How Blockchain Technology Can Transform Royalty Payments


In a sign of the increasing mainstream popularity of distributed ledger technology in the media space, Spotify recently announced its acqui-hire of blockchain technology company Mediachain Labs to help it reward online content owners with royalty payments.

Mediachain created an open source, peer-to-peer database and protocol for registering, identifying and tracking creative works online. The blockchain component aims to help creators and rights holders prove they are the owner of a piece of work and receive due payment.

The move came after the announcement last month that Spotify reached a $30 million settlement with a publishing group over unpaid royalties and agreed to put in place a system that guaranteed that a "reasonable effort" would be made to match all music streams with creators and rights owners. This is an important period for readdressing an industry in which the artists still lose up to 86 percent of the proceeds from their music.

The Wrong Notes

As one looks at the ecosystem of music and royalties, the inherent problems quickly become clear. There is no central database to keep track of information about music, yet two types of information about pieces of music are critically important to manage: the identities of the original creator and the rights owner. Today, that information is still complicated to track down to the detriment of artists, music services and consumers.

But as Benji Rogers, CEO and cofounder of Dotblockchain music explained in a post on Medium , "the money being left on the table is dwarfing the money being made under the table," suggesting that, overall, a transparent system would generate much more revenue and create more opportunities than it would actually destroy.

Essentially, bad or missing ownership data creates completely fractured databases that prevent artists from getting paid and makes life impossible for platforms trying to pay them.

Royalty payments, for a piece of music's sound recording and the underlying words, are often slow to occur, taking months or even years to reach the bank accounts of rights holders. Given that fans can listen to tracks at the click of a mouse, this system seems archaic.

"Friction" is an issue too. By the time the appropriate funds reach rights holders, more than one performance rights organisation (PRO) may have deducted administrative fees.

The record industry can be characterized as a web, connecting numerous small/medium enterprises (SMEs) with other SMEs and micro-businesses. Even the three, so-called "major" labels , through sometimes complex licensing arrangements, are connected within this web. Since relationships are often carved out by territory for periods of several years and subject to accounting periods that might, at best, be six months apart, SMEs and micro-businesses may be holding sums for onward payment for substantial periods, leaving the money vulnerable to seizure in the case of business failure.

While most of the debate regarding the speed of royalty payments seems to overlook the fact that artists tend to be paid in advance. A record label or publisher pays money to the artist and then keep the artist's royalties until it has recouped its money. Though the speed of accounting is not important for an artist yet to recoup, it would have an immediate effect on artists who do not receive large advances or given a non-recoupable advance.

Hearing The Solution

Distributed ledger technology has the potential to change this dynamic in various ways.

Firstly, the low transaction costs of digital currencies, which have a large range of denominations (typically to eight decimal places), make micropayments feasible. This is particularly important given the small size of typical payments in the streaming era.

For instance, technologists Don and Alex Tapscott suggest that the blockchain could also allow for the "micrometering" of streamed content such as videos, down to thousandths of a penny in exchange for milliseconds of video. It remains uncertain, however, whether consumers will pay for streams, which are typically monetized through subscription or advertising models..

Secondly, smart contracts, implemented via software, allow music royalties to be administered almost instantaneously. Rather than passing through intermediaries, revenue from a stream or download could be distributed automatically between rights holders, according to agreed "splits," as soon as a track is downloaded or streamed. As well as improving cash-flow for artists, smart contracts have a significant effect on counterparty risk within the sector.

The number of distributed ledger technology innovators that are forging solutions are camped in three areas within the ecosystem: licensing rights management, removing intermediaries and addressing piracy problems.

One key player is UjoMusic , based on the Ethereum blockchain, which enables artists to manage their identities, music and licensing on their own terms. Combining the transparency of the blockchain with the innovation of smart contracts, the system also enables consumers to license the music for various purposes.

Ujo beta-tested the platform last year with "Tiny Human," a song by award-winning British singer and songwriter Imogen Heap, and it plans to go mainstream in 2017. Heap described her platform as "trying to take away the power from top down and give power, or at least a steering, to the artist to help shape their own future."

PeerTracks is offering a business model that could change how artists develop their fanbases and build relationships with their fans. PeerTracks is a download and streaming platform on which artists get 95 percent of the revenues.

PeerTracks also introduces the concept of "Notes," a sort of ICO token tied to artists' profiles. While Notes do not give fans a stake in songs, albums or copyright, they can be bought, sold and traded, and their value rises as an artist's content is downloaded or streamed off the blockchain. Artists can also use them to identify their biggest fans.

Widespread adoption of distributed ledgers within the music industry appears to be prompting a new wave of change, and compatible with contemporary models of digital music consumption and distribution. From the consumers' perspective, very little will change. What could be fundamentally transformed would be the way that artists manage their intellectual property and control the ways that their content is used and paid for.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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