Blockchained to the rhythm: what are ‘distributed ledgers’ and could they help the music industry and copyright?

Forget Napster! One of the biggest problems in the music industry is the who, what, where, and why: which labels and publishers, performers, songwriters and producers own which rights and what split of royalties should be paid? Worse still: when are the songs being played, who by, and for what purpose?

This occurs, in part, because of the labyrinthine distribution of rights that occurs through copyright licensing and contracting in the modern music business. For the uninitiated, the question is rarely just: “who owns the song?” – in reality, there are endless questions about “which bit”, “who did they licence it to?” and, most importantly, “how do I find them?

Emerging technologies like blockchain (also dryly called ‘distributed ledger technology’) may hold the key by introducing scalable, secure and ‘smart’ systems for interlocking and tracking music rights.

Music industry basics: a chain reaction

In any ‘musical song’, there are generally a number of forms of copyright that subsist, with generally more than one owner:

  • there is the composer who wrote the music, who in most cases will initially own copyright in the musical works; and
  • there is the lyricist who wrote the lyrics, who in most cases will initially own copyright in the literary works; and
  • there can also be the recording artist who performs the music, who might own copyright in the performance of the other former two punter’s music!

The singer/songwriter is generally lucky enough to start out by selling off all three sets of rights! These rights, for commercial reasons, are often split. Terms used in music business include:

  • the mechanical rights which refer to the right to record the song, typically onto a master, CD, or a digital format;
    the synchronisation rights which refer to the right to reproduce the music in, for example, a soundtrack of a film or advertisement; and
  • the performance rights which refer to the right to perform the public in public – this could be live, or by way of a recording, by broadcast or by playing it over the internet.

Musicians (who write the songs) and artists (who record the songs) then receive royalties through these different ’streams’ depending on the activities. Confused yet? Imagine trying to track who owns what, who should pay whom, and in which drawer you left all the contracts. For a long time, this was managed by music publishers and collecting societies – whose complex databases and international networks were generally effective at recouping and redistributing the royalties. It’s a truism to say the internet has changed everything: not just in speed of distribution, but also volume. Blockchain technology might assist by providing a secure record-keeping system that tracks sales, performances, and recordings.

‘You would never break the [block]chain’

Blockchain, or ‘distributed ledger technology’ isn’t as complicated as it sounds. It is most famous as the underlying technology of the cryptocurrency, Bitcoin. Our helpful Financial Markets team at King & Wood Mallesons explains it this way:

Blockchain is useful for more than just Bitcoin – it has the potential to change the fabric of markets. At its core, blockchain is a data structure that forms a public ledger. The distributed ledger acts as a transparent and secure way to track executed transactions, acting as a single source of truth. Blockchain will not only provide numerous opportunities and efficiencies for the financial services industry, it can vastly reduce the cost and complexity of business processes across other sectors.

Typical elements in the roll-out of a blockchain-based technology include:

  • a network of participants – which are the persons who require access to the ledger – in this case, consumers, rights-holders, music playback applications, and perhaps Lady Gaga?;
  • a distributed ledger – which is, as the name suggests, a ledger – but one that is ‘distributed’ or shared across the network of participants in the technology;
  • a consensus mechanism – being a set of algorithms that each of the participants can use to verify and agree that any records posted to the distributed ledger are correct, thereby ensuring the security and veracity of each new entry; and
  • some cryptography, for good measure – to keep stored records secure and private.

Critically, this process is all automated by software. There is no need for Miley Cyrus to operate any machinery. Instead, there are two applications of blockchain that could already be a real wrecking ball for the music industry:

  • using blockchain as a form of digital rights management to track music; and
  • using blockchain to validate ‘smart contracts’ in agreements.

Digital rights management: it’s no chain of fools!

Blockchain has the potential to revolutionise the way in which music rights are tracked through the distribution chain from composer to consumer. Accurate digital rights management (DRM) and management of metadata is a massive issue in the music business. Metadata for music includes data like the owners of the copyright in compositions and master sound recordings, ISRC codes (unique identifying codes for master recordings), ISWC codes (unique identifying codes for compositions), performance rights organization affiliations, and more fun information like lyrics, album art, and – crucially for house-party playlists – the year of release.

The complexity of entering, matching and tracking all that data can make it near impossible to accurately record which songwriters, performers, producers, publishers and labels should be ascribed to a particular track and how and when they should be paid – and that data itself can be very insecure.

Instead, blockchain technologies could store cryptographic signatures that represent tracks along the blockchain – along with the mission critical licensing data – and useful add-ons such as lyrics, cover art, and liner notes. The technology is on the horizon:

  • On 18 October 2016, Canadian collecting society SOCAN announced a partnership with blockchain startups Core Rights and Re:Sound to build a “Canadian, country-wide digital marketplace for licensing music rights.
  • Then, on 7 April 2017, three of the world’s largest collection societies – ASCAP, Sacem, and PRS for Music announced “a groundbreaking partnership to prototype a new shared system of managing authoritative music copyright information using blockchain technology.” In their own words:

The societies are working together to model a new system for managing the links between music recordings International Standard Recording Codes (ISRCs) and music work International Standard Work Codes (ISWCs). Establishing robust links between these two pieces of data offers a practical solution with enormous potential for improving the processes of royalty matching, which will in turn speed up licensing, reduce errors and reduce costs.

  • And, recently, on 26 April 2017, Spotify, the world’s favourite streaming service (#JustSayYes, please Taylor Swift), has recently acquired blockchain startup Mediachain Labs. After a string of expensive lawsuits related to proper tracking and allocation of rights and royalties on the service, it’s no surprise that Spotify might opt to acquire a decentralised ledger that can track music metadata and rights rather than rely upon its own. It’s an issue Spotify is likely keen to resolve before an upcoming IPO.

Not only could blockchain create a secure and automated database of songs and their legal and creative metadata – but it could revolutionise the way in which music contracting and monetisation takes place in the industry: through smart contracts.

Who run the contracts? Blockchain!

Smart contracts can be combined with blockchain to create secure and automated contracts. If blockchain isn’t your forte, you can read the ’10 things you need to know about smart contracts’ from our Financial Markets at King & Wood Mallesons here; but, critically a ‘smart’ contract is:

… simply any agreement that can execute a part of its functions by itself. One example is a contract which automatically calculates the payments which are due between the parties, and then arranges for those payments to be made. Smart contracts reduce the amount of human intervention that is required for the performance of an agreement.

Put simply: imagine a contract that is automated by software. Combined with the security of blockchain:

… certainty and resilience can be added. If the contract is going to be making its own payments and deliveries on behalf of the parties, then it is a good thing that the terms have been verified as being agreed by other disinterested parties and are protected from attack by being held on multiple systems. This is what blockchain can do when combined with smart contracts. A smart contract can be executed “above” the blockchain (where the software program runs outside the blockchain and feeds information to the blockchain) or “on” the blockchain (where the software program is coded into blocks).

The potential here for the music industry (and the entertainment industry in general) is massive. Theoretically, rules about royalty thresholds and distribution could be automated and secured by blockchain technologies. Contracts which rely on ‘distribution waterfalls’ (which are also common in television commissioning) could also be computerised and verified in a system which is backed by the ‘peer to peer’ security of the ledger. Don’t go chasing waterfalls – blockchain can do it for you!

It’s not just about being secure it’s also about it being fast: you hit the required amount of downloads on iTunes, and the next phase of your royalty agreement might kick off instantaneously. If a DJ plays a song in a nightclub or the radio, they could instantly pay the correct micro-royalties to the correct parties. Assignments and licences of copyright could be pre-set and programmed.

The refrain?

The cobweb of music rights, distribution and payment could be cleared. Not only might Spotify be served with less lawsuits, but the focus could shift from the polemics about how copyright is structured and ‘unfair’ to consumers, to how we can properly remunerate rights-holders (and protect distribution platforms).

The music industry was slow to attune to the internet. This could be a “huzzah” rather than a Kazaa moment. Most importantly, we could finally answer the question: does anybody actually listen to or like that awful new Katy Perry song?