Blockchain and the Music Industry: Turning Pennies into Dollars

Guest post by Irving Wladawsky-Berger, former VP of Technical Strategy and Innovation at IBM

Just about every industry has been significantly transformed in the past few decades.  But few have been as disrupted as the music industry.  Everything seems to be changing at once, from the way content is produced and delivered, to the sources of revenue and profits.  Digital technologies, - the Internet, smartphones, cloud computing, … - have literally turned dollars into pennies.  Now, blockchain and related technologies may once more play a major role in the music industry, - this time helping to turn those pennies back into dollars.

We’re truly surrounded by music as never before, - in a wide variety of styles; in physical and digital formats; over the Internet, satellite, and broadcasts; in mobile devices and home music systems.  But, the shift from physical to digital, and then from downloads to streaming have wreaked havoc on the business of music.  US retail revenues of recorded music were close to $14 billion in 1998 before starting their decline.  According to the Recording Industry Association of America (RIAA), revenues fell from roughly $12 billion in 2006 to around $7 billion in 2010.  They stayed flat at $7 billion though 2015, starting to increase in 2016 mostly due to a growth in paid streaming music subscriptions.  Revenues are expected to be around $8 billion in 2017.

Turning dollars into pennies succinctly captures the music industry’s precipitous revenue declines.  As this article noted, “During the heyday of the 80s, the music industry was rolling in so much money it could afford to leave some on the table… which it often did…  There were so many dollars coming in, they didn’t bother paying attention to the pennies.  Well, as we all know those days are gone.  And after a decade of losses from its traditional revenue stream (sales), we’ve seen the music industry forced to look for revenue in new places and in different ways.  In the absence of dollars, the pennies now matter.”

As a result, the music industry now finds itself trying to figure out how to keep track of all those pennies in the hope of turning them back into dollars.  In the first half of 2017, streaming services accounted for 62% of the total market, with digital downloads and physical sales accounting for 19% and 16% respectively, said the RIAA.  But streaming pays royalties in fractions of pennies, so legislation, new business models and technological innovations are needed to make sure that all the necessary data are efficiently collected so the various artists involved in a song are paid.

In June of 2016, the Berklee College of Music founded the Open Music Initiative (OMI), to advance the way the industry administers music rights and help assure that all creators, performers and right holders of music are properly compensated.  OMI is developing open standards to enable the creation of platforms and applications that will simplify the way rights owners are identified and paid.

The initiative is led by Berklee’s Institute for Creative Entrepreneurship, along with MIT’s Media LabIDEOand Context Labs.  It already has over 200 members, including the three major labels, - Sony, Universal, and Warner, - as well as Spotify, Pandora, Netflix, SiriusXM, You Tube, Alibaba and many others.

The music industry was ill prepared for the digital technology revolution.  “After decades of building distribution channels around record contracts and sales, the micro-transactional nature of the internet has, in some ways, diluted the industry,” noted a recent Wired article.  A major part of the problem is that the industry has a serious information gap, namely, keeping track of who helped create a song, so they can get the proper attribution and royalty payments.  “Publishers might keep track of who wrote the underlying composition of a song, or the session drummer on a recording, but that information doesn't always show up in a digital file’s metadata. This disconnect between the person who composed a song, the person who recorded it, and the subsequent plays, has led to problems like writers and artists not getting paid for their work, and publishers suing streaming companies as they struggle to identify who is owed royalties.”

“As a first step, [OMI] created an API that companies can voluntarily build into their systems to help identify key data points like the names of musicians and composers, plus how many times and where tracks are played.  This information is then stored on a decentralized database using blockchain technology - which means no one owns the information, but everyone can access it…  Keeping track of this metadata means artists and platforms can leverage it various ways without fear of violating rights…” The API, still in beta, is a solid starting point for an industry that rarely shares information.  In addition, once the data and APIs are openly available to everyone in the industry, musicians can get more creative with how they sample and produce music, and entrepreneurs can start new companies based on innovative business models.

Blockchain technologies have emerged over the past decade as a secure distributed data and application framework able to handle large volumes of transactions where no parties need to know nor trust each other.  These attributes make blockchain architectures particularly appealing to industries like financial services that deal with highly sensitive data and transactions, and to applications like supply chain management where sharing data securely among all participants can help improve the efficiency of their far flung operations.

These are precisely the attributes necessary to enable the management of the huge amounts of data generated by the micro-transactional nature of streaming music.  At a recent music industry conference in London, a panel of artists and technologists discussed the potential of blockchain.  There was general agreement that after a challenging decade, the music industry is starting to recover.  Now, the big issue at the heart of the industry, is getting everyone paid accurately a problem that will only get more acute as streaming continues to grow.

Panos Panay, - Berklee’s vice president of innovation and strategy and one of the founders of OMI, - explained that “a global hit might have as many as 700,000 lines of different revenue, and at its worst there could be as many as 50 different intermediaries between a listener and the song’s creator.  And there is no interoperability across those intermediaries.  Without interoperability at the end of the day, there is a lot of friction in the system, a lot of money doesn’t get distributed to the people who should be getting the money, and most importantly we are thwarting our ability as an industry to innovate.  Often as an artist if you want to accomplish something, you can’t, because of the way the infrastructure works right now.”

To help achieve its stated mission of assuring “proper compensation for all creators, performers and right holders of music,” the Open Music Initiative recently released the first draft of it’s Minimum Viable Interoperability APIs (MVI 1.0), which will make it possible to link the data associated with recordings, musical works, creators and right holders.  OMI intends to extend the traditional music value chain, - content creation, production, and distribution, - with a blockchain-based interoperable framework suitable for the future needs of the industry.

“Even though some of the majors are not quite ready to embrace blockchain fully, the concept of it - the idea of it  - is actually what made them join the initiative,” added Panay.  “I think everybody acknowledges that the current infrastructure is just not working.”  Labels and publishers are not able to identify and collect revenues for the usage of their works, nor are streaming services able to keep track of the music they play so they can properly pay for it.  “We have a 19th century infrastructure.”  He further explained the potential of blockchain to the music industry in this recent CNBC interview.

Let’s hope that with the help of blockchain technologies, the music industry can develop the kind of 21st century infrastructure needed to manage those myriads of pennies and turn them back into dollars.


About the author: 

Dr. Irving Wladawsky-Berger worked with IBM for 37 years, identifying emerging technologies and marketplace developments critical to the future of the IT industry before retiring in 2007. Since then, Dr. Berger has worked as an advisor for numerous companies and is a visiting lecturer at MIT.