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After a $30M settlement over unpaid royalties, Spotify announced the acquisition of Mediachain – a peer-to-peer blockchain database and protocol for registering, identifying and tracking creative works. When the solution goes live, beneficiaries (especially artists), won't be able to stop singing and dancing to "I heard it through the blockchain", as they reap the benefits of the new attribution system.

Spotify + Blockchain — understanding the future of creative rights attribution

Kerry Maguire | July 12, 2017

(Photo edits: Kerry Maguire) (Original Photo: Vesna Maginn)

With an excessive number of intermediaries, the music industry is extremely complex to navigate— especially for digital music services like Spotify, whose product is the works of many. In return for selling music as a service, distribution platforms are *obligated to give credit to and pay each intermediary in a timely manner (*If credits aren’t appropriately attributed, the risk is backlash from the artist community as opposed to a legal obligation). WHICH would be a non-issue if there were transparent access to accurate information needed to fulfill their duties, BUT, alas, there is not. And, while Spotify is killing it in the market with their massive user-base (50+ million paying users), strong brand and great service, their margins are razor-thin. The blockchain technology will ideally help Spotify grow margins by cutting overhead costs and saving on subsequent lawsuits. It should also create new business revenue by attracting more artists and creating more opportunity for innovation of products, attracting more users to their service.

To keep things simple, the two main topics of interest when investigating the motivation to pursue a blockchain attribution solution are:

1) CREDITS: properly acknowledging the contributions made by artists for their work, improving Spotify’s artist relations.

2) RIGHTS: Paying rights holders their fair share so Spotify can reduce their exposure to millions of dollars lost to litigation.

As previously mention, there has never been a comprehensive central database that stores the necessary information required to give credit or determine rights. Right now the industry relies on disjointed third parties such as collection societies (ROVI, the American Federation of Musicians, SAG/AFTRA, and MusicBrainz to name a few) in order to piece together information about the contents of their catalogue, and give credit to and pay those involved.

Additionally, the industry has evolved from music as a product, to music as a service, and the technology behind how “credits” and “rights” are attributed should have progressed in parallel. That is not the case.

(CREDITS)

In the past, producers of records and CDs documented song “credits” for us. Anyone buying an album could read the packaging and find out who contributed to a given song. Now, in a ‘music as a service’ market, contributors to songs are often robbed of credit entirely. All consumers see online is the superficial data: the main artist’s name, who wrote the song, the name of the album, and the date of its release. Who loses? Artists— as the loss of credit for their past projects are vital in accessing future opportunities.

(RIGHTS)

Almost all recorded music is a work of collaboration, which inevitably makes attributing rights to music very messy. That is no excuse, however, for the fact that 20-50% of music payments do not make it to their rightful owner! Contributing to this inequitable payouts phenomenon is the lack of transparency throughout the accounting process as well as the complexity of micro-transactions on a digital platform. First, payments that finally do make it to the artists, have had to flow through the pockets of several intermediaries, including record labels who often pay their artists using low royalty rates designed for physical rather than digital products. The system in place inables a lack of transparency with how payments are divvied up as well as a timing issue where artists are often paid months or years after accrual, making it difficult to monitor finances to ensure fair payment. Second, on a digital platform there are exponentially more payouts than there are with the physical product of the past. Recorded performance and underlying words and music are separately monetized, not product or service depending. On a digital platform however, those payouts are multiplied by the millions of micro-transactions daily, across the various platforms which all use different profit models (e.g. per-stream royalties vs. pay-per downloads) and the end result is not only a huge administrative burden for the distributors, but an unpredictable and uncomprehensive income for the artists.

How SPOTIFY has managed RIGHTS to date

Spotify keeps track of yours and other 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. The payment Spotify distributes is, in fact, a collection of micro-payments for the various owners for a song, so with multiple rights holders, Spotify can conceivably end up writing checks to upwards of 20 distinct parties per song per month! With over 30M songs in its catalog, and being responsible for systems to keep track of all rights holders over 75 years of data, being a music distributor is a massive endeavor.

A month after reaching a $30M settlement with a publishing group over unpaid royalties, Spotify announced their acquisition of Mediachain in Apr 2017 – an open-source peer-to-peer blockchain database and protocol for registering, identifying and tracking creative works. If successfully implemented, the blockchain capabilites will not only help Spotify create a simple, efficient and transparent way to pay creators and rights holders; it also may unlock new paths to innovation and value creation within the company.

Spotify is not the first attempt at a consolidated database for music information though. The most recent bid by the music publishing sector to create a central database was the Global Repertoire Database (GRD), but it ran aground in 2014. Its demise, relates back to the organizations’ inability to align on which data should be public and which should be held private, given their differing motivations and perspectives, in the formation of an independent, powerful entity. No one likes to relinquish their perceived power.

So, will Spotify’s acquisition be a smashing hit?

Given the conditions under which blockchain works best,

· lack of transparency

· lack of trust

· high cost of intermediation

· tightly-specified collaboration

· and need for transactional security and confidentiality,

Spotify’s application seems to satisfy all. So yes, a smashing hit could be instore for the company, but more than that, we may well be witnessing a killer app laying the early infrastructure for adjacent pull-through opportunities. With a universal, accurate, real-time system for credits and rights ownership would serve as a low-friction routing infrastructure for music usage fees and royalties, the full spectrum of media, from professional to user-generated content benefits.

All that said, development is early and big challenges remain, including technology maturity, replication and durability of information on the network, adoption of standards, and whether the new configuration of information will shift and reconsolidate.

Final thoughts...

Blockchain’s ability to replace middlemen with mathematics is why this technology matters – but also why it is potentially so disruptive. It can reduce overhead costs by quickly validating rights information and allowing parties to trade assets directly with each other – activities that currently require either a central authority or impartial mediator.

It also has implications beyond the music industry. Digital rights management (DRM) is a prototypical use case for decentralized-ledger technology (also refered to as blockchain), one that demonstrates well the potential for blockchain to transform any industry. Perhaps we’ll find that with these new fee models, approaches become viable that were previously not lucrative enough to scale meaningfully. With accurate accounting, real-time transaction processing, and analytics, the options box opens up for creators and organizations to innovate through the full lifecycle from creation all the way to consumer experience.

Some participants, such as collection societies and publishers may find traditional roles obsolete and will need to reinvent their value in the ecosystem. They will have to consider how the value chain might reconfigure itself, what new roles they might play, and what the implications might be, as the Media sector slowly rewires for a blockchain future. By automating tasks and freeing up administrative overhead, stakeholders may be able to refocus on their core purpose or redeploy talent to fill higher-value roles.

What industry will blockchain disrupt next? It may not be obvious at first (disruptive applications never are) but I challenge you to think about your business acquiring a blockchain company, how that would impact the core functionality of what you do, how it could change jobs, reduce overhead and alter the future of your business (…on to something? Run your scenario through the blockchain readiness framework!)

Taking Blockchain Live, Deloitte FSI, May 2017

...still got some steam?

Dive deeper into the tech implementation and how it will work specifically for Spotify:

Bitcoin for Rock Stars by D.A. Wallach

Find out what is Deloitte saying about Blockchain:

Blockchain: A new game changer for the media industry

Deloitte UK: Blockchain in the media industry

Tech Trends 2017: Blockchain- trust economy

Tech Trends 2016: Blockchain- democratized trust

Taking Blockchain live

...and stayed tuned in to more news on Spotify as they prepare to go public!

Special mention: At Deloitte we have an amazing sensing/publication team, who, every week, create an innovation report for the internal organization called Global Line of Sight. It is SO juicy that we simply cannot share it with the public, BUT they have given me permission to pull from their publication and add my own twist. So, I give credit to the Global Line of Sight team for the awesome work they do!