Are Smart Contracts Smart Enough For the Music Industry?
08.29.2018

The music industry likes what it hears with blockchain.

Akon, Björk, and Gramatik are experimenting with raising funds directly from fans using coins and ICOs. Startups like Choon and Resonate are building blockchain-powered streaming services, hoping to give artists a bigger share of the revenue pie. Even major record labels, publishers and performing rights organizations (PROs)—which DIY-minded music advocates want to eliminate using blockchain—are investing in the technology for their own good.

One big hope for blockchain: streamlining how payments and music rights data are organized and transacted. Currently, questions of ownership and rights are frequently confused and contested—meaning that music companies, artists and platforms are constantly suing each other.

Artists regularly sue their labels for withholding payments, and labels often sue streaming services like Spotify and Tidal for unpaid royalties and copyright infringement. Sometimes, artists even sue each other—like when Lina Iris Viktor sued Pulitzer-winning rapper Kendrick Lamar for using images from one of her paintings in a video for “All the Stars” (from the movie Black Panther).

Smart contracts (self-executing digital contracts) could help automate rights management, ending the need for courts to settle disputes, say blockchain advocates. In their highest, most disruptive form, smart contracts can implement “code as law,” they say, autonomously and programmatically enforcing agreements, essentially eliminating the need for litigation. Some have even gone so far as to claim that smart contracts will ultimately replace human lawyers.

Smart contracts may be incompatible with the sprawling layers of complex, dynamic agreements that pervade the music business today. 

 But whether music-oriented smart contracts can actually perform the work of highly-paid lawyers is an open question. Many industry players are skeptical smart contracts are currently that smart, and even if they are really contracts at all. There is an optimism in the industry about what blockchain can do, but at the moment it’s somewhat tempered by reality.

Consider Imogen Heap’s release of her 2015 single “Tiny Human” on Ethereum, which was executed in collaboration with Ujo Music, one of the flagship projects under ConsenSys. In an op-ed last year, Heap claimed this single was “the first song ever to automatically distribute payments via a smart contract to all creatives involved in the making and recording of the song” (emphasis added).

Yet, the smart contract at work here was nothing more than some lines of code that automated transactions and payment splits. The likes of Airbnb, Uber, and PayPal already have such payment capabilities, independent of any blockchain.

“It might be a false assumption that the way to get people [their] money faster is to use blockchain to streamline the actual flow of the money,” says Phil Barry, founder & CEO of Blokur, a blockchain startup working to automate administration and increase accuracy of rights data for labels, publishers and other music companies.

“The reason money doesn’t get to the right person quickly enough is because it’s difficult to identify who exactly that person should be. If you can’t accurately identify who owns the music in the first place, you can’t even begin the payment process—be that in dollars, bitcoin or anything else.” (Barry also founded Ujo Music and worked with Heap on the “Tiny Human” release.)

In other words, proper provenance and identity data must precede accurate payments and transactions. Yet, this former data layer is precisely where most smart contracts in music today fail to deliver on their bulletproof promises.

“Because smart contracts are just pieces of code, they don’t manage real ‘humans’ or ‘identities’ per se,” says Vaughn McKenzie, CEO of JAAK, a startup that is currently piloting a permission-less, decentralized network of global rights information called KORD with several major music companies. “They manage locations in a network that hold a balance of whatever assets the contracts in question are trying to manage, be that rights data or something else,” McKenzie says. “It’s similar to how an IP address, which everyone has, simply represents a location in a network, rather than a fixed human identity.”

Also, while the autonomy of smart contracts implies that machines can verify identity in the absence of human oversight, most proofs-of-concept today still deem the startup itself as the centralized authority in verifying identity—defeating the purpose of using a decentralized blockchain in the first place.

“All the massive ICOs that have launched and traded on the idea of pushing music rights around automatically have placed themselves in a scenario where they might be committing fraud,” says Benji Rogers, founder and chief strategy officer of Dot Blockchain Media, which is working to build a new blockchain-based file format for music and media (deemed “.bc”).

“I’ve been shocked by the cavalier way in which startups raise huge amounts of money on the promise of ‘smart contracts,’ but then you look into their white papers and there’s almost nothing on identity models. Establishment of identities precludes any contract being smart—particularly in music, where identity is kind of everything.”

Part of the problem with smart contracts in music is that, in chasing and rewarding consensus, blockchain arguably cannot handle nuance by design. This approach is incompatible with the sprawling layers of complex, dynamic agreements that pervade the music business today, especially when it comes to digital consumption.

For instance, the simple act of playing a song on Spotify occurs atop an entire web of agreements: the end-user agreement between the listener and Spotify, the Sound Recording and Musical Composition licensing agreements between Spotify and each of the major labels and publishers across multiple different territories, and the deals that each of those IP-owning companies has with the government via consent decrees and statutory licenses. Some of these agreements are worth millions of dollars, and are negotiated over a period of five years or more.

There are also many complicated clauses in the contracts artists sign with record labels, such as re-paying amounts offered against a cash advance. Recording agreements are also filled with intentionally subjective terminology (e.g. “reasonable,” “good faith”) that end up being more relational than transactional, and that cannot be encoded in smart-contract form, critics contend.

In this chaotic landscape, “a startup’s solution to identity can’t just be ‘look, we’ll just pay the accounts we have.’ Otherwise, it seems that money laundering will be even easier than it is today,” says Rogers. “You need to take steps like verifying that the artists actually own the assets that they claim to own, confirming that they are alive and corroborating their identities against other identities.”

Smart contracts in music are most effective for programmatically enforcing large volumes of lower-value contracts. 

Dot Blockchain is currently trying to build precisely this automated, autonomous ID verification system. The idea is that, in a completely machine-readable world, “you can’t have a perfect identity, but you can have an identity likelihood,” says Rogers. This is based on factors such as social network logins and reciprocated linkage to certain ISO standards and to other parties in the system such as publishers, PROs, and streaming platforms. Each user is given a score using a points system that can be changed with natural evolutions in ownership.

This model is far from perfect, and arguably makes conflicts and disputes—and the enduring relevance of human intervention from lawyers—even more likely, despite its advantages.

For now, smart contracts in music seem to be most effective for programmatically enforcing large volumes of lower-value contracts, such as licensing music for a TV show. “That type of contract usually has only around four meaningful variables in it—name of the song and TV show, price of the song, territories where the song will be used—and the rest of the contract is just legalese that makes it legal,” says Barry. “Programming that into a smart contract, into a license that’s captured on a blockchain, is perfectly achievable and there’s no reason why it shouldn’t be done.”

Where JAAK and Blokur see an even “smarter,” more profound application of smart contracts for music is in situations involving complex co-ownership on a global scale. Different countries or markets will have their own PROs and rights databases, with which international publishing companies spend hours of back-and-forth manual labor corroborating their own rights information for potential conflicts.

In these cases, blockchain adds real commercial value because it enables a shared, synchronized administration infrastructure for these rights holders, cutting out discrepancies that typically occur with independent processing that lead to the costly lawsuits and settlement delays one reads about in news headlines. “It doesn’t remove the need for trust, but makes trust a lot cheaper to acquire,” says McKenzie.

As smart contracts advance and administrative costs decrease, some commentators claim that entire parts of the music value chain—especially PROs—will cease to be necessary.

That said, “blockchain won’t make marketing redundant,” says Julian Berzbach, a digital media consultant who completed his master’s thesis on blockchain applications for music licensing in collaboration with Universal Music Group. “You still need a service provider for the artist in growing their brand. It’ll reconfigure the role of a label by streamlining administrative issues. It’s also not good for anyone to sit on half a year’s worth of money, especially when interest rates are low.”

On the consumer-facing side, the most significant ramifications of smart contracts would be a proper infrastructure for legal user-generated content. The absence of such an infrastructure is the primary reason why some of the world’s most popular music apps and websites, including SoundCloud, Musical.ly, and the now-defunct Vine, struggled to monetize their gargantuan user-bases and build financially stable companies atop their cultural impact.

Smart contracts can benefit many other types of entertainment where users and fans drive value. For example, they could facilitate more secure platforms for trading cards and skins in gaming, or for exchanging tickets to sports games and other events on the secondary market. Making this new legal and social paradigm as sustainable as possible, however, requires acknowledging its current limitations to execute properly on its true potential.