Spotify, Blockchain And Music’s Future [Thomas Euler]

In this piece Thomas Euler defends his optimistic projections (sparked by Spotify's purchase of Mediachain labs) of how blockchain technology could be beneficial to the music industry, while acknowledging that there are plenty of concerns and complications involved as well.

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Guest post by Thomas Euler on Attention Econo.meLife is funny, at least sometimes. I recently wrote about Spotify’s acquisition of the blockchain company Mediachain Labs. Just after I had published the piece, I came across David “Rocknerd” Gerard’s take on music blockchains. It’s not a very optimistic take. I decided to write a follow-up piece with a little pushback to David’s point.Then the funny part happened. A few hours later I opened the day’s Redef Music newsletter (which you can read here if you aren’t a subscriber – which, to be sure, you definitely should be). In there, Matty Karas pitted exactly those two pieces against each other. He wrote:Is SPOTIFY’s acquisition of blockchain company MEDIACHAIN LABS a sign of a radical new business model to come, a chance to add some solid data tools for the existing business model, both or neither? The pro-futurist argument, from THOMAS EULER at ATTENTIONECONO.ME: It’s time to find a way around the middlemen who control rights to a variety of media (e.g. record companies) and stand between content creators and content users, and blockchain technology the way. The naysayer take, from DAVID “ROCKNERD” GERARD: The business problem the industry faces isn’t how to distribute and account for content-rights data, it’s the data itself, along with the “contradictory interests” of the various parties who use it. And the last thing those parties want to create, he argues, is “a new central octopus.” This, I suspect, is the basic pro/con of all blockchain arguments in music and other media. Data vs. database. Complicated humans vs. complicated robots.

Finding our pieces juxtaposed in this way, just a couple hours after I decided to respond to David’s piece, was certainly amusing. At the same time, Matty’s summary also hints at the reason why I wanted to address the piece in the first place: the difference isn’t a simple black-and-white he’s wrong, I’m right.Actually, I regard many of his points as valid issues. They highlight why the future is such a complicated thing: it’s rather easy to imagine, but actually getting there is hard. We can’t simply dismiss the status-quo. Our current reality needs to be taken into account when thinking about the future.When Matty describes my argument as pro-futurist, he isn’t wrong. I indeed think it’s generally safe to assume that the future will differ from what is today. But for every possible future, there is resilience by forces which would rather conserve the present. Those forces might not be as sexy as the next thing, but they are real. When you concern yourself with the future, it’s easy to forget that the nitty-gritty details of reality matter. As Bill Gates once famously stated:“We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.”The music blockchain case is a perfect illustration of the above. The different takes David and I presented are presumably caused by different time frames at the foundation of our respective analysis. And by a diverging valuation of the power that derives from “owning the user”.Let me briefly recap both of our Spotify/Blockchain takes.

In my piece, I explained that music labels are what blockchain-lingo calls a “trusted third party”. The blockchain’s appeal (to the community and investors) largely derives from its potential to replace those trusted third parties with algorithms. Labels fall into that category because rights handling — one of their essential services for artists — is a TTP function. Since their business model is largely based on owning those rights, any technology that enables an alternative approach is potentially a threat to them.I then looked at the acquisition from Spotify’s perspective. I wrote (emphasize added):As I’ve written before, the streaming service’s best long-term scenario would be to own the music. The second best option is not having to deal with the labels, albeit not owning the music. This way, the company at least wouldn’t have to pay fortunes to the labels without turning a profit itself.The second scenario is a world where entrepreneurial artists release and manage their work in DIY fashion. But for this model to become a mainstay among creators, it must develop into a profitable alternative to the label system. …One important component of such a future: a system that allows artists to earn royalty dollars from their music. This requires rights handling, particularly when music is accessed, not purchased. …Trying to replace them [the labels] is playing the long game. But we can be confident that many will try to challenge the status-quo. I assume that Spotify just joined them.

David, meanwhile, first explains many (valid!) concerns on the technology & data-side of things. Those details aren’t to be glossed over. They are the reason why we overestimate the change that will occur in the near future. The challenges David describes are real. Yes, I tend to believe that most of them will eventually be solved. But it will certainly take time. And likely more time than many blockchain optimists would hope.The standard comparison I use to classify blockchain technology is the internet of the early 90’s: Still way to go, with many failures to be expected on the road ahead. But the core idea is simply too promising (in many respects); people will continue to work on it. Think back to the web’s early days. Then, too, we had many skeptics as well as a bunch of optimists. As we have witnessed, the impact turned out (and still is!) profound but it also took time. And not every possible scenario materialized.However, the key part of David’s argument, the part where I think he’s overlooking an important detail, is here (emphasize mine):The proponents’ business goal is to become the organisation controlling the newly cleaned-up data, with a monopoly maintained by network effect. The barrier that such efforts founder on, over and over, is that no industry’s players want to create a new central octopus.One problem nobody seems to mention: incumbents will treat technological change as a threat and resist it as bitterly as they have every other technology. …And the other problem: the record companies are still way too interested in keeping their actual deals secret. Because, as IBM was actually surprised to find out with their Hyperledger blockchain project, real-life businesses of all sorts don’t want to share data even with all participants in their blockchain, but only with the people each specific deal is actually with. Funnily enough.The first highlighted point is mostly true but there is an exception: If your business model is being a platform — that is you aim to be the central place where all transactions between users and suppliers happen — you yourself need to become the “central octopus”. It’s the very definition of being a platform/aggregator. And it’s Spotify’s business model.His points regarding the incumbents opposition to change aren’t wrong. To the contrary. These objections admittedly present an obstacle; but not an insurmountable one. A little thought experiment will explain why.

Let’s find out how a plausible path to a future with a broadly accepted music blockchain would have to look like. As you will see, the industry incumbents — the major labels — likely wouldn’t play a big role in it. And Spotify is particularly well positioned to pull it of (compared to anybody else).¹A word of warning: I don’t claim that the following is going to happen. But I do regard it as feasible:

Create a digital music distribution system that establishes a direct relationship with users
Grow it to the point that artists can reliably use your system to reach a sizable audience and establish a working business model
Once the platform scaled on the user side, start offering services that present a different solution to managing rights & royalties. Target it at new artists. Don’t try to own the rights. Simply create the infrastructure that gets the job done.
Iterate on that system until it works flawlessly and grow it over time
Once it has proven to be a workable solution, start to target established artists

A few remarks.I’m well aware of the delicate balancing act streaming services and labels are performing in their struggle for power. I’ve written about it at length. But the appeal of the approach above is that you might be able to pull it off without creeping on the label’s turf too obviously. You don’t set out to take artists they already signed away from them. It’s basically the Soundcloud approach — yet with an established distribution platform and a business model in place.A critical component would be to not even try to own the rights. Currently, any large-scale attempt to do so by a streaming platform would certainly result in displeased labels. As any streaming service relies on the access to their catalogues, that’s not an option. But you might get away with trying to build a rights-management infrastructure, especially when targeted at newcomers. It doesn’t necessarily take blockchain technology to build such a system, but it certainly has some useful things built-in.If you could pull that of, time would work in your favor. At least if your system is profitable. Than, more and more young artists might end up using it. At that point, having a large-scale distribution platform and a business model in place matters. Young artists love Soundcloud. But once they become famous, Soundcloud no longer is a good option because it doesn’t make you money.Spotify is in a different position though. While the company is still fighting to become profitable (its new deals certainly are an important step in the right direction), it is continuously growing its base of paying users. A few months ago, it has crossed the 50 million subscriber milestone. That’s great because Spotify’s revenue depends on scale. But profitability is also contingent on the cost of content Spotify has to bear. Lowering these costs by being less reliant upon the labels’ catalogues might go a long way in that regard.That doesn’t take a full-blown attempt to turn into a label. Creating an alternative rights-handling system as infrastructure for artists might do. It’s not a quick fix because it takes time to come to fruition. But it might be feasible, whereas the former isn’t (at least right now). The prerequisite, of course, is having a large user base that makes it attractive for artists to join.Spotify fulfills that criteria. It isn’t just another obscure blockchain startup. It is the biggest platform of paying music fans. If anybody is in a good position to try and build such a system, it’s Spotify. Particularly if it can do so without offending the labels in the early stages. To that end, their established relations with the labels (including their minority stake in Spotify) and the sizable revenue it creates for them are assets.This, in brief, is what David’s analysis, in my opinion, undervalues: Spotify “owns” music users. Hence, it is better-suited to experiment with alternative rights-management models than almost anybody else. In the long-run, such a system comes with upside: the potential to grow into an alternative to labels. Yet, the money Spotify makes them, might just convince the labels to resist not quite as bitterly as they do with every other technology.Making a desired future happen takes time, the resources to survive the meantime and a good strategic position. Twice so in the face of powerful incumbents. Right now, we don’t even know whether Spotify even wants to go in the direction I laid out. Even if they do, success remains uncertain. But pursuing that path would be aligned with the company’s best interest. And as of right now, they are in a pretty solid position to try.¹ Apple, while not having the same user base, has a way bigger warchest. Yet, Apple Music isn’t central to the company’s business. In theory they could go down that route as well. But I’m not convinced they are focused on doing so.Thomas Euler: Analyst, writer. At the intersection of tech, media and the digital economy. Founder of www.attentionecono.me. For more info check: www.thomaseuler.de | Munich