Flourish or Fail? The Future of Smart Contracts in the Music Industry

10 April 2017
By Sergey Bludov, SVP Media & Entertainment

The Future of Smart Contracts in the Music Industry

What if we could replace antiquated physical contracts execution to fit with the new digital music age and real-time commerce? Well, today we can and the technology is known as smart contracts. Just as the blockchain has emerged to claim its place as the new financial instrument of the future, smart contracts have become an equally hot topic. Electronic contracts, or smart contracts, between labels, distributors, and artists, can reshape the industry to ensure transaction and payment efficiency as well as increased transparency. Smart contracts are primarily a computer program whereby all parties can agree to the contract electronically, and it can also be enforced electronically. This can be achieved through the introduction of blockchain technology. In the case of an executed smart contract, the blockchain would keep track of the ownership rights ensuring that the proper parties are paid in accordance with their smart contact. The more sophisticated the code, the more automated, self-executing, and “smarter” the contract.

Blockchain is best known as the disrupting technology behind cryptocurrency Bitcoin. In a TechCrunch article posted by Ben Dickson in late 2016, he stated that “Blockchain technology can also revolutionize the monetization of music.” In the article, he describes how Bitcoin can easily support micropayments, which, due to the high transfer fees, is virtually impossible with traditional payment modes. This opens up options for on-demand music services as artists, labels and producers can receive payment in real-time with cryptocurrency. Lower operating costs are another benefit because the contract would be self-sufficient after its creation, so no costly human interaction would have to take place afterwards. Smart contracts can also circumvent the textual ambiguity and fraud potential of standard contracts, preventing possible legal disputes. Because the rules of the smart contract are programmed at creation, the contract would only execute per said rules.

With all its benefits, there can be some challenges with blockchain technology and smart contracts. The main issue is the fact that blockchain is a public ledger and as such, it will need to be given the “authority” by all parties to the smart contracts. All stakeholders have to agree that this is the method that revenues and payments will be tracked and delivered. If not, then we are back to square one. Smart contracts can also be very rigid, unable to acclimate to fluctuating circumstances and the parties’ revised preferences. To address this issue, artificial intelligence (AI) can be pragmatic to the creation, management, and enforcement of smart contracts.

Ethereum platform, by some experts labeled as ‘Blockchain 2.0’ or ‘Bitcoin 2.0’, is a programming framework to allow a network of peers to generate and administer their own smart contracts, without a central authority. It combines a blockchain network with a universal programming language and users are able to interact and execute transactions in Ethereum’s own cryptocurrency called ether (which hit an all-time high last month, prompting its market capitalization to exceed $2 billion). Ethereum is just one technology whose goal is to be a platform for smart contracts.

The days of agreements being scribbled on napkins in bars are long gone. However, even with the introduction of written, long-form contracts, there are areas of concern. After all, lawyers and artists are not really known to be on the same page. The adoption of smart contracts presents an exciting, transformative opportunity for the music industry. Over time, it is likely smart contracts or hybrids between “old fashioned” and smart contracts will progress past the proof of concept phase and take center stage. As smart contracts represent more of a revolution than an evolution in the way payments for streaming and downloaded music are transacted, they will require significant strategic long term resources committed to their productive development. Coders will need to anticipate legal implications and lawyers will need to think like technologists to ensure a successful outcome. Though highly promising, the smart contract solution for the music industry is still not perfect. After all, people can write bad code just as they can write bad contracts. Which is why it’s as important as ever to choose a reliable partner in tech.

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