2 Rules For Success For Blockchain Music Entrepreneurs

This article originally appeared on Forbes on October 12, 2018.

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We are at an inflection point in the trajectory of blockchain tech and music product development.

In this space and now in book form, I have been chronicling the application of blockchain tech to the music industry from the beginning. I’ve pulled back a bit from writing about this topic of late and have focused on working and advising in the space, in my role as Lead Researcher with the Open Music Initiative and as a consultant in conjunction with ATC Management for Intel. But I return now to sound an alarm.

I hope that I’m wrong, and that this piece and its soon-to-come followup will be rendered moot the moment they are published via a product or startup that utilizes blockchain’s unique technical attributes to successfully achieve product/market fit.

To be sure, the crypto markets, and thus blockchain tech by association, are currently in a position that I refer to as the Trough of Despair. This is the stage where all new technologies (and products, and relationships, and humans) find themselves after the initial thrust of excitement has worn off and the challenges to what had seemed like a slam dunk of a concept have emerged. Some technologies reverse course and claw their way back up from this trough by embracing a "purpose, not product" approach. But many, perhaps most, technologies — like most startups, relationships, etc. — do not. They die in the trough.

Blockchain Tech Has Achieved A State Of Antifragility

I am very confident that blockchain technology will persevere. This technology is not as new as most would have you believe — Stuart Haber and W. Scott Stornetta were implementing rudimentary blockchain tech back in the early 1990s while Satoshi Nakamoto was likely impressing his/her/their grade school friends with mad Rubik Cube prowess — and it has, via its successful implementation across a range of industries, reached a stage of “antifragility,” as defined by the brilliant Nassim Nicholas Taleb.

An antifragile state means that adverse circumstances now only extend blockchain technology’s long-term strength and durability. For example, code exploitations are now increasingly rare because not only was the code improved to address the initial weakness but these exploitations led to the discovery and addressing of other vulnerabilities. Thus, rather than being taken down by these attacks (“fragility”) or simply enduring them (“resiliency”/“robustness”), the technology has become stronger and more likely to endure because of the “threats.”

Certainly there is no guarantee that any of the current crypto currencies, their associated blockchains or the vast number of companies that attempted to cash in on the ICO crypto-rush will survive. However, I believe strongly that blockchain technology is not going anywhere and, in fact, is beginning to arrive at a state that pretty much guarantees long-term technological durability. To wit, this recent New York Times piece: From Farm to Blockchain: Walmart Tracks Its Lettuce.

Blockchain As A Technical Solution For Music Is Very Fragile

Sadly, I am much less sanguine when it comes to blockchain tech music startups. For a variety of reasons, I’m not going to specifically name those that I feel are unlikely to make it (most of them) or those that I think have a shot (very few), but the fact remains that it is very difficult to point to any example of real product/market fit in terms of adoption.

Still, rather than citing examples — as a serial entrepreneur myself, I am all too aware of the challenges faced in this line of work — I’m going to define what I believe to be the key points of failure that far too many of these music startups continue to stumble over. I do this with the enduring hope that some will be able to reverse course and that new entrants will begin with these points in mind.

The Howard Test

As a nod to the Howey Test — the guidelines used to determine whether a transaction qualifies as a security (and thus is governed by the SEC), which of late have been much in the minds of those contemplating ICOs — I’m going to jokingly refer to these points as the Howard Test.

I carefully laid out these exact points several months ago at a conference in Berlin; there is (NSFW) video evidence of this. In any case, forthwith are two of the four points of failure any blockchain-based music company must avoid. Doing so, of course, will not guarantee success. However, ignoring them all but guarantees failure.

Ignoring Or Being Unaware Of The Fundamental Structure Of Music Copyrights

Unlike other copyrightable intellectual property, a song will almost always have two separate and distinct copyrights. One is owned or controlled by the songwriter/publisher of the song and is the copyright for the composition: the melody and lyric, the song itself. The other is owned or controlled by the performer/label that recorded/released the song and is the copyright for the sound recording: the specific version or rendition of the song.

For example, Dolly Parton wrote a song entitled “I Will Always Love You.” She and her publisher are the owners of the copyright to the composition of this song.

Many years after she wrote it, Whitney Houston recorded a version of the song that appeared on an album released by Arista Records; Arista owns the copyright of this rendition of the song — but not the song itself. In fact, Arista must secure a license from and pay a royalty to Parton/her publisher in order for Houston’s version of this song to be released without infringing on Parton’s exclusive rights.

Certainly, there are many, many songs that are both written and performed by the same person. And increasingly, there are singer/songwriters who are by either design or default acting as their own publishers and labels. However, there are vast, vast numbers of songs that make the rights soup described above seem simple.

For example, not only are many songs today versions of someone else’s song (“covers”), but the “someone else” might be literally dozens of writers. Check out the songwriting credits, for example, on a Beyoncé song. Additionally, the songs are often full of samples or are mashups.

No one is to blame for this. This type of songwriting-via-assembly-and-collaboration is very natural, and technological advances have made doing so incredibly simple. The culture — both technology-enabled creators and music fans — wants these types of works. Laws, however, tend to lag behind culture, and there is currently no scaleable legal solution to address, for example, the licensing of samples.

Because of this complexity surrounding music copyrights, those who attempt to populate their blockchain-based music services with works that are not owned or controlled by a single rightsholder — I’ll use the term “controlled compositions” as shorthand for these works — are doomed to find themselves mired in a sea of lawsuits and/or insurmountable licensing challenges.

Thus, Rule No. 1 is to understand the complexities of music copyrights and to avoid building a business that requires a large number of songs that are not controlled compositions.

Overestimating The Current State Of The Art With Respect To Smart Contract Technology

A core advantage of blockchain tech is the ability for a set of machine-readable rules to be programmed that, when met, enable transactions to occur without the need of intermediaries. This feature is known as a “smart contract.”

Currently, smart contract technology works exceedingly well when what is programmed are binary rules that are not dependent on multiple-party sign-off: that is, a simple “if this, then that” dynamic between entities. This is why the transactions on the Bitcoin blockchain work, and it’s why supply-chain management has embraced blockchain tech.

However, if for a transaction to occur numerous complicated rules and multiple stakeholders must sign off, smart contracts are currently not able to manage this at the speed or cost necessary to scale.

Therefore, those attempting to utilize blockchain tech to facilitate complex licensing as part of their business’ core competency should proceed with caution. It is one thing to construct a business that employs a smart contract to facilitate a transaction with a rightsholder authorized to construct a dynamic that states, for example, “Upon a single rule being satisfied, I authorize the party who satisfies this rule to utilize my work.” It is a completely different situation when one attempts to construct a smart contract to accommodate anything close to the following: “Upon several different rules being satisfied and verified, and upon approval and acceptance of this satisfaction by the following 11 songwriters; their respective publishers, sub-publishers, administrators, co-publishers, labels, affiliates and estates; the rightsholders for the various interested parties who have granted the rights to any and all derivatives; and, notwithstanding the forgoing, their respective publishers, subpublishers and labels, authorization will be granted."

This is simply not going to happen with the current state of the technical ability of blockchain-based smart contracts. Even if smart contracts could handle this type of complexity, the amount of time, energy and money to power it would be massive. Certainly, Moore’s Law-accelerated technological development is on the side of rapid improvement, but it’s going to be a while. And the above example, with a multitude of parties, is not the exception, particularly when it comes to popular songs.

Thus, Rule No. 2 is to not overestimate the current state of the art with respect to smart contract technology.

These are two of the four rules that make up the Howard Test. I will shortly post the second part of this piece, which details the remaining rules. Unless, that is, some savvy entrepreneur develops or demonstrates a blockchain-based music product that has gained at least a toehold of product/market fit — then, my work here will be done.