Bitcoin for Rockstars: How Cryptocurrency Can Revolutionize The Music Industry

By D.A. Wallach, Recording Artist, Investor, Artist in Residence @ Spotify. This article originally appeared on DAWallach.com

There is an incredibly boring problem in the music industry for which Bitcoin offers a potentially fascinating solution. In fact, I think this might be one of the coolest and most immediately worthwhile applications of distributed ledger and payment network technologies such as Bitcoin.

The problem is simply that no central database exists to keep track of information about music. Specifically, there are two types of information about a piece of music that are critically important: who made it and who owns the rights to it. Right now, this information is fiendishly difficult to track down, to the great detriment of artists, music services and consumers alike.

Decentralized, open-source, global cyryptocurrencies such as Bitcoin and Ripple (full disclosure: I am an investor in Ripple Labs, which is developing this currency) offer a model for how we might address this bedeviling status quo. By applying the technical breakthroughs of these networks, we can sensibly organize data about music for the first time in human history and, more importantly, reinvent the way artists and rights-holders get paid.

The Problems

1. The Credits Conundrum

The first category of interest is “credits.” Almost all recorded music is a collaboration between songwriters, singers, musicians, producers, recording engineers, mastering specialists, and others. Everyone knows who Adele is, but few people know that Chris Dave played drums on her bestselling album. And you won’t discover this great musician’s contribution by buying the song on iTunes or listening on Spotify or YouTube. It’s a shame.

In the past, the lusciously expansive packaging and liners of Vinyl records and later CDs were the paradise of behind-the-scenes talent. Anyone buying an album could page through the notes and find out who contributed what to the music. But in our digital-first market, these personnel are orphaned into obscurity. On today’s digital services, all one can see for a song is superficial data: the main artist’s name, who wrote the song, the name of the album it’s on, and the date of its release.

It’s much more difficult to get work if no one knows that you were responsible for that amazing drum performance or that brilliant mix.

As Spotify’s Artist-In-Residence, I’m extremely interested in fixing this problem for the unsung heroes of recorded music. But I’ve now witnessed the challenge from the inside. It’s not that services such as Spotify and other retailers don’t want to know about the music on our platforms; it’s that we struggle to obtain it. Artists and record labels have sent us over 30 million songs. Although we ask that they package it up for us in an organized and informationally rich package, what we actually receive varies widely.

Digital services rely on a number of third parties to help piece together better information about their catalogues. For example, ROVI has a massive database of credits information that it will, for a price, share with customers in a highly controlled manner. Others, such as MusicBrainz, crowdsource data and share it freely or at a small cost. A number of other corporations, unions, and nonprofits also keep a tight grip on music metadata. For instance, in the United States, the American Federation of Musicians and SAG/AFTRA are unions that represent large numbers of musicians and singers, and they attempt to keep tabs on their members’ every recorded performance. They care about this information because it allows them to ensure that their members receive union-negotiated fees (and that the unions themselves, in turn, receive their dues).

In short, the information about who did what on a given record almost always exists somewhere in the world, but it is typically fragmented between a large number of databases that don’t sync with each other, and whose owners have conflicting views about what should be public and what should be private. This forces digital services such as iTunes and Spotify to invest internally in cleaning up and organizing the information they receive, a burdensome administrative necessity.

2. The Riddle of Rights

Though getting credit for one’s work is a big deal, getting paid for it is an even bigger deal.

Let’s look at Katy Perry’s “Dark Horse,” one of the biggest songs of the past few years, as a case study. From a legal point of view, the first thing to know about a song is that it’s not one thing. It encompasses a diffuse constellation of conceptual properties, each with numerous potential owners.

The biggest two buckets of rights are 1) rights in a song or composition and 2) rights in a recording of a song.

“Dark Horse,” for example, was written by Perry, Max Martin, Juicy J, Dr. Luke, Cirkut, and Sarah Hudson. Each of them theoretically owns a piece of the underlying song, although they can assign their ownership to one or more third parties. Because Perry first recorded the song, she owns that recording. Whenever someone else records the song after Perry, that individual will own that recording, but the six original writers will still own the song itself.

That being said, artists and songwriters often sell these rights to record companies and publishing companies. Perry, for instance, has a publishing deal with the company Warner/Chappell (a subsidiary of the Warner Music Group) and a record deal with Capitol Records (a subsidiary of the Universal Music Group). When these rights generate earnings, contracts between Perry and her partners determine how these earnings are shared.

But publishing and recording rights are just the beginning. When Perry and her collaborators wrote “Dark Horse,” they also originated additional rights in the public performance of the song. These rights entitle their owners to be paid when a song is publicly exhibited—when it is, say, played on the radio, performed live, or broadcast over the speaker systems at the Staples Center or Chipotle.

The slicing and dicing of rights doesn’t stop there. For example, Katy Perry might choose to sell one company the rights to her general publishing but another company the right to make sheet music for her songs. She can also assign rights to different owners in different countries.

In short, if someone writes and records a song, they effectively create a basket of rights, which they can sell to all sorts of actors all over the world.

How Royalties Work Today
(A Journey Into Unnecessary Complexity)

With that crash course in music rights complete, let’s talk about how a play of “Dark Horse” on a streaming service produces royalties for the owners of its rights:

You play “Dark Horse” on Spotify in the USA.
Spotify keeps track of your and others users’ plays over a period of time and then pays out a share of its royalty pool proportional to the song’s popularity on the service during that same period. One percent of plays would equal one percent of total payouts, for example.
This payout actually comprises multiple separate payments to the various owners of the rights in the song. These include:

The record company (Capitol) to compensate for usage of the master recording.
The performing rights organizations representing the song’s writers (ASCAP and BMI in the United States).
The Harry Fox Agency, which Spotify uses to administer another esoteric type of publishing royalties called “mechanicals.” These are statutorily-mandated royalties that compensate songwriters for the use of their songs within recordings that are being exploited, which is subtly different in a streaming context than in a performance. (If this is confusing, that’s because it is totally confusing.)

A similarly mind-boggling array of recipients exists in every market in which Spotify operates, and so every month, for a song with multiple writers, Spotify can conceivably end up writing checks to upwards of 20 distinct parties.

This situation creates an enormous administrative burden for a music service, but that’s not the big problem. The big problem is that money only makes it to artists after passing through all of these intermediaries, each with its own accounting processes, timelines, fee structures, and reporting standards. The result is that artists and songwriters suffer from a nearly complete lack of predictable, understandable income.

Having survived solely on my music for years, I experienced this firsthand. Checks for widely varying amounts randomly show up in the mail each month, from all sorts of different issuers. Each comes with some fashion of itemized receipt, but since all of the receipts represent different rights categories and earnings periods, it’s extremely difficult to piece together a clear picture of one’s financial life.

In public conversations about streaming music, many voices are passionately calling for “transparency.” The implication is usually that someone — a music service, record label, publisher, or rights society — is being dishonest and hiding money. This interpretation is understandable in light of the long history of artists’ being exploited for profit. But having spent three years now in the trenches with Spotify and in conversations with executives across the industry, my assessment is that fraud is not the primary impediment to transparency. Complexity, outdated IT systems, and fragmentation are. Luckily, technology can fix this.

A Solution

These deep infrastructural inefficiencies around credits and rights information diminish the lives of creators and impose unnecessary administrative complexities and costs upon the entire music industry. A new paradigm for music data management is sorely needed. One solution could be a decentralized, open-source global platform, owned and controlled by no single entity.

The platform would have two complementary functions.

It would contain accurate, real-time, global data encompassing credits and rights ownership. This would make it the universal, authoritative reservoir for these types of information, and it would be open to and accessible by anyone.
It would serve as an instantaneous, frictionless payments routing infrastructure for all music usage fees and royalties.

The architecture of Bitcoin provides an instructive example of how this platform might work. Bitcoin is an extraordinary intellectual and technical achievement, and it has generated an avalanche of editorial coverage and venture capital investment. But very few people understand it. Here’s what’s important to know.

Bitcoin, abbreviated BTC, is the name of a digital currency, just as the U.S. Dollar is the name of the fiat currency in the United States. But more important, Bitcoin is a network. The Bitcoin network is instantiated by a bunch of separate people running the Bitcoin software on their computers. The software is open-source, meaning that anyone can check out its code, modify it and so on. Nerds love open-source applications because it means that no single company is unilaterally controlling the software’s development.

Even though Bitcoin is open-source, there is always a single current version of the software that almost everyone agrees to use, and when they use it, they create a network between themselves. If a group of people chooses to use a different version of the software for long enough, they “fork” the network, creating their own, separate network.

This network connects Bitcoin’s users to each other and enables them to do one thing very well: maintain a common “ledger,” or database, that keeps track of how many BTC each person on the network owns. Imagine that Mark, Jane and Sara are sitting around a table, and in the middle of the table is a book, the only purpose of which is to keep track of how much money each one of them has. This is exactly what the Bitcoin network does.

The technically marvelous thing about Bitcoin, however, is that not only can it keep an accurate accounting of this ledger, it can process real-time transactions between participants.

Back to our example: say Mark, Jane and Sara each have 10 BTC, but Sara wants to send Mark 2 BTC. Executing this simply means amending the ledger to reflect that Sara will now have 8 BTC and Mark, 12 BTC. Nothing physical moves between Sara and Mark; the record of their balances just changes. Bitcoin can do this almost instantaneously, and, more importantly, in an extremely secure way. If Sara had wanted instead to transfer Mark this money using traditional bank accounts, the transaction would require intermediaries to govern the process, including both participants’ banks and the ACH network, which mediates interbank transfers. These intermediaries impose their own fees, time delays and security risks upon the process. Bitcoin knocks out these middlemen, replacing them with decentralized, open software. No one owns or oversees the Bitcoin network; it is literally by, of and for the people using it.

Using A Decentralized Ledger For Credits and Rights Information

A few years ago, I helped a friend try to obtain licenses to use a song for a commercial she was producing. Even as a music industry insider, I had an agonizing two-week goose chase. Just figuring out who owns which rights in a song and how to contact these owners can require several days of phone tag with record label licensing teams, rights societies, artist managers, publishers, and estates. It is, in short, extremely hard to buy music. For an industry seeking to rebuild its economic livelihood, this is an enormous problem.

The root of the problem is again the one we’re exploring here: the absence of a single dataset containing credits and rights information. Instead, this information is fragmented among a large number of territorial organizations. Every entity treats its data as proprietary and intrinsically valuable. This is understandable, given that these organizations invest heavily in their datasets. For example, ASCAP, one of the two predominant performing rights organizations in the U.S., dedicates significant operational resources to keeping track of its members’ compositions.

But ultimately, all of this information is just information. Who owns which rights are simply facts. There is no good reason that all these facts cannot live in public, accessible by anyone anywhere.

Previous efforts to create a single, authoritative global database have failed, seemingly as a result of coordination problems. The most tragic of these failures might have been the Global Repertoire Database (GRD), which died earlier this year (after raising millions of dollars) when it could not successfully balance the various interests of its stakeholders. As the GRD experience illustrates, getting several self-interested organizations to cooperate in creating a separate, powerful organization is extremely challenging. No one wants to cede perceived power. By contrast, a decentralized database, analogous to the Bitcoin ledger, could align incentives across the global music industry. Since no one would control this database, no existing stakeholder would need to fear mutiny.

But mitigating fear is only one prerequisite. Since existing database-keepers invest serious time and energy into collecting and grooming their data, incentives must exist to reward them for this work. These intermediaries currently benefit from being closed and proprietary, so a decentralized solution must allow them to benefit from being open.

In Bitcoin, there is a similar collective action problem. In order to create the network’s security, a lot of computers must donate processing power. Bitcoin ingeniously incentivizes people through a system called “mining.” Those who contribute lots of computing power, “miners,” basically participate in a lottery. The more power contributed, the more lottery tickets you get. And if you win the lottery, the network spits out some free Bitcoin for you.

A similar approach could reward participants in a global music credits and rights database. As mentioned, lots of different folks, including musicians, licensees and music services, would benefit from having this data reliably organized. Every time one of these users would need to call upon the data, they could issue a small payment to the network for access, and this payment could be distributed to the originators of the data being requested. In other words, anyone contributing data — be it an artist, union, publisher, label, or rights society — would be rewarded for its contribution in perpetuity.

Though reading from the database would be open to anyone in the world, writing to it would require specific permission. These permissions, as well as arbitration of contradictory data submissions, would need to be managed by some independent authority, perhaps a board of directors including artists, publishers, rights societies, labels, and music services.

These are just a few of the procedural questions to be addressed, but an organization called ProMusicDB has already made some compelling proposals about how to ingest and verify credits data. Their approach, which has some promising initial buy-in from the musicians unions, would call upon artists and music-specialist librarians to contribute information, bringing constituencies currently excluded from the credits marketplace to the table. (Interested fans and artists can join the ProMusicDB conversation by participating in its survey here.)

Using A Decentralized Network For Royalty and Licensing Payments

The argument I’ve been making so far is that a decentralized, open, global ledger is the optimal technology solution for credits and rights information about music. Such a system would align the interests of those who currently control fragments of the informational universe and would greatly benefit creators and all of those who use music commercially.

Perhaps more radically, this architecture could also create a simple, efficient and transparent approach to paying creators and rights-holders.

In Bitcoin, each network participant has one or more addresses on the common ledger to and from which payments can flow. If Sara wants to send Mark BTC, she does so by transferring the BTC from her address to Mark’s, and this can be seen by the entire network (although who owns each address is private). All transfers of value on Bitcoin are visible publicly, but the participants’ identities are not.

In the proposed music rights network, each song, recording, rights-holder, creator, and payor would have its own unique address on the ledger. And complimenting this ledger would be “smart contracts,” programmatic rules defining how the addresses relate to each other and automating their interactions. For example, Katy Perry’s “Dark Horse” would have its own address, as would Katy Perry herself, each of her collaborators, and each of the companies entitled to royalties from the song. One set of “smart contracts” could connect all of these addresses to one another.

Spotify, YouTube and other services could then issue all-in royalty micro-payments (aggregating all negotiated fees) directly to the “Dark Horse” address every time the song is played. The smart contracts connected to the “Dark Horse” address would recognize the source of the payment—say, Spotify—and then instantly split and redirect royalties to all the addresses entitled to payments from the service for the song. Katy Perry, her label, her publisher, and her collaborators would all have total visibility into payments received by the “Dark Horse” address, and each would receive its shares instantly in its own wallet. This software-based relay station for royalty and licensing payments would put creators at the center of the action, allowing them to understand how much money their works were generating, and from which services or licensees. It would also give artists and songwriters instant access to the funds generated by their work, obviating the long waiting periods they currently endure.

In this way, theoretically all payments and accounting in the entire music industry could migrate onto this network. The record deal of the future could primarily be a set of smart contracts on the network that establish very clear protocols for how an album’s address should automatically split different income streams between an artist and a label. The work done by the network could replace work done today by outdated accounting systems in hundreds of different organizations.

Though this regime would diminish, to a degree, the monopolies of certain intermediaries, it would really just refocus them on their core purposes and free them of administrative overhead. A performing rights organization such as ASCAP, for example, should primarily be in the business of negotiating rates with its buyers, not routing micro-payments through opaque internal formulas that no one understands. In 1970, this was the only way. Today, it’s not.

The huge number of practical details involved in this plan are beyond the scope of this essay, the goal of which was merely to outline a framework for evolving the music industry’s outdated data and payments infrastructures. That being said, though Bitcoin is an inspiring model, the Bitcoin network is unlikely to be the best network on which to build this specialized application. One potential enabler is Codius, a new protocol for decentralized applications that could permit smart contracts to operate across multiple different ledgers. If Katy Perry wanted her royalties to flow from this music-specific ledger to her Bitcoin wallet on the Bitcoin ledger, for instance, Codius could make that happen.

These are not sexy, glamorous, rock-n-roll matters. But they are integral to ongoing, impassioned conversations about how the media landscape is changing, and what the lives of artists will look like in the future. It is also likely that these ideas are relevant to state copyright management and to other media businesses, where similar complexity exists around credits, rights and payments.

Entrepreneurs in the cryptocurrency movement may be wise to explore the possibilities therein. Accumulating even minuscule transaction fees across this sort of network could over time amount to one of the most defensible, passive profit streams in the entire media sector, a rich reward for anyone intrepid enough to brave the industries.