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Cybersecurity Research
  1. 1.5 Music Business Perspective
    1. 1.5.1 Blockchain Impacts & Policy Concerns
    2. 1.5.2 Blockchain Supply Chain
      1. 1.5.3 Blockchain-based Music Platforms

1.5 Music Business Perspective

1.5.1 Blockchain Impacts & Policy Concerns

Ignacio De Leon and Ravi Gupta in The Impact of Digital Innovation and Blockchain on the Music Industry analyzed the potential impacts and policy concerns of applying blockchain in the music industry.20 De Leon and Gupta identified eight (8) discrete impacts blockchain could have on the music industry, summarized in the list below:

  1. flexible pricing and revenue optimization;

  2. speedier payments;

16We gathered approximately fifty (50) sources (articles and papers) in total and included forty-one (41) sources.

17The Bitcoin blockchain was released in 2009 and smart contracts did not become viable until the Ethereum blockchain was released in 2015.

18Especially concerning emergent issues that arise from the interaction of all these fields and practical projects that apply Web3 technologies to music-related applications.

19Though, we hope we can improve the Literature Review in a future version of this report.

20Ignacio L. De León and Ravi Gupta. The Impact of Digital Innovation and Blockchain on the Music Industry. Tech. rep. IDB-DP5 49. Inter-American Development Bank (IDB), Nov. 2017. url: https://publications.iadb.org/publications/english/document/The-Impact-of-Digital-Innovation-and-Blockchain-on-the-Music-Industry.pdf (visited on 12/17/2019).

  1. superior valuation;
  2. transparency and negotiating power;
  3. piracy;
  4. sharing revenue;
  5. news business models (fans, micropayments); and
  6. reordering of the music industry.”21

For our research purposes, we decided to focus on De Leon and Gupta’s discussion of impacts (1), (4), (6), and (8).22 De Leon and Gupta’s analysis of impact (1) led to them conclude that blockchain can optimize revenue and enable flexible pricing by:

  1. having consumers pay for specific songs, rather than a Collective Management Organization’s (CMO) entire catalogue, and

  2. dynamic pricing of musical works based on usage, popularity, and other real-time metrics (can embed in a smart contract).23

De Leon and Gupta’s analysis of impact (4) led to them concluding that blockchain can lead to greater transparency for stakeholders but is unlikely to lead to musicians and consumers becoming better negotiators solely based on more transparency.24 De Leon and Gupta’s analysis of impact (6) led to them concluding that musicians would not receive a substantially greater share of the music industry revenue because intermediaries provide vital services such as monitoring intellectual property infringement and developing and promoting sound recordings.25 De Leon and Gupta’s analysis of impact (8) led them to conclude that new business models would develop that empower consumers to promote musicians in exchange for micropayments.26

De Leon and Gupta discussed that blockchain could lead to new business models in the music industry that empower consumers to promote musicians in exchange for micropayments27 Despite these impacts, De Leon and Gupta do not expect blockchain to cause a decentralized transformation of the music industry because it makes more economic sense to rely on large consolidation to share risk among stakeholders, but they do believe that blockchain could reorder the industry supply chain like le sharing platforms did in the late 1990s and early 2000s.28

De Leon and Gupta then transitioned to discuss policy issues that may arise from blockchain use cases in the music industry.29 De Leon and Gupta identified four policy issues regarding smart contracts, intellectual property, incumbency and monopolies, and governance structures.30 For our research purposes, we focused on De Leon and Gupta’s analysis of smart contracts, intellectual property, incumbency, and monopolies.31

De Leon and Gupta’s analysis of the smart contract policy issue led them to conclude that there is a need for clarifying how smart contracts comport with traditional legal frameworks and principles before stakeholders utilize smart contracts in the music industry.32 Despite these concerns, De Leon and Gupta believe that smart contracts will eventually lead to greater compensation prospects for musicians.33

21De León and Gupta, The Impact of Digital Innovation and Blockchain on the Music Industry.

22Ibid.

23Ibid.

24Ibid.

25Ibid.

26Ibid.

27Ibid.

28Ibid.

29Ibid.

30Ibid.

31Ibid.

32Ibid.

33Ibid.

De Leon and Gupta’s analysis of the copyright law policy issue regarding assignment and piracy led them to conclude that musicians could self-certify their ownership of musical works, but that this is not a cure-all because the self-certifying musicians may not actually own the copyright to the work.34 However, De Leon and Gupta do believe there are benefits for musicians unaware of copyright law, especially small time musicians, because generally registering the musical work on or with the blockchain is coupled with monetization of the musical work.35

De Leon and Gupta’s analysis of the incumbency and monopolies policy issue led them to conclude that incumbents are unlikely to be replaced because they can acquire blockchain startups to harness their innovations, and incumbents are likely to repurpose themselves through innovations.36

De Leon and Gupta’s analysis of the governance structures policy issue led them to conclude that blockchain may lead to policy changes in the governance structure of the law and society overall.37 In the music industry, blockchain may help modernize PROs consent decrees with the Department of Justice (DOJ)38

1.5.2 Blockchain Supply Chain

Camila Sitonio and Alberto Nucciarelli in The Impact of Blockchain on the Music Industry, continued in the same vein as De Leon and Gupta by analyzing blockchain’s impact on the recorded music supply chain.39 In particular, Sitonio and Nucciarelli see blockchain having the potential to affect the recorded music supply chain by removing intermediaries, ending monopolization of distribution channels, inhibiting information asymmetry among stakeholders, and speeding up royalty payments.40

Sitonio and Nucciarelli examined three recorded music supply chains:

  1. before digital media ( traditional supply chain ),

  2. after digital media ( digital supply chain ), and

  3. with blockchain technology ( blockchain supply chain ).41

Sitonio and Nucciarelli, in analyzing the recorded music supply chain before digital media, discussed how the supply chain was vertically integrated to eventually produce physical goods or promotional items for the end consumer.42 Record labels were the primary intermediary and retained approximately thirty-percent (30%) [of the value, larger than any other actor] in the recorded music supply chain before the era of digital media. .43 Record labels were responsible for financing and resourcing musicians needed to record their music, and collecting royalty payments for artists, thus leading to information asymmetry among artists, distributors, and consumers. .44 This led to extreme information asymmetry among artists, intermediates, and final consumers. 45 However, the value retained by record labels dramatically fell in the recorded music supply chain after digital media.46

In the recorded music supply chain after digital media, Sitonio and Nucciarelli discussed how record labels lost their substantial influence to a new actor, the Aggregator.47 Aggregators were a new actor in the supply chain

34De León and Gupta, The Impact of Digital Innovation and Blockchain on the Music Industry.

35Ibid.

36Ibid.

37Ibid.

38Ibid.

39Camila Sitonio and Alberto Nucciarelli. “The Impact of Blockchain on the Music Industry”. In: July 2018.

40Ibid.

41Ibid.

42Ibid.

43Ibid.

44Ibid.

45Ibid.

46Ibid.

47Ibid.

that collected usage information about how and where people are streaming music, listening to digital radio, and downloading digital music files.48 With the introduction of digital media, musicians could distribute their music physically in the traditional supply chain, or digitally through the digital supply chain.49 Especially for smaller musicians, they could now record their music anywhere and digitally distribute their music online through Aggregators without first needing to sign with a record label.50 Aggregators led to the Record Labels losing their losing their monopolistic control over the supply chain because transaction costs shifted music distribution to digital media rather than physical goods.51 However, the value captured by Aggregators and the Record Label’ monopolistic loss of control over distribution did not lead to greater value capture for Artists, and rather reinforced the information asymmetry in the industry. 52 Stunningly, Record Labels still retain about fty percent of the value in the digital supply chain.53 Especially regarding the ow and totality of royalty payments, musicians are receiving fewer royalty payments from the Aggregators’ business models, and for smaller musicians, royalties are commonly unpaid. 54 Thus, some believe the blockchain supply chain will make up for the lack of value added for Artists by eliminating intermediaries inhibiting direct interactions between musicians and consumers.55

The blockchain supply chain is expected to allow musicians to directly publish their music on a blockchain, then have their music reached by consumers on blockchain-based platforms, reducing transactional costs, allowing artists to access data generated by the transactions, and creating a more efficient system for royalty payments. 56 However, Sitonio and Nucciarelli the rise of the blockchain supply chain to be inhibited because for major artists under contract with record labels, choosing to self-publish may raise contractual liability or cause them to violate their contractual relationship.57 Alternatively, intermediaries may not be completely eliminated from the supply chain, rather, the role of intermediaries such as record labels may change to usage information collectors and providers of technical, marketing and sales support for musicians, while the blockchain would handle royalty payments and information transparency.58

Sitonio and Nucciarelli believe blockchain can solve two of the main issues they identified in the music industry:

  1. “the lack of access to transactional information,” and

  2. “the inefficiencies associated to royalty payments.”59

Sitonio and Nucciarelli identified four blockchain use cases in the music industry:

  1. record keeping;

  2. smart contracts;

  3. data analysis and business model innovation; and

  4. revenue management.60

1.5.3 Blockchain-based Music Platforms

Alexandra Cecilie Gjøl Torbensen and Raffaele Ciriello investigated how the music industry can create value with blockchain technology in Tuning into Blockchain: Challenges and Opportunities of Blockchain-based Music

48Sitonio and Nucciarelli, “The Impact of Blockchain on the Music Industry”.

49Ibid.

50Ibid.

51Ibid.

52Ibid.

53Ibid.

54Ibid.

55Ibid.

56Ibid.

57Ibid.

58Ibid.

59Ibid.

60Ibid.

Platforms. 61 For our research purposes, we focused specifically on Torbensen and Ciriello’s analysis of challenges and opportunities of blockchain-based music platforms.62

Torbensen and Ciriello identified two categories of blockchain use cases:

  1. Musician-centered music supply chain; and

  2. Process optimization.63

Furthermore, Torbensen and Ciriello identified four blockchain use cases that fall under the two above categories:

  1. “ticket sales,

  2. cryptocurrency enabled music platforms,

  3. blockchain powered streaming startups, and

  4. providing an infrastructure for decentralized music business.”64

In Torbensen and Ciriello’s analysis, the first category of blockchain use cases, musician-centered music supply chain, is unlikely to take root because even though this is the most musician-friendly outcome, most musicians are not interested in dealing with the work that comes after the recording of the music. 65 Torbensen and Ciriello then discussed three specific areas under process optimization where blockchain could aid the music industry.66 The first area Torbensen and Ciriello envision blockchain aiding the music industry is providing a common resource for metadata via smart contracts.67 However, a major issue Torbensen and Ciriello believe may arise is obtaining metadata from di erent organizations in different databases, [and] integrating all these datasets into one platform. 68 Such a strategy would be extremely costly for a blockchain-based music platform, and thus Torbensen and Ciriello note that some blockchain-based music startups are aiming instead towards creating interfaces to aggregate metadata and make the complex licensing structures more transparent via smart contracts.69

The second area Torbensen and Ciriello envision blockchain optimizing processes is automated royalty payments.70 Through smart contracts and relevant metadata, Torbensen and Ciriello believe payout processes could simply be automated via smart contracts with transparent business logic.71 The third area Torbensen and Ciriello see ripe for process optimization by blockchain-based music startups is achieving in transparency in licensing structures.72 However, Torbensen and Ciriello, based on their interviews, found that there was an apprehensive mindset from industry members about transparency in licensing structures because they want their contractual agreements to remain confidential from competitors73

Additionally, we also focused on Torbensen and Ciriello’s discussion of matching the interests of stakeholders in the music industry and the need to align incentives embedded in the blockchain.74 Torbensen and Ciriello’s analysis identified a major disconnect among music industry stakeholders because stakeholders all want a better

61Alexandra Cecilie Gjøl Torbensen and Rafiaele Ciriello. “TUNING INTO BLOCKCHAIN: CHALLENGES AND OPPORTUNITIES OF BLOCKCHAIN-BASED MUSIC PLATFORMS”. in: Research Papers (May 2019). url: https://aisel.aisnet.org/ecis2019_rp/62.

62Ibid.

63Ibid.

64Ibid.

65Ibid.

66Ibid.

67Ibid.

68Ibid.

69Ibid.

70Ibid.

71Ibid.

72Ibid.

73Ibid.

74Ibid.

way to handle metadata and licenses, but there is a mismatch of incentives for stakeholders75 For example, Torbensen and Ciriello mentioned that record labels and publishers have a disincentive to make their deals with musicians public, and thus, Torbensen and Ciriello suggest a private blockchain solution.76 However, will this private blockchain solution meet the goals of record labels and publishers?77

For a blockchain-based music platform to succeed, Torbensen and Ciriello believe it will need to align incentives for all stakeholders that will lead to data sharing and effective governance.78 Torbensen and Ciriello conclude their thoughts with the opinion that current blockchains do not [have the] appropriate incentives at the music industry level. 79 To reach the appropriate level of incentives, Torbensen and Ciriello see a need to embed these incentives in the blockchain because music industry stakeholders are worried about mak[ing] the risky first step towards an integrated solution without knowing whether others will follow. 80 To get stakeholders to make the first step, the incentives for a blockchain-based music platform needs to be aligned towards an integrated solution for all stakeholders.81

Juri Mattila continues in the same vein as the preceding authors in The Blockchain Phenomenon The Disruptive Potential of Distributed Consensus Architectures by discussing one of the first blockchain-based music platforms, Ujo Music.82 Ujo Music was one of the first blockchain-based music platforms to issue royalty payments to musicians on the Ethereum blockchain to address the long-standing issue of artists collecting royalties not in a matter of days or months but often years.83 Ian Dunham in Music Information: The Need for a Central Music Licensing Database emphasized that blockchain may provide the appropriate infrastructure to develop a centralized music licensing database, although more work must go into parsing the details of its operation, including who would organize it, the exact details of protocol, and how all parties can cooperate in order to achieve a higher efficiency. 84 These problems are not overcome by international standards such as the International Standard Recording Code (ISRC) and the International Standard Musical Work Code (ISWC).85 These questions are particularly important now while the global music industry is noticeably turning to streaming services, with the existence of the above mentioned Aggregators in Sitonio and Nucciarelli’s work.86 An additional point of contention are intermediaries in royalty distribution such as CMOs, who usually charge a substantial fee for their distribution services87

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