Blockchain Revolution

Rube Goldberg Strikes Again: Complexity in the Music Business
To paraphrase Talking Heads, how did we get here? How do we work this?
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It starts
with a basic problem for artists—that they signed contracts drafted for the vinyl age,
when huge analog production and distribution costs stood between recording artists
and their potential consumers. Heap told us, “When I first found a record label, I think
I managed to get something like fifteen percent. My last record deal a few years ago, I
got maybe nineteen percent. If people are lucky, they might get more now.”
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Artists
may have assigned their rights to a label for the full term of copyright. In the States,
that’s either ninety-five years or the life of the artist plus seventy years. Imagine all
the unforeseen innovations that a contract would have to cover to keep the deal fair
for artists and their heirs.
Initially, the labels were small, radio was king, the record store was queen, and
artist and repertoire personnel not only scouted for new talent but also oversaw their
artistic development. In the last twenty-five years, the industry has consolidated from
thousands of labels down to three global superpowers—Sony Music Entertainment,
Vivendi’s Universal Music, and Warner Music Group—and a few hundred indie
labels. These three majors have a combined 15 percent stake in Spotify, the most
popular and lucrative streaming music service.
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So they will get an extra cash
infusion if and when Spotify goes public. Apple has become the world’s largest music
retailer, and Live Nation the world’s largest live entertainment company.
So control of music copyright is concentrated in the few. The labels and the tour
promotion companies have started asking for 360-degree deals from artists. That
means getting a cut of all the revenues an artist generates—publishing rights to the
underlying composition, usage rights to the sound recording, performance rights when
the artist goes on tour, potentially even merchandise and sponsorship rights—
regardless of whether they invested in the cultivation of those rights.
With consolidation comes systems integration, and that’s never easy. Each
conglomerate has its own process of accounting and its own version of a contract and
a royalty statement, making side-by-side comparisons a challenge. “We have a big
problem in that the industry is very fragmented. With all of its different platforms, it’s

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a bit of a nightmare,” Heap said.
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These systems must accommodate innovation in
production, format, distribution, and context of usage. But rarely is an element
immediately outmoded, and so every party must maintain two or more models
concurrently, the most obvious two being the physical and the digital.
To add to the complexity, there are many members of the supply chain, not just
the publishers and the performance rights organizations (PROs)—organizations that
monitor public performances of music and collect performance royalties such as the
not-for-profit American Society of Composers, Authors and Publishers (ASCAP),
not-for-profit Broadcast Music, Inc. (BMI), and the enterprise formerly known as the
Society of European Stage Authors and Composers (SESAC)—but also the producers
and the studios, the venues, the concert tour organizers and promoters, the
wholesalers, the distributors, and the agents, each with its own contract, accounting,
and reporting system. They take their cut and pass along the remainder to the artists’
managers and agents. Whatever’s left goes to the artists themselves, per the terms of
their contracts. That’s right—the artist is the last to be paid. It could be six to eighteen
months before the first royalty check arrives, depending on the timing of the release
and the label’s accounting cycle.
Finally, an entirely new layer of intermediaries—technology companies like
YouTube or Spotify—inserted themselves into the supply chain between artists and
labels, slicing the artists’ piece of the pie even thinner. Let’s look at streaming music.
Spotify pays on average between $0.006 and $0.0084 per stream to rights holders,
usually the labels.
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The calculation of this initial payment may seem transparent at
first. Spotify’s site states that it pays 70 percent of its advertising and subscription
revenues to rights holders. But we reviewed its forty-one-page “Digital Audio/Video
Distribution Agreement” with Sony USA Inc., and the payout of some $42.5 million
in nonrecoupable advances to Sony artists is anything but clear. In fact, the first
paragraph of the agreement calls for confidentiality. It appears that neither Spotify nor
Sony can inform Sony’s artists of the impact of this agreement on artists’ revenues.
Rich Bengloff, president of the American Association of Independent Music, said
that, in his experience, the labels don’t usually share money not directly tied to
usage.
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Industry analyst Mark Mulligan said, “Artists are going to feel pain for at
least another four to five years, just as they did in the first four to five years after
iTunes launched.”
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So what value do the labels add? Certainly, they attempt to manage this
complexity, police piracy, and enforce rights. For example, Universal Music
Publishing Group had dedicated a third of its workforce to royalty and copyright
administration in local markets around the world.
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Universal recently deployed an
artist’s portal that allows artists to peek at the status of their royalties and to request

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advances against future revenues for no fee. The portal also provides “insights into
Spotify usage: how many times a song streams, what kinds of people are streaming it,
what else is on those listeners’ playlists, and how specific songs resonate with certain
audiences.” Universal has devoted sixteen staffers to upgrading the portal and
interpreting data for artists.
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The labels also have huge teams of lawyers and
lobbyists. They can launch new artists globally, demanding their boilerplate terms,
marketing through local foreign media, distributing their music in foreign markets,
licensing rights to foreign publishers, supporting international tours, and aggregating
all the revenues. The cost of policing royalties has increased with the complexity of
the business—that is a cost that directly affects artists everywhere, because it
functions like a tax.
Smart contracts on the blockchain can eliminate the magnitude of this complexity,
replacing a mission-critical role of music labels in this ecosystem. According to
Imogen Heap, “If you’re a computer program, a piece of software, a database . . .
these issues disappear, as it’s just maths half the time. This bit goes to this person . . .
and it doesn’t take a year or two to reach the artist, writer, performer. . . . It’s instant
because it’s automated and verified. On top of this, culture-shifting new music
distribution services gather really useful data from artists’ fans, which could
massively help us be more efficient if the artists themselves could get to it.”
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That’s
the future of music on the blockchain.