Master Thesis MSc Business Administration (Entrepreneurship & Management in the Creative Industries)
Disruptive technologies and business models:
An exploration of distributed ledger
technology for online music distribution.
Frank ter Haar (11418834)
August 2017
Revised Version
1
stsupervisor: E. Dirksen MSc
Abstract – Since the emergence of the distributed ledger technology called ‘blockchain’, expectations
have been high concerning its potential implications. Through a shared online ledger, this technology allows decentralized transactions without the interference of a trusted third party. The music industry has shown growing interest in blockchain technology through idealistic projections of a value chain without unequal interference of third parties. The technology has given hope to artists who are discontent with the fractions of cents they earn per online stream and the lack of transparency over income through streaming. The lack of transparency over income is commonly referred to as the who
earns what problem. This study aims to explore the potential of distributed ledger technology in
solving this. The research was conducted using semi-structured interviews with ten different
stakeholders the music industry. The analysis of data shows that the problem of who earns what is not a result of unequal profits for musicians in online music distribution, but rather a consequence of persistent oversupply that is caused by a lack of gatekeeping institutions in online distribution channels. The first contribution of this research is that it reconsiders the problem of who earns what. Secondly, this research shows that for now the potential of blockchain in online music distribution is limited to being an efficient tool for legal rights registration and supervision.
Table of contents
1. Introduction Page 3
2. Theoretical Framework Page 8
2.1 Business model innovation Page 8
2.2 Evolution in the music industry Page 10
2.3 The music artists and their problem with streaming Page 11
2.4 A short explanation of blockchain Page 12
2.5 Blockchain’s potential of solving the ‘who earns what’ problem Page 14
2.6 Theoretical Propositions Page 15
3. Research Methodology Page 16
3.1 Research design Page 16
3.2 Data collection and description of sample Page 17
3.3 Quality of the research Page 18
3.4 Method of analysis Page 18
3.5 Research ethics Page 19
4. Results Page 20
4.1.1 Today’s music industry: Multiple sources of revenue Page 20
4.1.2 Repositioning of the ‘majors’ in the digital era Page 22
4.1.3 The use of streaming in the businesses of the participants Page 25
4.2.1 (Un)equal contracts and fair business in the value chain Page 27
4.2.2 Challenges in online music distribution Page 30
5. Discussion Page 33
5.1 Summary of findings Page 33
5.2 Discussion of findings regarding the theoretical propositions Page 34
5.3 Implications of findings Page 36
5.4 Recommendations and limitations Page 37
6. Conclusion Page 38
7. References Page 39
1. Introduction
“The art of good business is being a good middleman: putting people together.”
(Layer Cake, 2004).
Business relationships are generally based on centralized transactions through companies or institutions that play the role of middleman, who function as a trusted third party and usually take a share of profits for their services. For example, consider ‘trust’ as a main component of business in the banking sector. If consumers lose trust in a specific bank, they tend to relocate their savings, which could have disastrous consequences for the bank’s business. To maintain a trusting relationship with customers or business partners, companies should express their will to act in a transparent and honest way.
Now consider the music industry, which in the last decades has seen extreme transformations through different media formats from analog to digital (vinyl, tape, CD, MP3), the ‘death of the album’1,
piracy (copying or ripping) and last but not least, illegal peer-to-peer file sharing2. According to the
International Federation of the Phonographic Industry (IFPI), 50% of the recording industry’s global revenues in 2016 came from digital channels like streaming providers (with 34% from physical format sales and 16% from performance rights and synchronization). Although all these events changed the music industry considerably, the problem that the industry now faces seems to be transparency over profits in digital music distribution. Through a maze of copyrights and people who are involved in the production of music, losing track of who earns what has become a common problem according to many artists. In combat over claiming the correct slice of the pie, several major artists ended in conflict with streaming providers over the last years (Taylor Swift, Dr. Dre, The Black Keys, AC/DC, Led Zeppelin, Jay-Z and many others). In their own defense, streaming providers like Spotify claim that 70% of their revenue ends up at the major music labels as royalty-checks and as advanced deposit to access their catalogues. In 2013, the former Talking Heads’ lead singer David
1 The rising popularity of online playlists has led to a decrease of people who listen to full music albums.
https://www.theguardian.com/commentisfree/2014/jul/30/album-is-dead-long-live-playlists
2 Peer-to-Peer file sharing, or ‘P2P’ became popular through software like Napster. Current software that is
commonly used is BitTorrent, in which so called ‘torrent files’ can be downloaded through websites like ‘The Pirate Bay’ to connect to other file sharers (peers) in the online network.
Byrne wrote an essay in The Guardian about the division of earnings through streaming, stating that major record labels usually hand over 15-20% of royalty incomes to artists. He refers to the band ‘Galaxie 500’, who received $0.004611 per stream of their song ‘Tugboat’ on Spotify. Damon Krukowski, who is one of the three band members of Galaxie 500, writes in the online magazine ‘Pitchfork’ about the royalty check he received from Broadcast Music, Inc. (BMI) for the 7,800 streams that the song ‘Tugboat’ got on another streaming provider, Pandora: a whopping 21 cents – 7 cents per band member. The article is ironically called ‘When music stops making cents’. These and other publications in music magazines like Pitchfork evoke artists’ discontent with the current share of profit in the general value chain of online music distribution. Here one can question if distribution through streaming has caused this situation, or if other factors might have lead to the current
circumstances.
Unequal contracts between arts and commerce were already common before the streaming industry became what it is today, although in a different form. As argued by Caves (2003), the standard contract between record labels and (pop) musicians takes the joint-venture form, but adds the crucial element that the creative good’s production proceeds in steps. With 80 to 90 percent of recordings not reaching their break-even point, labels apply a so-called ‘buck-shot strategy’ by offering advance money to musicians to record an album and to promote and distribute it (one hit can cover for the failures). If the earned royalties eventually don’t cover the advance, future revenues of new albums will be charged to fill that gap if the label still has faith in the musician. The labels generally take responsibility for promotion and distribution and play a large role as gatekeepers who ensure the quality of published content to the audiences. According to Caves (2003), the options in contracts between musicians and labels are generally one-sided: the label can quit the artist more easily than vice versa. In the streaming business, labels and/or legal rights owners end up with a large part of the income with royalties through the contracts that are manifested in this type of business relations with musicians (taking a large part of the risk, but also a large part of potential profits).
of online music distribution3. One innovation that recently created high expectations for future
implications is that of blockchain, which in short is a decentralized online transaction system with its own ledger technology, possibly its own currency (like the Bitcoin) and its own protocol and client system. The development of the Bitcoin blockchain was initially triggered during the banking crisis of 2008, in which a financial world is projected where digital transactions are not dependent on a central middleman (Nakamoto, 2008). In traditional transaction systems the middleman is necessary, which leads to a certain percentage of fraud that is unavoidable (Nakamoto, 2008). Although it was
developed in 2008 as transaction system for the crypto-currency called Bitcoin, its implications reach much further than being just a payment system. These implications include transactions in currency, smart contracts, but also transactions of intellectual property such as music. Through its full
transparency and traceability, the system is said to be trustless (Swan 2015).
Swan (2015) argues that blockchain is the blueprint for a new economy: ‘We may be at the dawn of a new revolution’. Here she refers to blockchain being the next disruptive technology in the computing paradigms, after the computer mainframe-, PC-, Internet- and the Social/Mobile paradigm (Swan 2015). The structure of blockchain lends itself for applications beyond financial markets or currencies. As Swan (2015) puts it: ‘The key idea is that the decentralized transaction ledger functionality of the blockchain could be used to register, confirm and transfer all manner of contracts and property’. Next to financial services and other sectors, the creative industries have also given increased attention to blockchain. For example, PwC (2014) explores payments in creative industries through crypto-currency in its ‘Consumer Intelligence Series’. Some initiatives like ‘Ujo Music’ are already
experimenting with blockchain prototypes to connect artists and rights owners directly with fans and also offer smart licensing for selling music track packages for remix purposes through the distributed ledger system. Ujo Music is an example of the many initiatives in doing business in the creative industries through a distributed ledger system.
3 The band Radiohead experimented with an online ‘ pay what you want’ scheme for their album
What music labels and streaming companies are doing in the music industry, is somewhat similar to what financial institutions are doing in the role of central middleman in the banking sector.
Companies like Spotify, Deezer and Tidal offer music streaming and downloading through their centralized applications. The streaming providers pay an advance fee to major labels to get their catalogue onto the platform and subsequently earn their income through subscriptions and
advertisements. Negotiations with the streaming platforms can differ between labels (and artists for that matter), which means that contracts and relative profits can differ as well. Next to that, there is the transparency issue: Spotify for instance claims that they pay 70% of revenue to rights owners, but it does not go into the exact amount. According to an article in the International Business Times (2016), Spotify also sold data of 70 million users in 2016 for targeted marketing purposes. Although still in its infancy and on abstract level, blockchain technology has given hope to those that are not in favor of this centralized (music) distribution scheme. It could be the answer to the question that seems so urgent in the music industry: who earns what?
If artists in the music industry feel the need to solve these problems through cutting out the
middleman with a distributed ledger system like blockchain, then what are the implications for their (new) business-models? For instance, who is going to fulfill the task of gatekeeper in the music industry if everybody can be an artist online? Does the advantage of being connected directly to fans or listeners outweigh the advantages of centralized distribution from the viewpoint of the artists? This is where current research on blockchain for the music industry seems to hold: an abstract and
idealistic proposition for the future.
This qualitative study approaches the implications for a distributed ledger system from the viewpoint of different stakeholders in the music industry and could therefore be of contribution to theory and practice. The data is obtained through ten semi-structured interviews with music industry
stakeholders. The research will not cover the technological aspects of blockchain extensively, but will primarily focus on its potential implications for the music industry. To explore if multiple
following research question is proposed: To what extent can a distributed ledger technology like
blockchain solve the who earns what problem of centralized digital music distribution, according to stakeholders in the music industry?
This introduction is followed by a review of theories in research literature on the subject of business models, the status quo in online music distribution and the potential of blockchain in solving the who
earns what problem. The theoretic framework will be followed by an explanation of the research
2. Theoretical Framework
In this section, the relevant literature will be reviewed to give insights into the status quo in the music industry, with a main focus on digital music distribution. This review will start from a broad approach to innovations of business models in general and will proceed towards the specific theories of the music industry and its current dominant business model of streaming providers and the perceived problem that it caused. Subsequently, an overview is given of current research on implications of blockchain for music distribution, as a decentralized network of traceable file sharing. Although blockchain is currently a popular subject in research on innovation, application of the theory and technology itself are still in its infancy. To examine the research question within the scope of the theoretical framework, this section will be concluded with three research propositions.
2.1 Business model innovation
Although this research is focused on a particular type of technological innovation and its further implications for business models of streaming in the music industry, a lot has been written about innovation of business models in general. When ‘business models’ first appeared in academic writing as a concept, the term referred to a mathematical simulation of companies that should help with strategic decision making (Bellman et al. 1957). Although the construct has been studied to a great extent, especially in the last fifteen years, there is no consensus of a leading definition of business models (Stampfl, 2016). In academia, Stampfl says, definitions of the term can broadly be placed in five different groups. The first and most obvious definition of ‘business model’ is the way a company does business and in this sense every company has a business model (Chesbrough 2007). Chesbrough states that a complete business model should contain information on value propositions, the target market, the value chain, revenue mechanisms, the value network and the competitive strategy. A second definition refers to business models as a simplification of real world processes to understand key principles and elements (Gordijn & Akkermans 2003). In this approach, business models appear as schematic images representing (fragments of) a business to keep an overview. Third, business models appear as definition in ‘replica strategies’ (Winter & Zulanski 2001), in which various aspects
of an organizational formula needs to be ‘orchestrated’, for instance in franchising. A fourth definition proposes that business models mediate between technical inputs and economic outputs (Chesbrough & Rosenbloom 2002), which means that companies should keep up with technological developments in their sector in order to maintain a sustainable advantage. The fifth and final definition of business models that Stampfl (2016) mentions, is the choice for a certain business model as a competitive advantage (Christensen 2001). From this approach, the business model is seen as one of the components that together define a company’s strategy. For this thesis I will be using the first
mentioned definition of business models, being best described as an informative model that contains value propositions, the target market, the value chain, revenue mechanisms, the value network and the competitive strategy (Chesbrough, 2007).
With above explanation of the terminology of business models in mind, the next step is to conceptualize innovation in business models. As criticized by Markides (2006), the theory of
disruptive technologies (Christensen 1997) was widely used to explain innovations of both product-
and business model innovations. Markides shows that disruptive innovations are in need of better theorizing and that it needs more different categories. With this statement Markides (2006) contradicts Christensen by breaking the topic of innovation down in finer categories. Markides first distinguishes between business model-, product- and technological innovation. He defines business model
innovation as the discovery of a fundamental new business model which ‘enlarges the economic pie’, without the discovery of new products or services. Two propositions are made by Markides about business model innovation: it should attract new customers, enlarging the market (1) and it should require a different value chain compared with the incumbent business model (2). Christensen (1997) argues that disruptive innovations grow to eventually dominate in the market. Markides (2006) once more argues that this is not the case for business model innovation. It’s possible for business-model innovations to grow, usually taking a certain percentage of the market but never fully overtake the traditional way of competing. Here Markides gives the example of Internet banking, which still grows but did not completely overtake the market yet. An example of the music industry could be the lasting
sales of vinyl and other media formats, while the online music streaming market grew into the dominant position.
2.2 Evolution in the music industry
In the introduction to this thesis the current problem in music streaming is explained: Who earns
what? To fully understand the current dominant business model in the music streaming business,
explaining the evolution of the traditional music industry is essential. For the past centuries, music distribution has always been influenced by technological innovations (Hughes & Reiner Lang 2003). From the invention of music notation and the development of orchestrated symphonies, to the
invention of carriers of analog media and eventually towards the digital/online era, which has changed the way music is produced, distributed and listened to.
As mentioned in the introduction as well: contracts between musicians and labels are generally unequal (Caves 2003). Music labels take the risk of failure when financing unknown artists in the hope of them becoming (profitable) hits. Labels do this on a large scale: profitable hits make up for their losses. An important characteristic of the creative industries and also the music industry for that matter is what Caves (2003) calls ‘nobody knows’. This refers to the fundamental uncertainty of success that music producers face in distributing and marketing new music. This wouldn’t be a problem if creative output could be reused in some way, but a flop stays a flop. In other words, the producer has to deal with sunk costs on a large scale and has to earn all profits from the hits. From a beginning artists’ perspective, the concept of nobody knows forces him/her in a position with low bargaining power. Doing business with a label confronts the artists with a tradeoff. In return for a shot at the title that is financed, produced, marketed and distributed, the label receives a piece of potential profits and in many cases also the copyrights. This results in a profit sharing scheme that artists often call contractually one-sided and unequal. Of course, this also depends on the specific label and specific arrangements.
Although established in the analog era, the three major music labels4 managed to profit at large from
the paradigm shift from analog (LP, tape) to digital carriers (CD, MP3). With the rights to their massive catalogues they both had the advantage of reissuing ‘golden oldies’ from the analog era into digital formats, while also issuing the new music with lest costs compared to the analog predecessors. The appearance of peer-to-peer file sharing through the Internet around the year 2000 led the majors to stress ownership of their intellectual property through legal terms5, trying to preserve the status quo
that they had in the music industry. The threat of the peer-to-peer sharing system was also confronted on a large scale by labels and superstars6 through education and the development of new online
services (Freedman 2003). In the years 2000-2010, these new online services performed poorly. As Freedman (2003) stated: ‘Paying $120 a year simply to access music without any prospect of owning
any tracks is hardly an attractive business proposition’. The development of new technologies, faster
wireless internet connections and a wider range of mobile devices (Borja et al. 2014) have eased the possibilities of streaming, which allows the $120 a year subscription model to enter the consideration set of a growing group of music listeners worldwide (making Freedman’s statement obsolete). With more than 100 million paying users of streaming providers in 2016, digital revenue is by far the largest source of income in today’s global music industry7.
2.3 The music artists and the problem of streaming
Today’s music streaming business generally has two types of revenue generation: paid streaming services (PSS) and free streaming services (FSS) (Wlömert & Papies 2015). Through PSS, streaming providers earn subscription-based fees from clients who usually pay per month (in contrast to the
4 Currently these are Universal Music Group, Sony Music and Warner Music Group. From the ‘80s onwards, the
‘majors’ shrunk from being six different corporates to being three majors from 2012 because of mergers and acquisitions (Universal Music Group absorbed Polygram in 1999 and EMI/Virgin in 2012, BMG ended up in a joint venture with Sony Music, which from 2008 was marketed as Sony Music Entertainment).
5 In 2001, A&M Records held peer-to-peer file sharing network ‘Napster’ accountable of copyright
infringement. It sued the sharing network with success, ending Napster’s facilitation of file sharing under the argument that it was the users who were guilty of sharing and not the network facilitator.
6 A group of labels, intellectual property rights owners and a motley crew of artists like Stevie Wonder, Britney
Spears and Shakira, called MUSIC Coalition, started a campaign on ‘why you shouldn’t do it’ (Freedman 2003).
classic model where clients pay per song, album etc.). With FSS revenue is created through free streaming with interruptions for paid advertisements. Main arguments for allowing FSS is that it allows customers to ‘sample’ their music, before deciding to eventually buy, subscribe, or visit a concert (Dewan & Ramaprasad, 2012). In favor of streaming one could say that it effects the relation of customers with musicians in a good way, allowing them to ‘test’ before possibly purchasing. Generally, the streaming providers then negotiate directly with the copyright owners, i.e. the labels, or use a trusted third party to deal with the rate of royalties (Björkdahl & Holmén, 2013).
As discussed in the introduction, many artists currently hold a skeptical stance towards the business models of streaming providers. Royalty payments are often opaque, with artists trying to grasp and understand information about the accountings that they receive (Bargfrede et al., 2014). In their publication ‘Rethink Music: Transparency and Money Flows in the Music Industry’, Bargfrede et al. metaphorically call this opaqueness ‘the black box’. With the lack of a database that should identify the correct earnings to the correct writers and artists (i.e. legal rights holders), royalty revenues often do not reach the lawful owner. This happens on a large scale while the major labels receive advance payments from streaming providers, uncertain if they get earned out via streams during the advance period (Bargfrede et al., 2014).
Based on Markides’ two propositions for business-model innovations (enlarging the ‘economic pie’ and altering the value chain) a trustless system could possibly create a bigger online market, with more artists willing to sell online (there are numerous cases in which music artists declined offers of streaming providers like Spotify, Tidal and/or iTunes: Adele, Bob Seger, Black Keys, Thom Yorke and many others). Second, sharing or selling through a distributed ledger system creates a different value chain than that of incumbent streaming providers: decentralized instead of centralized. In short: blockchain for music distribution can be considered a potentially disruptive innovation with an impact on the dominant business model in music streaming. Although this thesis is not about the
technological aspects of blockchain, I will proceed with a basic description of blockchain and its potential for solving the mentioned problem of today’s music streaming industry.
2.4 A short explanation of blockchain
Blockchain technology was first conceptualized as a transaction system in 2008 by Satoshi Nakamoto, a pseudonym for one or more persons that never have been fully identified. This specific blockchain system was meant to run the Bitcoin, the well-known crypto-currency that was developed as a peer-to-peer alternative for electronic cash (Nakamoto, 2008). ‘Commerce on the internet’ relied
exclusively on a trusted third party (financial institutions), where a certain percentage of fraud risk is accepted as unavoidable (Nakamoto, 2008). Within a payment system based on cryptographic trust, there’s no need for trusted third parties that in some cases ask questionable fees for their services. Since the occurrence of the Bitcoin blockchain in 2008, interest for its purpose as crypto-currency rose with a common interest in blockchain following in the years after. The use of the Bitcoin blockchain was primarily intended for financial transaction purposes in currency, in recent literature commonly addressed as blockchain 1.0, with blockchain 2.0 and -3.0 following thereafter (Swan, 2015). Blockchain 2.0 relates to a broad variation of different transaction types (Nakamoto, 2010): ‘Escrow transactions, bonded contracts, third party arbitration, multi-party signature etc.’. Blockchain 3.0 relates to a category of blockchain use that will eventually circumvent the limitations of
internationally differing jurisdictions, or collectively called transactions with ‘smart contracts’. In my thesis I am primarily interested in the blockchain 3.0 implications for music markets as the retail of intellectual property. Next will be a short discussion of what blockchain is, how it works and what the implications could be.
Blockchain can be defined as ‘a distributed database solution that maintains a continuously growing list of data records that are confirmed by the nodes participating in it’ (Yli-Huumo et al. 2016). The main purpose for blockchain systems is excluding a third party, which is necessary when using a centralized transaction system. In a blockchain system, information about every transaction is recorded in a distributed ledger, which means that each user (or node) can access information about transactions. Next to a technological approach of studying the blockchain (scalability, privacy, data integrity etc.), research topics can have a business management approach, for instance when addressing the possibilities of crypto-currencies or smart contracts for businesses.
2.5 Blockchain’s potential of solving the ‘who earns what’ problem.
As proposed by O’Dair (2016), the implications of blockchain for the online music distribution can be divided in four categories: (1) being a networked database for music and all information about
copyright owners, (2) allowing fast and frictionless royalty payments, (3) having transparency through the value chain and (4) allowing access to alternative sources of capital. All these implications are partially connected to the discussed problem of who earns what.
Could blockchain technology cause the next power shift in the recorded music industry? The first power shift in digital music markets occurred when the traditional music industry’s value chain started competing with (illegal) digital distribution. Bockstedt et al. (2005) showcase changes in music market structure through the shift from traditional- to online distribution. According to Bockstedt et al., these power shifts are relevant for artists, labels and production companies, intellectual rights organizations, traditional retailers, digital retailers and the consumers. They
describe the following power shifts for actors in the music industries in the digital era: Artists (1) gain more control of production, have a greater profit potential but also lose power over copyright
protection. Labels and production companies (2) are confronted with a loss of control over production and distribution and a decrease in potential profits. Intellectual rights organizations (3) experience business growth due to the rise of illegal downloading and peer-to-peer file sharing and an increase in control over the legal distribution of digital music. Traditional music retailers (4) see a loss of
customers and thus a decrease in profits. Digital music retailers (5) experience a growth in digital music market potential, increases in profits but also increased competition. And finally, the consumer (6) sees his power risen through new supply channels, which offers more product choices and more power over prices.
2.6 Theoretical Propositions
In answering the research question, attention should be given to the specificities of the music industry. Online music streaming platforms have the advantage of having a great exposure for artists. One
receives. As discussed by Dewan & Ramaprasad (2012), audiences have the power to ‘sample’ their music through free streaming services, before deciding to purchase or subscribe. This leads to the assumption that, through streaming as a tool for exposure, artists can be discovered by their (potential) audience. Therefore, the first proposition (P1) is that streaming alone is not a sufficient source of revenue, but that it can trigger other revenue streams like ticket sales for live shows. This proposition is important in determining whether or not streaming income can truly be considered low.
The discussed concept of nobody knows (Caves, 2003) leads to the assumption that, without a proper gatekeeper, the supply of music in the online distribution channels rises to unrestrained heights (musicians that were previously rejected by labels are now able to publish more easily by themselves on streaming platforms). When the supply of music is more than the demand, prices generally are low. Therefore, the second and most important proposition (P2) is that the artists’ perceived low income per stream is a consequence of the lack of control over the distribution channels, rather than structural unfairness in the value chain. It’s important to question if a decentralized ledgering system really can be the main problem solver, or that the current who earns what problem needs better understanding. Another specific factor in the music industry is that of different music genres. Apart from the musicological differences, genres can be subject to having different dominant revenue streams. For instance, classical music has live performances as dominant revenue stream, while hard rock or metal has relatively more revenue through merchandise. Assuming that stakeholders from different genres have to deal with different business challenges, one can expect that the who earns what problem is not universal to the music industry as a whole. Thus, the third and final proposition (P3) is that an artists’ demand for a decentralized distribution scheme and acknowledgement of the who earns what problem of online music distribution is effected by the specific music genre of the artist. This excludes a onesided answer to the research question. In the next section I will discuss the research methods and -design, to find insights from the perspectives of multiple stakeholders in the music industry.
3. Research Methodology
This section of the thesis covers the research methodology and is divided into four different parts. First, the design and strategy of the research is presented, followed by an elaboration of the data collection and the participants. Third, the quality of the research is presented. The section is then concluded with an explanation of a data analysis strategy and research ethics.
3.1 Research Design
To address the perspectives of different stakeholders in the music industry with regard to the discussed issues, qualitative interviews were taken to learn more about their different motives and perspectives. This is an inductive study, having an interpretive approach to understand situated meanings and motivation through the eyes of the stakeholders, i.e. subjects or participants (Rynes & Gephart, 2004). The reason for choosing a qualitative research approach is because the subject of a distributed ledger system is relatively new and based in a rapidly changing environment of innovation. As discussed in the introduction and literature review, perspectives on the current dominant business model in the music industry (streaming) might differ depending on the specific stakeholder and the specific music genre that the participant is active in. So the aim of the research was answering how or
why technological innovations like the distributed ledger system can cause a paradigm shift (or not) in
online music distribution, rather than answering what could cause or prevent a shift. This approach allowed the research to develop and perhaps change during progressing. This exploratory design has flexibility as its main advantage, but has its limitations in the lack of statistical generalizability of results due to the number of subjects (Lee, 2003). In qualitative research, generalization refers to the empirical observations and the theory, rather than a population (Yin, 1994).
A case study of stakeholders within the Dutch music industry is designed to collect the data. Different stakeholders are people who own/work at music labels, -agencies, record stores, legal rights
organizations or work as music artists. As mentioned above, the qualitative data provided details and insights into processes, business models and perceived (in)equality of income. A semi-structured
face-relevant (Leech, 2002). This interview strategy also left the opportunity open for the respondents to ask extra questions to elaborate on their experiences through anecdotal information.
3.2 Data Collection and Description of Sample
As mentioned, stakeholders from the music industry were selected to take part in interviews. With reference to the research question, the purpose of this thesis was to discover to what extent transparency over income in online music distribution’s business model could improve through technological innovations like the blockchain. Therefore the sample contains different stakeholders in the industry, because a potential shift in a collective system should need approval or support from different stakeholders. For instance, only interviewing artists could lead to biased results. Information concerning the population of possible respondents is not available, because it entails different
professions in the industry and probably a lot of part-timers. Therefore a technique of chain referral is used until the targeted number of interviews was reached, a technique also known as ‘snowball sampling’ (Biernacki & Waldorf, 1981). The number of respondents that participated in the research is ten. To ensure construct validity (see 3.3), secondary data was used from other interviews
concerning the research object as well. The interviews were designed semi-structured, to offer the respondents the possibility to add extra information that they think is important in this exploratory study. On the next page, a table is found that specifies the background of the ten respondents.
Table 1: Background of participants
Participant’s function Company Type Genres (if any)
1. Owner/financial director Live music agency (booking, artists management, marketing & strategy, promotion, legal). Active in Europe with two branches.
Modern, electronic, jazz, pop & crossovers.
2. Owner Multidimensional record store with multiple branches across the Netherlands.
All-round.
3. Salesman/store clerk Multidimensional second hand record store with one branch in the
Netherlands.
All-round.
4. Head of marketing & communication
International wind ensemble with pioneering productions.
Music of all times, genres and cultural backgrounds.
5. Managing
Director/producer
International wind ensemble with pioneering productions.
Music of all times, genres and cultural backgrounds.
6. Musician International wind ensemble with pioneering productions.
Music of all times, genres and cultural backgrounds.
7. Owner & publishing Label that branched into publishing and live booking over the years. Founded by a group of musicians.
Jazz, pop, soul, disco, electronic, folk.
8. Artist/DJ Part-time DJ in the beginning phase of career (recently won a DJ contest to play a major festival).
Hardstyle (electronic).
9. Manager business development
Legal rights organization/collecting society for composers and music publishers.
-
10. Musician Musician (1st oboe) at a leading
German symphony orchestra.
Classical.
3.3 Quality of the Research
This subsection elaborates on the different criteria that this study used to safeguard the quality of the research. As discussed by Gibbert & Ruigrok (2010), ‘researchers can ensure rigor […] relating to the broad criteria construct validity, internal validity, external validity and reliability’. Referring these four criteria, rigor in case study research is safeguarded by what is called the “natural science model” (Eisenhardt & Graebner, 2007). In this qualitative research, the main criteria are credibility,
transferability, dependability and confirmability. Credibility is ensured by making sure that the findings made sense, for instance by handing participants a transcript of the interview, to check
whether or not they agreed with the outcome (or summarize their answers for a confirmation of understanding). By communicating exactly how research was conducted, the author safeguards transferability to allow others to replicate the research (for instance with the interview protocol – see appendix). By showing data and methods in a correct way, the researcher ensures dependability.
3.4 Method of Analysis
With regards to the exploratory nature of this research, categories for data analysis were developed when data was collected. One interview was conducted after developing the results section to ensure confirmability. Appropriate categories were designed once there was a common pattern discovered in the interviews. Both the primary- and secondary data was used when building a theory for answering the research question. The interviews were documented on a sound recorder and afterwards
transcribed into a verbatim (word-by-word). A code or a letter was assigned to the interviewer and the interviewees to indicate who said what.
As discussed by Miles & Huberman (1984), qualitative data analysis has three components (after or during data collection): data reduction, data display and conclusion drawing. Through coding the transcribed data of recorded interviews was reduced, in which data is displayed in matrices to keep an overview of frequencies of arguments8. From this overview, a narrative was developed to display the
results of the interviews. The final step was answering the research question with attention to the research propositions based the prior steps, drawing a conclusion with regards to prior components.
3.5 Research Ethics
Prior to the interviews, the subjects received a short explanation of the purpose of this research. To ensure that there are no potential negative consequences for the interviewees for cooperating in this study, anonymity and confidentiality will be ensured. When respondents are promised anonymity, they tend to feel more relaxed to speak freely about precarious or sensitive issues. The respondents as well as the companies were not named in the study, only a reference to the genre that they specialize in and their specific function in the company or industry (as shown in section 3.2).
4. Results
To test whether or not the interviewed stakeholders would agree with ‘who earns what’ as the music industry’s biggest problem, participants were first asked about the business model of the companies that they own or work for and secondly how they could relate to the current status quo in the value chain of digital music distribution with the emphasis on streaming. Attention is given to the repositioning of the major labels and finally the viewpoints on the use of streaming from the perspective of their own businesses. This can be considered as the first part of the results. The second part will pay attention to the general fairness of the division of profits and general problems that the music industry faces. Subsequently a discussion will follow of what they think the challenges are in today’s business of music distribution.
The results section will be followed by a discussion in chapter five, checking the arguments of the participants in parallel to who earns what as the perceived main problem of the industry. The discussion will move towards answering the question if technologies like blockchain could be the answer to the current challenges of transparency issues in the music industry.
4.1.1 Today’s music industry: Multiple sources of revenue
Characteristic for all participants who are involved in the production of music were the multiple sources of income from different connected business activities that together kept the company in business. It is important to emphasize that participants varied in the music genre in which they are active, showing discrepancies in the importance- and attention for streaming. Compared to the traditional business models for major music labels, in which the label took care of production, promotion and distribution of music, the participants who are active in production acknowledged that many of the business activities that used to be outsourced were now (partially) in their own hands. Although this similarity among the participants may seem primarily concerned with pure business strategy, this was not always the case. As participant 5, business leader at an international pioneering orchestra, put it: ‘[…] At that time we didn’t want to be dependent on third parties anymore. We had a
contract with DECCA9, who decided what was fit for the market and what was not. Therefore we wanted to step out of the deal’. Here, the reason to stop collaborating with the concerning label and
taking business into own hands was clearly based on creative differences.
Participant 7, owner of a jazz record label that branched into publishing and booking over the years, gave another reason for addressing multiple business activities: ‘It once started as a company that
wanted to be independent from the labels that dominated the business. […] When we started, there already was no way to build a career on record sales in jazz, so we started a ‘do it yourself’-house as a platform for artists. The thing about jazz musicians is that they will continue doing their thing, despite the small amount of income. So the next step was to look for opportunities other than success’.
As mentioned above, the company then branched into publishing and booking because recording alone was considered insufficiently profitable to run a business, and secondly because […] ‘among
musicians there was a need to keep in charge’. Thus the reason for tapping into multiple income
sources was triggered by market specific aspects of the jazz genre. The participant then went on to explain that their business model is different from the ‘360-deal’ because they grant artistic freedom to their musicians and offer additional booking services. The 360-deal is of frequent occurrence in today’s contracts between artists and labels. This type of contract allows the label to tap into all revenue streams of the artist, in which the label gives financial and other support in return (marketing, promotion, touring, direct advances etc.). According to Panos Panay, CEO at SonicBids10, this type of
contract is characteristic in todays’ general business approach of labels since the decline in revenues that started in the heyday of illegal downloading. But although of frequent occurrence, it is not particularly new: “If you were Marvin Gaye or Stevie Wonder and signed to Motown in the late 60s,
they owned your likeness, your touring, publishing, record royalties, made the record deal, told you what to wear, they told you how to walk … It made for great entertainment and clearly produced a lot of great songs but if you look at every one of those artists, what happened? Sooner or later they said, “I’m not going to go on the road for 200 shows because you tell me so. I’m an artist! I’m an
9 DECCA is now part of Universal Music Group.
10 SonicBids is an worldwide online booking platform, both for musicians and bookers and with more than
independent entity. And I’m not going to put out the tenth album in five years because you tell me so. I’m a creative person!” Eventually all these artists left”.11
Participant 8, who is a hardstyle DJ in the beginning phase of his career, also elaborated on the switch of the music industry. Sales of records used to be dominant, but now the experience economy has taken its dominant position: “People just
want to be part of something. That is where the money is being spent: festivals and merchandise, instead of buying an album. […] The young audience that now goes to these events doesn’t know most of the tracks we are playing. They just want to be part of the experience, it feels like a community”. A change of revenue mechanisms is observed and more importantly a change in the
value chain (relatively more value is added through offering live experiences, like festivals and concerts). Within the business model definition proposed by Chesbrough (2007), this could be considered a change in business model. Within Markides’ (2006) definition, this could be considered a business model innovation: both changing the value chain as the as enlarging the market.
Major labels used to dominate the distribution channels. Taking into account the above anecdotes raise questions concerning the survival of major labels in today’s competitive arena of the music industry. This is an important aspect in understanding the current status quo in the music industry and will be illustrated in the following subsection of results.
4.1.2 Repositioning of the ‘majors’ in the digital era
The event of major labels losing grip on their advantages in music distribution was put in motion through digitalization and peer-to-peer online file sharing. This led majors labels to lose their exclusivity as suppliers to the record stores, and with that also the loss of control over distribution channels in general. When questioning how and why there are still major labels in business with respect to this digital transformation, participants often were aware and praiseful about the strategic shift that some majors took to stay in business. For instance, participant 2, who runs multiple record stores throughout the Netherlands, acknowledges that it is almost impossible for artists to break through on a global level without the help of a label that also operates globally. When questioning the
future of the majors, participant 2 answered: “[…] they truly have found their way again. There are so
many different artists, ranging from very small to very big. Look, it’s simple: if you are a big one, you are going to need these majors. Otherwise you are dealing with all those countries one at a time. With a major you instantly drop your music on the international market. […] They are particularly good at propelling global hit machines”.
Not all participants were positive about the self-reinvention of the majors. For instance participant 1, who runs a booking agency in two European cities, mentions that many entities “are present in the
music industry, but don’t really add value […]. In the end it’s all about the people who love music and therefore are willing to support their favorite artists”. Another argument from participant 5
showed that big labels in classical music genre are primarily in it for the money: “A label only invests
in super talents that are gifted on the stage. In classical music, it’s not that the artist who is talented gets recording time in the studio to sell CD’s through the common distribution channels. […] The label only records if the talented musician spends most of his time performing on stage. Because that’s where you sell most of your copies: after the show”. Participant 4, who is responsible for
marketing at the same pioneering orchestra as participant 5, adds that the labels who only bet on guaranteed crowd pleasers also push the branch of live concerts towards uniformity of general repertoires in venues that offer classical music concerts.
Participant 7 mentioned in retrospect that ‘the old’ status quo in which major labels dominated the distribution channels was not even that bad, mainly because it kept the music markets in balance. “Now we are dealing with a market that has no filters anymore. […] A label would give somebody a
‘no’ in the old days, nowadays that label has to compete with that same person. The artists decide to publish it themselves and now we are dealing with the mass flooding of average music. […] Those are just naïve attempts of people who think they are the geniuses that everybody wants to hear. There is too much music nowadays, much more supply than demand”. These statements by participant 7 fit
well with theories concerning the valuation of cultural products through expert selection (Wijnberg & Gemser, 2000), in which an innovation (a new song or album) attains value only if it is considered valuable by the selectors that control a given selection system. Although value can also be accredited
by the market (i.e. the audiences), the market does not have the power to decide who enters the distribution channels like labels used to do12. Subsequently, Pieltoniemi (2014) argues that creative
industries are subject to persistent oversupply and extreme uncertainty and therefore need an appropriate gatekeeper to prevent the number of products entering the market. With the absence of expert selectors in music distribution, the gates to distribution are open – leading to structural
oversupply. As participant 7 added: “I hear a lot of people talking about the problems with labels and
streaming providers, or other ‘crooks’, who supposedly are scamming the artists. But the oversupply of clutter from the artists themselves has led to a marketplace that is extremely overcrowded”.
Although this oversupply might have thrown the distribution channels off balance, not all participants saw this as a problem. For instance participant 9, working in the business development & marketing intelligence department of a legal rights organization, who mentioned that this sense of entitlement from the side of ‘self proclaimed’ artists causing oversupply is not particularly bad: “Control over
distribution has shifted completely from one side to the other, with the labels rearranging their businesses like collectives of artists and offering wider ranges of services”. Next to the rearranging of
their business models, the majors are embracing online streaming and sales through the likes of Spotify, iTunes and YouTube – something that was unthinkable ten years earlier. Participant 2: “The
thing they hated the most turned into their cash cow: online distribution. They never have earned money this easily through streaming, YouTube and custom deals with artists. […] I sometimes imagine the CEO’s wanting to ditch CD’s and vinyl completely because it’s relatively less profitable and more time consuming to produce”.
With streaming providers paying themselves into label catalogues at large and also paying royalty fees for the number of plays, these labels seem to be the only ones profiting substantially from streaming: “And with that Spotify has entrance to the catalogue. After which the music becomes
available for consumers and subsequently there is a royalty check for artists who actually get listened to. It’s like taking a large piece of pie and having the power to decide how to share it later on”
(participant 9). Overall, participants elaborated that the majors have seemed to readjust and manifest
themselves in today’s music industry. To develop a clear sense of how the participating stakeholders saw the industry’s biggest source of revenue, the next section will discuss their viewpoints concerning music distribution through streaming.
4.1.3 The use of streaming in the businesses of the participants
As referred to in the literature review and the introduction to this thesis, multiple artists are discontent with their revenue through streaming and its lack of transparency. Some of the participants were also skeptical about streaming, for instance participant 1, who elaborated on the catalogue deals that are discussed in the previous subsection: “I think it has become harder for the artists and easier for the
majors, because of streaming services who have to apply for the rights and the major just sits there waiting for income”. And although participant 1 was optimistic about the concept of streaming, he
saw a lack of continuity for artists as its main concern:”[…] let’s say that the costs of recording a new
album is 2.000 euros for a beginning artist. Let’s say you will press vinyl copies and sell them 20 euros apiece. Sell a hundred and you will hit break even. Just do the math on how much streams that will take. […] So streaming actually results in artists who lack funds for recording following
albums”. Participant 1 points out that streaming income is insufficient compared to the record sales,
which could force artists to stop producing. This argument was opposed by the majority of the
participants, who labeled the comparison of record sales and streaming revenue with the Dutch saying of ‘comparing apples with pears’ (i.e. oranges). Participant 9: “I hear all kinds of prices per stream
come by, like 0.001 cent per stream and so forth. It makes you think… Wow, that is little. Especially compared to direct downloads on iTunes for instance that give the artist 8 cents. Now let’s say that the same song gets airtime on a popular radio show with 1.5 million listeners. This raises even more questions of what is much and what is little. You will just have to keep comparing apples with apples. And todays discussion often lacks this distinction”. Participant 7 would also join the side of
participant 9 in this matter, referring to the misunderstanding about streaming income. After already referring to the current artists’ sense of entitlement and structural oversupply in music in the prior subsection, he says that it is indeed too risky to compare streaming with record sales: “The legal
A radio station with 500.000 listeners pays something like 20 euro per played song. If a radio station would have only 30.000 listeners then it better could call it quits”. Although the participant does not
think of streaming as a direct goldmine for his business, he does see the importance of streaming: “It
is our future, we are fully focusing on streaming. We will keep producing CD’s of course, but only if an artists is willing to do a lot of live shows. If an artist chooses not to, we will focus fully on digital”.
This argument by the label owner concurs with wat participant 4 and 5 mentioned on behalf of the pioneering classical orchestra, that live shows are the only place where CD sales are still profitable. Participant 4 and 5 saw streaming only as a marketing tool, not as a sufficient revenue stream. Participant 3 three also elaborated on advantages of audiences in countries or areas with less purchasing power, but who do also have access to a lot of music nowadays.
With the major labels holding the legal rights to the majority of content with global popularity, they seem to be the only ones profiting substantially from streaming. This raises questions to why and how the participants saw streaming to be beneficial to their own businesses. Participant 4 said it was their way to interact with a younger audience. Streaming is accessible. Everybody can go online and give it a go. Although with regards to classical music in general, the transition to online streaming could be defined as marginal. “Mainly because the quality is very bad and the way that different generations
are listening to music in their own way. Classical music is often still being sold on CD. There is a large group that for the time being is not going to switch to streaming. The quality is just not good enough”. This argument was opposed by participant 10, who is a musician in a leading German
symphony orchestra: “The orchestra started to webcast the concerts live, which is relatively popular
in Germany. I think it’s a good thing to show the people who are considering to buy a concert ticket what they can expect at a concert”. Participant 10 thus used the sample argument in favor of
streaming (although not through a dominant streaming platform like Spotify).The argument
concerning quality of sound was also mentioned by participant 2, the owner of multiple record stores. Referring to older people in his clientele who refuse to use Spotify or similar streaming providers, he mentions that the way people listen to music has changed drastically: “he (the client) mentioned that
and the thing would still spew out songs when I would return. I don’t want that. I want to sit on the couch with my wife and put on my favorite record. This is what listening to music is to me. I want slow food… I want slow music”.
Participant 8 added that the business model of the earlier days is gone: “Artists who make it nowadays
keep publishing new work just to sell their performances and shows. It is more promotion than an actual earnings model”. Many of the participants concurred that the good thing about streaming is
that many people are listening to more music, because it is so accessible. In reaction to the question if this positive aspect of exposure outweighs the negligible incoming cash flow, participant 1 elaborated:
“This exposure argument is partially ‘a dead letter’ to me, mainly because of the aspect of playlists. The choices of the people who actually make these playlist on streaming platforms have the most power when it comes to exposure. It has become hyper centralized. I have reasons to believe that artists who are contracted by majors are being pushed on these lists”. As already mentioned in the
introduction, playlists in a sense have displaced listening to full albums. Here, the participant states that this centralized way of music distribution evokes crooked competition through the popular playlists. The power over playlists could be linked to what radio stations are doing when selecting who (not) to play. The unfairness with regards to playlists mentioned by participant 1 shows comparisons with how independent rock ‘n roll producers in the 50’s and 60’s bribed local radio stations in America into playing their music and thus influence the gatekeeping process (Mol & Wijnberg, 2007). These and other perceived inequalities in the value chain of music distribution will be discussed in the second part of the results. Participant 9 as well mentioned these control
mechanisms to be specific to the music industry in general: “Control over distribution is transferred
to these online platforms. Somebody is responsible for distribution. In the early days, some records were pushed and others were not – even If half of the listeners want to hear a specific artist. […] These are things that are happening for the last 100 years and also will be happening for the next 100 years”.
4.2.1 (Un)equal contracts and fair business in the value chain
“Maybe that digital music distribution will bring a more honest division of profits […]. It’s
characteristic for the music industry. If there is big money to be made, people tend to put their morals aside. […] It’s funny, when hearing such nice songs you won’t believe the harsh business behind it”.
Participant 3 works at a second hand record store with an online sales platform and clearly doesn’t describe the music industry business as a ‘merry’ one. This image of an industry where the creative artist is supposedly scammed by the larger corporations seems to be one that is hard to overcome. Although according to many of the participants, things are not half as worse as they used to be. When discussing the repositioning by the major labels with participant 2, the ‘new type’ of record deal is brought up in conversation. Record deals are “lean and mean” but now they are now accustomed to the will of the artists and/or the involved manager. “Yes, things were legendary in 60’s and 70’s. You
only have to read biographies of Joe Cocker or John Fogerty to see how they have lost their rights to crooks. But in the 90’s these things changed. Artists were more aware of sharks in the pond. All of a sudden they called in help for protection by agents and lawyers”. Participant 2 thus acknowledged
that the current state of affairs between art and commerce in the music industry is not that bad
compared to how things used to be. And however being moderately positive about the current state of affairs, participant 2 added that “It would be great if more power would come to the artists in these
matters. That would be great. […] With the majors you can go and set the clock for when their next sleazy trick is pulled to maximize their profits”. Also participant 1, who does not directly work with
recording- and distribution deals, could recall that some of the artists on his agency spoke out on their experiences with labels trying to tap into multiple revenue streams. When questioning the fairness of the industry, participant 1 answered: “I have never seen an actual record deal. But based on the
complaints that I hear from some artists my gut feeling for the industry is not so well”. Overall, the
participants were aware that the relationship between music and commerce can be tough and predominantly took a more favorable side towards the artists.
that the industry is dealing with, due to a lack of gatekeepers. Participant 9 also took a more
economic/business approach towards the current state of affairs: “You can compare the record label
with a bank. They analyze a certain product or business opportunity and if they believe in it they will invest. Maybe they will go bust on one project and succeed with the next. But this also means that the artist signs off a part of potential profits in return for the deal […]. Apparently there is some
economic balance over there, otherwise the artists would stop signing”. Here the participant
recognizes the so called ‘buckshot strategy’ that many music labels traditionally follow (Caves, 2003). In addition, the participant emphasizes that somewhere in the career of an artists the option occurs to do business with certain labels and in many cases this obviously leads to transferring the legal rights as well, because the “label has helped you along the way to a position in which you currently
remain”. With regard to fair business, the participant added that there will always be people seeking
profit and there will always be scams, but that it is not unique to the music industry only.
When questioned about the lack of transparency over profits or pricing in the value chain of digital distribution, only participant 1 regarded the price for a streaming subscription far too low to begin with: “Of course this model is much better than when piracy was at its peak, but I think consumers
must be aware of the fact that 10 euro is an extreme small amount for so much music”. He added that
if you want your favorite artist to keep producing, you better be supporting the artist by visiting concerts or by buying records. However, participant 4 and 5 did think that 10 euro is reasonable, in their viewpoint of Spotify as “just a marketing tool”. They elaborated that in the current music industry, and especially the subgenres that they are active in, business opportunities occurred in offering unique (intangible) experiences, instead of selling tangible products. The people who buy their CD’s or DVD’s are mostly the people who were at their concerts.
Next to elaborating extensively on fair contracting, participant 9 also questioned in what sense there is a lack of transparency in streaming. “Sometimes you will hear that transparency is reached when the
cash flows are traceable. That is kind of a utopian view in streaming. Take Spotify as an example. And let’s say that you don’t click anything for the whole month. Who will get the money? Direct pay per play is not an option due to the maze of legal rights and technical difficulties. If you want full
transparency it feels like you are going to need a thousand legal solutions”. Participant 7 once more
was skeptical about the artists who claim that they are becoming a victim of streaming: “Of course it
easy to say as an artist but is not based on facts. I even think that the music industry has never been as transparent as it is now. In the early days there was no clear way whatsoever for artists to check the exact record sales. Nowadays it is far more easy to check. […] And yes, the fact that there is so little revenue through Spotify is hard, but that bothers everybody. Even Spotify itself so to speak”.
In retrospect to peer-to-peer file sharing and online piracy, all participants saw streaming as a big step forward. Participant 2: “Well it is good to see that people are paying more and more on these
premium accounts. It’s a good thing because paying for music has entered the consideration set again”.
4.2.2 Challenges in online music distribution
After questioning the participants specifically about the honesty and transparency in the value chain, they were asked to elaborate on the challenges in music distribution to check whether or not who
earns what was considered a prioritized problem. As already mentioned in the prior subsection,
participant 1 saw a challenge in making consumers more aware of the absurdity of the low price of streaming. Participant 2 was skeptical about the role of consumers: “Well, something never comes out
of the consumer. It wouldn’t trust it whatsoever. […] Consider buying biological chicken. If it is six times the costs of regular chicken, I don’t think it’s going to work. The challenge lies in legislation”.
Participants were not on the same page with regards to the consumers’ sense of support for artists. As stated by participant 4: “People don’t buy our CD’s because they want to support us. They are fans
who just want to listen to it whenever they want to”. When asked about the main challenges that the
music industry faced, participant 5 referred to the conventions in the classical music industry and did not mention anything about inequality in the value chain. Here, challenges were not so much
concerned with who earns what but more with breaking the repetitive repertoire of recordings:
“Conductors often have contracts with labels. They target a more global audience and therefor choose things that are conventional. I wonder why every conductor is so convinced that his idea is
