate and, if necessary, redistribute the organization around them. Imogen Heap, Helene Muddiman and now Hardwell prove that they understand their new role as the focal point in the organization and as a direct link to the fans. They control how and when they release content, they have insight in all data and the behaviour of their fans.

Artists not engaging actively with setting up a direct fan-artist infrastructure, will miss out. Tech companies are not just more specialized in content distribution. They behave more and more as a label (see the releases of e.g. Drake or Frank Ocean) or collective rights management organisations (YouTube’s content ID system). This type of companies can easily assume the role of label, publisher and even as a booker.

It’s only a matter of time before tech-companies introduce their own Blockchain systems. The artist will then even more be dependent on the Apple Musics, Spotify’s and YouTube’s of this world. These companies will determine the market value of artists in multiple ways, paying what they want without any guarantee that these payments also may be controlled and the data remain with those companies and they have no intention to share that with the management of an artist. Artists and their team must do it their selves. Blockchain seems to be the ultimate tool to create a DIY-platform.

Conclusion

Is Hardwell’s Blockchain initiative merely a marketing stunt? I don’t think so. It is a first step towards a more mature music industry, in which a level playing field is created by simultaneous horizontal distribution of funds and direct licensing of intellectual property rights

[1] Imogen Heap and Helene Muddiman are already working on such initiatives for some time. Read more http://bindudeknock.com/2015/10/01/block-chain-technology-save-music-industry/.

[2] Thanks to Denis Doeland for background information.

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