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HOW TO USE DIGITAL CURRENCY AS A MUSIC INDUSTRY STANDARD?
Connecting Currency with Music
By Jennifer Buglione
Submitted to the Department of Global Entertainment and Music Business
Berklee College of Music
In partial fulfillment of the requirements for the degree of Master of Arts
Alexander Perrin, Supervisor
Emilien Moyon, Program Director
July 2015
TABLE OF CONTENTS
Abstract …………………………………………………………………Page 3
Introduction……………………………………………………………..Page 4
Part I: Literature Review……………………………………………….Pages 4-8
Part II: Methodology……………………………………………………Pages 8-9
Part III: Results & Discussion………………………………………….Pages 9-13
Case Study #1 PeerTracks ………………………………………………Pages 9-10
Case Study #2: Song Coin……………………………………………….Page 10
Trends……………………………………………………………………Pages 11-13
Conclusion………………………………………………………………Pages 13-14
Bibliography…………………………………………………………….Pages 15-16
Appendix……………………………………………..………………….Page 17
Buglione
2
Abstract
The purpose of this research is to explore the world of digital currency and how it’s being
used in the music industry. It’s not a secret that since the dawn of the Internet, the world as
we know it is in a continuous state of change. Every industry is moving from physical to
digital, including our payment systems. Consumers are spending more time and money on the
Internet, which has led to innovations in digital currencies as recognized ways to pay for
online content or physical products. These digital currencies may allow for innovation, and
quite possibly revolution, in a music industry plagued by piracy, low royalty payouts and an
overall indifference to pay for music, a once highly valued product. This research project
aims to suggest how the music industry can use digital currency as a standard.
The literature review will explore the history of digital payments, review the current state of
the digital currency world, analyze the most successful forms of cryptocurrency and what’s
become the standard in today’s technology ecosystem. Two case studies and ten expert
interviews will be the focal point of the research, exploring music related companies that are
using some form of digital currency and asking the crypto enthusiasts where and how the
music industry can benefit.
The results of this study concluded that the technology behind digital currency is where the
music industry can find success. Through the use of blockchain technology, the music
industry can begin to change how payments of royalty payouts while empowering musicians
especially Indie musicians. Secondly, implementing smaller fees or micropayments proves
valuable. Finally, as you can see the volatile nature of Bitcoin’s price makes using the
cryptocurrency less attractive to the mass market therefore creating a niche which may not
succeed.
Buglione
3
Introduction
In 2013, digital revenue from music sales increased by 4.3% and globally 39% from digital
revenues alone.1 Though digital revenue has seen an increase, overall paying for recorded
music is down.2 Meanwhile, royalty payouts from streaming services are extremely low and
artists are looking for more money because they are receiving less than a penny per stream.3
All three of these points are some of the biggest issues that face the struggling music industry
today. Where there is a problem one must find a solution through technological
advancements of our society. While identifying the issues, the research will dive into the
types of opportunities we can use with digital currency and how it can be applied to the music
industry.
Part I: Literature Review
A. History and Landscape of Digital Currency
Before evaluating everything related to digital currency, specifically Bitcoin, we need to
begin with the definition of money. The official definition of money, as defined by the
Merriam Webster Dictionary, is defined as “something generally accepted as a medium of
exchange, a measure of value, or a means of payment.” From that definition we can deduce
that virtually anything can become money because money is rooted in perceived value.
Ancient peoples started with cow shells, later shifted to coins, and eventually invented the
paper money that is still the norm worldwide.4 Today, modern society has become
increasingly reliant on technology and is shifting towards becoming a strictly digital society.
1
IFPI,
Digital
Music
Revenues
2013
2
IFPI,
Digital
Music
Revenues
2013
3
Digital
Music
News,
A
Quick
Summary
of
Streaming
4
PBS,
NOVA,
The
History
of
Money
Buglione
4
Our currencies and objects of value are transitioning just the same, leading to the digital
currencies and cryptocurrencies seen emerging and evolving in real time.5
Floridian Oncologist Douglas Jackson first popularized the term “digital currency” in the
early dot-com days of the 1990’s. Back then the digital currency (known as e-gold) was
backed by incremental pieces of actual gold.6 Using gold incrementally can be recognized as
the first step towards the micro-transactions we see with Bitcoin today. Before E-gold
collapsed it was known as a high-end international currency, allowing more global
transactions to occur as the e-commerce world flourished. It’s value once peaked at $85
million dollars and was seen in use across 165 different countries, comparable to a PayPal of
that period.7 E-gold eventually met its demise, as members of the U.S. Federal government
began to find that early cyber criminals were using the company to funnel money into
anonymous accounts.8
Enter Satoshi Nakamoto’s white paper in 2008 titled Bitcoin: A Peer-to-Peer Electronic
Cash System. Nakamoto’s paper detailed a new way of thinking, pushing for the elimination
of middlemen [banks], giving the user a more transparent view of the value chain of their
money.9 While most currencies are validated by something with physically perceived value,
Bitcoin is uniquely backed by complex cryptographic math equations. Essentially, value is
created from the 0’s and 1’s of data from binary code in a computer, and therefore is used as
a form of currency. The Bitcoin transactions are recorded on the blockchain, a virtual public
ledger that is not controlled by any outside entity. This topic is also known as
5
TechRepublic,
10
Things
You
Need
to
Know
6
Wired,
The
History
of
E-‐Gold
7
Wired,
The
History
of
E-‐Gold
8
Wired,
The
History
of
E-‐Gold
9
Satoshi
Nakamoto,
Bitcoin:
A
Peer-‐to-‐Peer
Electronic
Cash
System
Buglione
5
decentralization. Fans of Bitcoin and most digital currencies argue that the decentralized
nature is the heart.
These concepts only scratch the surface of understanding how Bitcoin works and operates.
For example, one can’t simply just acquire Bitcoin. A Bitcoin wallet software such as
Coinbase or Xapo is needed in order to acquire, as well as initiate and process Bitcoin
transactions. Once you have your wallet, you will receive a unique Bitcoin address, with
which you may purchase Bitcoin with local currency for use. Retailer’s physical and digital
alike are now accepting Bitcoin as form of payment.
There are a few important points to note about the Bitcoin wallet. Primarily, note that it acts
as your personal identifier. Users receive a public address, as stated earlier, in order for
transactions to be verified and to confirm a unique individual’s identity.10 Additionally,
Bitcoin miners play an important function as well. Bitcoin miners are people with
supercomputers who solve the complex cryptographic problems and verify transactions.
Since transactions from all over the world are verified, a block is created and continues,
eventually creating a chain, the blockchain. Miners who solve the cryptographic problems
first will receive Bitcoin’s as a reward. See Diagram 1. One of the biggest positives of using
any cryptocurrency is the fact that it makes global transactions much simpler.
As it stands Bitcoin generated an enormous amount of buzz when its value peaked at around
$1,200 in November 2013, but eventually huge losses followed. As of June 2015 it’s worth
around $250. According to economic experts the biggest issue with bitcoin is the security
10
Digital
Gold,
Nathaniel
Popper
Buglione
6
problems and volatile worth of the cryptocurrency.11 If the market isn’t using Bitcoin, its
value or worth is low.
You cannot mention Bitcoin without talking about two of its most pivotal and game changing
moments, starring Mt. Gox and Silk Road. In 2013, a Japanese Bitcoin exchange company,
Mt. Gox, became the premiere destination of Bitcoin transactions, composing about 70% of
Bitcoin business.12 By February 2014, Mt. Gox later filed for bankruptcy. Due to an
undetected theft the company lost over 740,000 Bitcoin worth close to $750M belonging to
their clients.13 Silk Road was the underground illegal marketplace, where anonymous users
could purchase anything from fake identification cards to illegal substances using Bitcoin.
Both companies failed in the end, and each underwent justice department investigations in
countries across the world. Eventually, Silk Road founder, Ross Ulbricht was indicted and
convicted and public perception began to change with the negative press piling up from these
two massive incidences. Since this controversy, Bitcoin’s price has been able to remain
steady during 2015, with one BTC currently valued and holding steady at $250 USD.14 Some
questions that begin to arise are how can the music industry benefit from using Bitcoin to
purchase recorded music or can the blockchain create transparency and efficiency for
payments to artists.
Thinking about the history of the music industry and looking at the evolutions of how artists
are paid, how labels are paid, and how the industry makes money in its entirety, one can ask
the question, is there simpler and more efficient method? How will it work? Will artists be
11
Digital
Gold,
Nathaniel
Popper
12
Wall
Street
Journal,
5
Things
about
Mt.
Gox’s
Crisis
13
Inside Bitcoins. “The Mt. Gox Post Bankruptcy Claims:”
14
CoinDesk,
Homepage
Buglione
7
able to make a sustainable income off of their recorded music? Alec Wren, Audio Visual
Technician and Audio Engineer states:
The current music industry is very disjointed, with so many intermediaries that do not
communicate well or at all with one another. Music streaming/purchasing services,
copyright and royalty services are currently all centralized. This results in slow
payments out to artists without providing them with a clear and accurate (publically
verifiable) breakdown of the payment, all while the companies absorb their elegant
fee for carrying out such service – slow, cumbersome, expensive and too ambiguous.
This simply doesn’t suffice for the information age we live in today.
By creating a simplified global standard as it relates to royalties, splits and licensing
musicians can focus on the creation of music and create more value of their product.
Part II: Methodology
For this research, using qualitative research methods were the best option because the
cryptocurrency world is still in its infancy stages. Therefore early adopters and pioneers are
currently shaping and developing the industry. The primary data collected focuses on
different companies that in the crypto-marketplace, two exemplified the most innovation
using Bitcoin or blockchain technology were chosen for further examination. One in depth
case study was conducted on the company, PeerTracks in which each business model, value
proposition and special features were analyzed. Founding members of each company were
interviewed with 10 open-ended questions that focused on the economics, current landscape
and upcoming challenges that come with using digital currency. Applying this approach
allowed for a wider analysis of the ecosystem in order to identify key trends thus answering
the initial research question.
Continuing to search for a broad range of experts, the same 10 open-ended questions were
sent to an additional 8 professionals, making 10 interviewees in total. These individuals were
Buglione
8
chosen based off their expertise and knowledge within the music, financial and technology
industries. The 8 executives received the questionnaire by email with a turn around time of
48-72 hours. Each of their responses were analyzed and compared to the initial findings from
the literature review. A summary table highlighting the top 5 questions from most of the
interviews will also be created and displayed. Secondary data referenced throughout the study
include research about the history of Bitcoin and the future of digital payments, as well as
current news, laws, and events surrounding cryptocurrency.
Part III: Results & Discussion
Case Study: PeerTracks
PeerTracks is a company that has created its own decentralized musical ecosystem. Cofounded by Eddie Corral and Cedric Cobban, the company was formed in 2014 and officially
launched in 2015. Both co-founders envisioned a system that allows artists to generate a new
revenue stream while empowering their own network of fans. The company’s core focuses on
incentivizing the “superfans” by making them promoters, honing in on the importance of
Peer-2-Peer activity through the use of individual ArtistCoins. Let’s consider a hypothetical
situation: if you follow a punk band, we’ll call them BandX, and are a loyal fan because you
attend all shows and purchase all merchandise sold. BandX is a member of PeerTracks and
developed its own limited quantity ArtistCoin called BandXCoin. For an example, say as a
superfan, you want to be part of an experience BandX can reward you with 5 BandXCoins
per dollar of merchandise. You then realize that BandX will offer you a virtual VIP session if
you own 5 or more BandXCoins. In an interview with CryptoJunction, Cobban states: “The
more music and merchandise artists sell on PeerTracks, the greater the value of their
Artistcoins, so both the artist’s and fan’s interests are aligned and incentivized in a
completely new way.” PeerTracks considers themselves as a streaming service as well as an
Buglione
9
online retail store. Interestingly enough, PeerTracks does not use Bitcoin, but they do use the
decentralized blockchain technology. Another important feature of PeerTracks is when a user
wants to download music or stream an artists’ music, payments the user makes for that
purchase go directly to the artist with no additional fees and minimal turn around time
because of the blockchain. Though the company is still in its beginning phases, the
Parisian/Canadian hub has shown significant growth and potential to break the traditional
barriers within the music industry.
Case Study: SongCoin
SongCoin, a company dedicated to be the unofficial alternative currency in the music world
in 2014. The premise for the creation of SongCoin was to make international transactions for
music simpler along with introducing additional features like tipping and a user rewards
system for purchasing things like concert tickets or merchandise. Founder, David Prince
stated, “we’re looking at providing people with a way to not pay transaction fees, not go
through international wires, and a way for people to just kind of have something pretty much
alternative to a dollar.”15 Another big advantage of using something like SongCoin is the
transparency in which you get when using the cryptocurrency. You physically can see all
parties involved in the purchase and you can track all the splits if necessary. It takes the
complication out of processing and being paid. “Once we have a major Indie band involved
with our enterprise, and we see some market adoption then we will start to challenge the
existing music revenue streams,” states Prince in a CryptoCurrency News interview.16
Currently as of June 2015, SongCoin is experiencing technical issues.
15
Billboard,
SongCoin
wants
to
be
Music’s
Alternative
Currency
16
Crypto
Coin
News,
SongCoin Reveals Plans to Disrupt Music Industry
Buglione
10
Trends
The Importance of the Blockchain in Music
Blockchain technology is, as mentioned earlier, the heart and core of Bitcoin. It allows for all
and any transactions to be recorded on a public ledger. The ledger acts like a middleman and
eliminates the need for a governing body, better known as being decentralized. If we apply
something like this to the music industry, it could potentially transform some of archaic
systems already in place.
Looking at the innovation of smart contracts proves the overall potential of the blockchain. In
an article with Fast Company’s FastCoLabs states that a smart contract can be defined as
such:
“…these automated contracts work like any other computer program's if-then
statements. They just happen to be doing it in a way that interacts with real-world
assets. When a pre-programmed condition is triggered, the smart contract executes the
corresponding contractual clause.”
Smart contracts are using the blockchain technology to initiate the agreements, ultimately
saving money and including fewer parties in the process. Let’s apply this to the music
industry. Contracts in the music industry, ranging from management contracts to publishing
agreements, can be complicated and technical. Most likely you will have a plethora of
stakeholders involved and it takes time and review. Entertainment Lawyer Martin Frascogna,
who published a blog on smart contracts for MIDEM, explains the relevance of smart
contracts, stating that “recording agreements can be digitally cross referenced to label
bylaws, crossed against publishing agreements, sales figures, and so forth.”17 Applying this
type of system to the music industry on a mass scale could level the playing field, as far as
lawyers are concerned. Artists would become more empowered and essentially have the
17
Midem
blog,
3 Reasons Contracts are Doomed
Buglione
11
ability to be their own lawyers. Smart contracts using the blockchain are just scratching the
surface, as the potential of the technology is much more expansive. Though as the
technological world advances, a question that can be raised is how will the surrounding
industries keep up? How will the PRO’s (Performing Rights Organization) be affected? Is the
blockchain safe? Will the law be an issue?
According to George Howard, Associate Professor of Music Business Management at
Berklee College of Music, there’s an easier way to track the creation of a musical work. He
stated that, “the blockchain holds promise in terms of creating a system in which – via a
public registration of a work to the blockchain - a public record of a work is created that runs
with the work so that when it’s transferred, derivatives are created…” Creating this system as
George stated can revolutionize the necessity for intermediaries in the music business.
The Micro Ecosystem in Music
The micro ecosystem in music is a place where companies and transactions use incremental
or small payments for specific purchases. We see this type of model when talking about
Bitcoin. When using the digital currency, Bitcoin, instead paying with one BTC you’re
paying a fraction of one BTC. Let’s break that down a bit more. In the editorial world
currently you are seeing laces such as WordPress are allowing members to be tipped via
micropayments. These tips are micro rewards/payments used to compensate the creators of
content that consumers enjoy. Currently SongCoin wants to offer a feature of tipping an artist
you like as mentioned earlier. According to Wong Joon Ian, Journalist at CoinDesk, there’s
an opportunity, “the case for micropayments seem strong. It could be a way for independent
artists to easily and quickly get paid a fair amount for their music. However for that to
happen mass adoption by listeners and fans of digital currency must first occur.” Will
Buglione
12
micropayments become a standard to stream and view music? Can this type of business
model prove a higher ROI than the streaming services?
Conclusion
In short, can the ever-changing music industry use digital currency as a universal purchasing
standard? Will the music ecosystem adapt to using digital currency just like money or will
there be a continued stream of innovation where the traditional systems are challenged?
As technology continues to advance and our species relies on technology, things like Bitcoin
will be circulated to the masses. Using the blockchain technology can make digital payments
more seamless and fair for musicians, and creating a decentralized and transparent system is
what the music industry needs.
The use of digital currency is here to stay. Digital currencies will be used like traditional
currencies and innovate through its unique as a technology. Perhaps we will see a more
gamification approach while using digital currency. Also, using incremental micropayments
for recorded music or musical services are offered will begin to become more frequent over
time.
“The fees being smaller than credit card fees allow an artist to keep the same price but
make more per sale. It also becomes viable to sell your music at a cheaper price and still
make as much income as before. This second option (lowering of prices) also makes buying
music more economically feasible for more users and can switch many people,”
stated Cedric Cobban when asked about the role of micropayments. These important trends
are ushering in the next iteration of the music businesses. In an interview with the United
Kingdom’s The Guardian, U2 front man, Bono stated, “Spotify are giving up 70% of all
their revenues to rights owners. It’s just that people don’t know where the money is because
the record labels haven’t been transparent.” Meaning that as musicians are being paid for
their music it’s taking time and most artists cannot understand why they haven’t made much
money off of streams when millions of people may or may not have streamed their music.
Buglione
13
The best way the music industry can use digital currency as a music industry standard is to do
one of three things: One – Simplify the role of the collecting societies by using the
blockchain to create and follow the music. If an artist can create a song and follow the value
chain globally, it may ease their concerns. It can also help give the artist a better
understanding of how their royalty splits work out in a more transparent way. Even though
Bitcoin made a real splash, the use of the cryptocurrency will not solve the issues simply
because Bitcoin has a limited quantity but most importantly because the price will continue to
fluctuate aggressively. Two – Use micropayments as a standard amongst all streaming
services. Instead of using a Freemium model, implement a nominal charge to listen or view
music. Finally, another option on how digital currency can be used is by creating software
that can combine both the blockchain and micropayments while somehow seamlessly
embedding it into music. If an integration is seamless the learning curve may be smaller for
users and musicians alike.
Buglione
14
Bibliography
American Banker. 2015. “Why Banks are Testing Bitcoins Blockchain without Bitcoin.”
June 1. http://www.americanbanker.com/news/bank-technology/why-banks-are-testingbitcoins-blockchain-without-bitcoin-1074622-1.html
Andre Hagiu and Nathan Beach, “Bitcoin: The Future of Digital Payments,” Harvard
Business School (July 2014): 3-20.
Billboard Magazine. 2014. SongCoin wants to be Music’s Alternative Currency. February 26.
http://www.billboard.com/biz/articles/news/digital-and-mobile/5915780/songcoin-wants-tobe-musics-alternative-currency
Billboard Magazine. 2014 “Mastodon, 50 Cent First Mainstream Acts to Accept Bitcoin
Payments.” June 11. http://www.billboard.com/articles/news/6114229/mastodon-50-centfirst-mainstream-acts-to-accept-bitcoin-payments
Bitcoin Magazine. 2014. “Bitcoin Revolutionizing Consumers Buying Music.” Last Modified
June 14. http://bitcoinmagazine.com/14005/bitcoin-revolutionizing-consumers-buy-music/
CoinDesk. 2015. http://www.coindesk.com/ June 29. Homepage
CryptoJunction. 2014. “PeerTracks Revolutionary One Stop Music Platform Powered by
Bitshares.” November 26. https://cryptojunction.com/peertracks-revolutionary-one-stopmusic-platform-powered-bitshares/
Crypto Coins News. 2014. “SongCoin Reveals Plans to Disrupt Music Industry.” November
9. https://www.cryptocoinsnews.com/songcoin-reveals-plans-disrupt-music-industry/
Digital Music News. 2013. A Quick Summary of what Streaming Services are Paying Artists.
December 13.
http://www.digitalmusicnews.com/permalink/2013/12/13/quicksummarystreaming
Economist Magazine. 2014. “How do Bitcoin Transactions Work?” Last Modified January 9.
Accessed December 2014.
Economist Magazine. 2013. “Mining Digital Gold.” April 13.
http://www.economist.com/news/finance-and-economics/21576149-even-if-it-crashesbitcoin-may-make-dent-financial-world-mining-digital
FastCoLabs. 2014. “Smart Contracts Could be Cryptocurrency’s Killer App.” September 17.
http://www.fastcolabs.com/3035723/app-economy/smart-contracts-could-becryptocurrencys-killer-app
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15
The Guardian. 2013. “Zoe Keating Spotify Streaming Royalties.” August 19.
http://www.theguardian.com/technology/2013/aug/19/zoe-keating-spotify-streamingroyalties
The Guardian. 2015. “Bono Apple Spotify Digital Music.” Jan 15.
http://www.theguardian.com/technology/2015/jan/05/bono-apple-spotify-digital-music
Midem Blog. 2015. “3 Reasons Contracts are Doom.” March 19.
http://blog.midem.com/2015/03/martin-frascogna-3-reasons-contracts-aredoomed/#.VZRaAhNViko
Inside Bitcoins. 2015. “The Mt. Gox Post Bankruptcy Claims: a Detailed Guide.” May 8.
http://insidebitcoins.com/news/the-mt-gox-post-bankruptcy-claims-a-detailed-guide/32357
Satoshi Nakamoto, 2008. “Bitcoin P2P E-Cash Paper,” October 31.
http://article.gmane.org/gmane.comp.encryption.general/12588, accessed April 25.
PC Magazine Australia. 2014 “Are Micropayments the way Forward for Journalism.” Last
Modified July 8. http://au.pcmag.com/micropayments/12977/feature/one-aussies-bid-to-savethe-media-industry
Tech Republic. 2014. “10 Things You Should Know About Bitcoin and Digital Currencies.”
Last Modified May 21. Accessed December 2014. http://www.techrepublic.com/article/10things-you-should-know-about-bitcoin-and-digital-currencies/
The International Federation of Phonographic Industry. 2014. “IFPI Music Subscription
Revenues.” http://www.ifpi.org/news/music-subscription-revenues-help-drive-growth-inmost-major-markets
PBS: NOVA. 1996. “The History of Money.” Accessed March 10.
http://www.pbs.org/wgbh/nova/ancient/history-money.html
Popper, Nathaniel. Digital Gold: Bitcoin and the Inside Story of the Misfits and the
Millionaires trying to Reinvent Money. New York: Harper Collins, 2015.
Wall Street Journal. 2014. “5 Things About Mt. Gox’s Crisis.” Last Modified February 25.
http://blogs.wsj.com/briefly/2014/02/25/5-things-about-mt-goxs-crisis/
Weismann, Miriam, and Smith, Antoinette. 2014. “Are You Ready for Digital Currency?”
The Journal of Accounting and Corporate Finance. Accessed December 1, 2014. Accessed
pages 17-21. DOI 10.1002/jcaf.21999
Wired Magazine. 2009. “Bouillon Bandits: The Rise and Fall of E-Gold.” June 9.
http://www.wired.com/2009/06/e-gold/ Accessed June 7.
Buglione
16
Appendix
Diagram 1
Buglione
17
Connecting Currency with Music
By Jennifer Buglione
Submitted to the Department of Global Entertainment and Music Business
Berklee College of Music
In partial fulfillment of the requirements for the degree of Master of Arts
Alexander Perrin, Supervisor
Emilien Moyon, Program Director
July 2015
TABLE OF CONTENTS
Abstract …………………………………………………………………Page 3
Introduction……………………………………………………………..Page 4
Part I: Literature Review……………………………………………….Pages 4-8
Part II: Methodology……………………………………………………Pages 8-9
Part III: Results & Discussion………………………………………….Pages 9-13
Case Study #1 PeerTracks ………………………………………………Pages 9-10
Case Study #2: Song Coin……………………………………………….Page 10
Trends……………………………………………………………………Pages 11-13
Conclusion………………………………………………………………Pages 13-14
Bibliography…………………………………………………………….Pages 15-16
Appendix……………………………………………..………………….Page 17
Buglione
2
Abstract
The purpose of this research is to explore the world of digital currency and how it’s being
used in the music industry. It’s not a secret that since the dawn of the Internet, the world as
we know it is in a continuous state of change. Every industry is moving from physical to
digital, including our payment systems. Consumers are spending more time and money on the
Internet, which has led to innovations in digital currencies as recognized ways to pay for
online content or physical products. These digital currencies may allow for innovation, and
quite possibly revolution, in a music industry plagued by piracy, low royalty payouts and an
overall indifference to pay for music, a once highly valued product. This research project
aims to suggest how the music industry can use digital currency as a standard.
The literature review will explore the history of digital payments, review the current state of
the digital currency world, analyze the most successful forms of cryptocurrency and what’s
become the standard in today’s technology ecosystem. Two case studies and ten expert
interviews will be the focal point of the research, exploring music related companies that are
using some form of digital currency and asking the crypto enthusiasts where and how the
music industry can benefit.
The results of this study concluded that the technology behind digital currency is where the
music industry can find success. Through the use of blockchain technology, the music
industry can begin to change how payments of royalty payouts while empowering musicians
especially Indie musicians. Secondly, implementing smaller fees or micropayments proves
valuable. Finally, as you can see the volatile nature of Bitcoin’s price makes using the
cryptocurrency less attractive to the mass market therefore creating a niche which may not
succeed.
Buglione
3
Introduction
In 2013, digital revenue from music sales increased by 4.3% and globally 39% from digital
revenues alone.1 Though digital revenue has seen an increase, overall paying for recorded
music is down.2 Meanwhile, royalty payouts from streaming services are extremely low and
artists are looking for more money because they are receiving less than a penny per stream.3
All three of these points are some of the biggest issues that face the struggling music industry
today. Where there is a problem one must find a solution through technological
advancements of our society. While identifying the issues, the research will dive into the
types of opportunities we can use with digital currency and how it can be applied to the music
industry.
Part I: Literature Review
A. History and Landscape of Digital Currency
Before evaluating everything related to digital currency, specifically Bitcoin, we need to
begin with the definition of money. The official definition of money, as defined by the
Merriam Webster Dictionary, is defined as “something generally accepted as a medium of
exchange, a measure of value, or a means of payment.” From that definition we can deduce
that virtually anything can become money because money is rooted in perceived value.
Ancient peoples started with cow shells, later shifted to coins, and eventually invented the
paper money that is still the norm worldwide.4 Today, modern society has become
increasingly reliant on technology and is shifting towards becoming a strictly digital society.
1
IFPI,
Digital
Music
Revenues
2013
2
IFPI,
Digital
Music
Revenues
2013
3
Digital
Music
News,
A
Quick
Summary
of
Streaming
4
PBS,
NOVA,
The
History
of
Money
Buglione
4
Our currencies and objects of value are transitioning just the same, leading to the digital
currencies and cryptocurrencies seen emerging and evolving in real time.5
Floridian Oncologist Douglas Jackson first popularized the term “digital currency” in the
early dot-com days of the 1990’s. Back then the digital currency (known as e-gold) was
backed by incremental pieces of actual gold.6 Using gold incrementally can be recognized as
the first step towards the micro-transactions we see with Bitcoin today. Before E-gold
collapsed it was known as a high-end international currency, allowing more global
transactions to occur as the e-commerce world flourished. It’s value once peaked at $85
million dollars and was seen in use across 165 different countries, comparable to a PayPal of
that period.7 E-gold eventually met its demise, as members of the U.S. Federal government
began to find that early cyber criminals were using the company to funnel money into
anonymous accounts.8
Enter Satoshi Nakamoto’s white paper in 2008 titled Bitcoin: A Peer-to-Peer Electronic
Cash System. Nakamoto’s paper detailed a new way of thinking, pushing for the elimination
of middlemen [banks], giving the user a more transparent view of the value chain of their
money.9 While most currencies are validated by something with physically perceived value,
Bitcoin is uniquely backed by complex cryptographic math equations. Essentially, value is
created from the 0’s and 1’s of data from binary code in a computer, and therefore is used as
a form of currency. The Bitcoin transactions are recorded on the blockchain, a virtual public
ledger that is not controlled by any outside entity. This topic is also known as
5
TechRepublic,
10
Things
You
Need
to
Know
6
Wired,
The
History
of
E-‐Gold
7
Wired,
The
History
of
E-‐Gold
8
Wired,
The
History
of
E-‐Gold
9
Satoshi
Nakamoto,
Bitcoin:
A
Peer-‐to-‐Peer
Electronic
Cash
System
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decentralization. Fans of Bitcoin and most digital currencies argue that the decentralized
nature is the heart.
These concepts only scratch the surface of understanding how Bitcoin works and operates.
For example, one can’t simply just acquire Bitcoin. A Bitcoin wallet software such as
Coinbase or Xapo is needed in order to acquire, as well as initiate and process Bitcoin
transactions. Once you have your wallet, you will receive a unique Bitcoin address, with
which you may purchase Bitcoin with local currency for use. Retailer’s physical and digital
alike are now accepting Bitcoin as form of payment.
There are a few important points to note about the Bitcoin wallet. Primarily, note that it acts
as your personal identifier. Users receive a public address, as stated earlier, in order for
transactions to be verified and to confirm a unique individual’s identity.10 Additionally,
Bitcoin miners play an important function as well. Bitcoin miners are people with
supercomputers who solve the complex cryptographic problems and verify transactions.
Since transactions from all over the world are verified, a block is created and continues,
eventually creating a chain, the blockchain. Miners who solve the cryptographic problems
first will receive Bitcoin’s as a reward. See Diagram 1. One of the biggest positives of using
any cryptocurrency is the fact that it makes global transactions much simpler.
As it stands Bitcoin generated an enormous amount of buzz when its value peaked at around
$1,200 in November 2013, but eventually huge losses followed. As of June 2015 it’s worth
around $250. According to economic experts the biggest issue with bitcoin is the security
10
Digital
Gold,
Nathaniel
Popper
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problems and volatile worth of the cryptocurrency.11 If the market isn’t using Bitcoin, its
value or worth is low.
You cannot mention Bitcoin without talking about two of its most pivotal and game changing
moments, starring Mt. Gox and Silk Road. In 2013, a Japanese Bitcoin exchange company,
Mt. Gox, became the premiere destination of Bitcoin transactions, composing about 70% of
Bitcoin business.12 By February 2014, Mt. Gox later filed for bankruptcy. Due to an
undetected theft the company lost over 740,000 Bitcoin worth close to $750M belonging to
their clients.13 Silk Road was the underground illegal marketplace, where anonymous users
could purchase anything from fake identification cards to illegal substances using Bitcoin.
Both companies failed in the end, and each underwent justice department investigations in
countries across the world. Eventually, Silk Road founder, Ross Ulbricht was indicted and
convicted and public perception began to change with the negative press piling up from these
two massive incidences. Since this controversy, Bitcoin’s price has been able to remain
steady during 2015, with one BTC currently valued and holding steady at $250 USD.14 Some
questions that begin to arise are how can the music industry benefit from using Bitcoin to
purchase recorded music or can the blockchain create transparency and efficiency for
payments to artists.
Thinking about the history of the music industry and looking at the evolutions of how artists
are paid, how labels are paid, and how the industry makes money in its entirety, one can ask
the question, is there simpler and more efficient method? How will it work? Will artists be
11
Digital
Gold,
Nathaniel
Popper
12
Wall
Street
Journal,
5
Things
about
Mt.
Gox’s
Crisis
13
Inside Bitcoins. “The Mt. Gox Post Bankruptcy Claims:”
14
CoinDesk,
Homepage
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able to make a sustainable income off of their recorded music? Alec Wren, Audio Visual
Technician and Audio Engineer states:
The current music industry is very disjointed, with so many intermediaries that do not
communicate well or at all with one another. Music streaming/purchasing services,
copyright and royalty services are currently all centralized. This results in slow
payments out to artists without providing them with a clear and accurate (publically
verifiable) breakdown of the payment, all while the companies absorb their elegant
fee for carrying out such service – slow, cumbersome, expensive and too ambiguous.
This simply doesn’t suffice for the information age we live in today.
By creating a simplified global standard as it relates to royalties, splits and licensing
musicians can focus on the creation of music and create more value of their product.
Part II: Methodology
For this research, using qualitative research methods were the best option because the
cryptocurrency world is still in its infancy stages. Therefore early adopters and pioneers are
currently shaping and developing the industry. The primary data collected focuses on
different companies that in the crypto-marketplace, two exemplified the most innovation
using Bitcoin or blockchain technology were chosen for further examination. One in depth
case study was conducted on the company, PeerTracks in which each business model, value
proposition and special features were analyzed. Founding members of each company were
interviewed with 10 open-ended questions that focused on the economics, current landscape
and upcoming challenges that come with using digital currency. Applying this approach
allowed for a wider analysis of the ecosystem in order to identify key trends thus answering
the initial research question.
Continuing to search for a broad range of experts, the same 10 open-ended questions were
sent to an additional 8 professionals, making 10 interviewees in total. These individuals were
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chosen based off their expertise and knowledge within the music, financial and technology
industries. The 8 executives received the questionnaire by email with a turn around time of
48-72 hours. Each of their responses were analyzed and compared to the initial findings from
the literature review. A summary table highlighting the top 5 questions from most of the
interviews will also be created and displayed. Secondary data referenced throughout the study
include research about the history of Bitcoin and the future of digital payments, as well as
current news, laws, and events surrounding cryptocurrency.
Part III: Results & Discussion
Case Study: PeerTracks
PeerTracks is a company that has created its own decentralized musical ecosystem. Cofounded by Eddie Corral and Cedric Cobban, the company was formed in 2014 and officially
launched in 2015. Both co-founders envisioned a system that allows artists to generate a new
revenue stream while empowering their own network of fans. The company’s core focuses on
incentivizing the “superfans” by making them promoters, honing in on the importance of
Peer-2-Peer activity through the use of individual ArtistCoins. Let’s consider a hypothetical
situation: if you follow a punk band, we’ll call them BandX, and are a loyal fan because you
attend all shows and purchase all merchandise sold. BandX is a member of PeerTracks and
developed its own limited quantity ArtistCoin called BandXCoin. For an example, say as a
superfan, you want to be part of an experience BandX can reward you with 5 BandXCoins
per dollar of merchandise. You then realize that BandX will offer you a virtual VIP session if
you own 5 or more BandXCoins. In an interview with CryptoJunction, Cobban states: “The
more music and merchandise artists sell on PeerTracks, the greater the value of their
Artistcoins, so both the artist’s and fan’s interests are aligned and incentivized in a
completely new way.” PeerTracks considers themselves as a streaming service as well as an
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online retail store. Interestingly enough, PeerTracks does not use Bitcoin, but they do use the
decentralized blockchain technology. Another important feature of PeerTracks is when a user
wants to download music or stream an artists’ music, payments the user makes for that
purchase go directly to the artist with no additional fees and minimal turn around time
because of the blockchain. Though the company is still in its beginning phases, the
Parisian/Canadian hub has shown significant growth and potential to break the traditional
barriers within the music industry.
Case Study: SongCoin
SongCoin, a company dedicated to be the unofficial alternative currency in the music world
in 2014. The premise for the creation of SongCoin was to make international transactions for
music simpler along with introducing additional features like tipping and a user rewards
system for purchasing things like concert tickets or merchandise. Founder, David Prince
stated, “we’re looking at providing people with a way to not pay transaction fees, not go
through international wires, and a way for people to just kind of have something pretty much
alternative to a dollar.”15 Another big advantage of using something like SongCoin is the
transparency in which you get when using the cryptocurrency. You physically can see all
parties involved in the purchase and you can track all the splits if necessary. It takes the
complication out of processing and being paid. “Once we have a major Indie band involved
with our enterprise, and we see some market adoption then we will start to challenge the
existing music revenue streams,” states Prince in a CryptoCurrency News interview.16
Currently as of June 2015, SongCoin is experiencing technical issues.
15
Billboard,
SongCoin
wants
to
be
Music’s
Alternative
Currency
16
Crypto
Coin
News,
SongCoin Reveals Plans to Disrupt Music Industry
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Trends
The Importance of the Blockchain in Music
Blockchain technology is, as mentioned earlier, the heart and core of Bitcoin. It allows for all
and any transactions to be recorded on a public ledger. The ledger acts like a middleman and
eliminates the need for a governing body, better known as being decentralized. If we apply
something like this to the music industry, it could potentially transform some of archaic
systems already in place.
Looking at the innovation of smart contracts proves the overall potential of the blockchain. In
an article with Fast Company’s FastCoLabs states that a smart contract can be defined as
such:
“…these automated contracts work like any other computer program's if-then
statements. They just happen to be doing it in a way that interacts with real-world
assets. When a pre-programmed condition is triggered, the smart contract executes the
corresponding contractual clause.”
Smart contracts are using the blockchain technology to initiate the agreements, ultimately
saving money and including fewer parties in the process. Let’s apply this to the music
industry. Contracts in the music industry, ranging from management contracts to publishing
agreements, can be complicated and technical. Most likely you will have a plethora of
stakeholders involved and it takes time and review. Entertainment Lawyer Martin Frascogna,
who published a blog on smart contracts for MIDEM, explains the relevance of smart
contracts, stating that “recording agreements can be digitally cross referenced to label
bylaws, crossed against publishing agreements, sales figures, and so forth.”17 Applying this
type of system to the music industry on a mass scale could level the playing field, as far as
lawyers are concerned. Artists would become more empowered and essentially have the
17
Midem
blog,
3 Reasons Contracts are Doomed
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ability to be their own lawyers. Smart contracts using the blockchain are just scratching the
surface, as the potential of the technology is much more expansive. Though as the
technological world advances, a question that can be raised is how will the surrounding
industries keep up? How will the PRO’s (Performing Rights Organization) be affected? Is the
blockchain safe? Will the law be an issue?
According to George Howard, Associate Professor of Music Business Management at
Berklee College of Music, there’s an easier way to track the creation of a musical work. He
stated that, “the blockchain holds promise in terms of creating a system in which – via a
public registration of a work to the blockchain - a public record of a work is created that runs
with the work so that when it’s transferred, derivatives are created…” Creating this system as
George stated can revolutionize the necessity for intermediaries in the music business.
The Micro Ecosystem in Music
The micro ecosystem in music is a place where companies and transactions use incremental
or small payments for specific purchases. We see this type of model when talking about
Bitcoin. When using the digital currency, Bitcoin, instead paying with one BTC you’re
paying a fraction of one BTC. Let’s break that down a bit more. In the editorial world
currently you are seeing laces such as WordPress are allowing members to be tipped via
micropayments. These tips are micro rewards/payments used to compensate the creators of
content that consumers enjoy. Currently SongCoin wants to offer a feature of tipping an artist
you like as mentioned earlier. According to Wong Joon Ian, Journalist at CoinDesk, there’s
an opportunity, “the case for micropayments seem strong. It could be a way for independent
artists to easily and quickly get paid a fair amount for their music. However for that to
happen mass adoption by listeners and fans of digital currency must first occur.” Will
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micropayments become a standard to stream and view music? Can this type of business
model prove a higher ROI than the streaming services?
Conclusion
In short, can the ever-changing music industry use digital currency as a universal purchasing
standard? Will the music ecosystem adapt to using digital currency just like money or will
there be a continued stream of innovation where the traditional systems are challenged?
As technology continues to advance and our species relies on technology, things like Bitcoin
will be circulated to the masses. Using the blockchain technology can make digital payments
more seamless and fair for musicians, and creating a decentralized and transparent system is
what the music industry needs.
The use of digital currency is here to stay. Digital currencies will be used like traditional
currencies and innovate through its unique as a technology. Perhaps we will see a more
gamification approach while using digital currency. Also, using incremental micropayments
for recorded music or musical services are offered will begin to become more frequent over
time.
“The fees being smaller than credit card fees allow an artist to keep the same price but
make more per sale. It also becomes viable to sell your music at a cheaper price and still
make as much income as before. This second option (lowering of prices) also makes buying
music more economically feasible for more users and can switch many people,”
stated Cedric Cobban when asked about the role of micropayments. These important trends
are ushering in the next iteration of the music businesses. In an interview with the United
Kingdom’s The Guardian, U2 front man, Bono stated, “Spotify are giving up 70% of all
their revenues to rights owners. It’s just that people don’t know where the money is because
the record labels haven’t been transparent.” Meaning that as musicians are being paid for
their music it’s taking time and most artists cannot understand why they haven’t made much
money off of streams when millions of people may or may not have streamed their music.
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The best way the music industry can use digital currency as a music industry standard is to do
one of three things: One – Simplify the role of the collecting societies by using the
blockchain to create and follow the music. If an artist can create a song and follow the value
chain globally, it may ease their concerns. It can also help give the artist a better
understanding of how their royalty splits work out in a more transparent way. Even though
Bitcoin made a real splash, the use of the cryptocurrency will not solve the issues simply
because Bitcoin has a limited quantity but most importantly because the price will continue to
fluctuate aggressively. Two – Use micropayments as a standard amongst all streaming
services. Instead of using a Freemium model, implement a nominal charge to listen or view
music. Finally, another option on how digital currency can be used is by creating software
that can combine both the blockchain and micropayments while somehow seamlessly
embedding it into music. If an integration is seamless the learning curve may be smaller for
users and musicians alike.
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Appendix
Diagram 1
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Media of
