Smart contracts have the potential to become the music industry’s next game changer. Bold statement? Yes. Will this happen soon? Probably not. However it’s important for Artists to position themselves now, so when the smart contract mainstream hits, there is little to no growing pains. Unlike the transition between formats – physical to digital and digital to streaming, where Artist income became a causality of war, smart contracts will impact a different group of industry professionals. For once, the looming industry shift towards smart contracts will be PRO Artists, where business folks will feel the blunt force trauma.
To understand smart contracts you must start with Bitcoin. The general understanding is that Bitcoin is a digital currency, but Bitcoin actually containing two interesting parts. First, it’s a decentralized, peer-to-peer online currency. Secondly, it’s a concept of a proof of work-based blockchain. I’ll be the first to admit, further explanation into blockchains ventures outside of my area of entertainment legal expertise, so I suggest reviewing Vitalik Buterin’s excellent White Paper “A Next Generation Smart Contract & Decentralized Application Platform” in order to gain a clearer understanding. However, I’ll connect the basic components to the music industry. “Blockchains” are essentially a coding system that will not allow X to happen without Y happening first. A “Smart Contract” furthers the blockchain concept into actual business transactions. For example: a band may have an internal operating agreement (physical document). This requires constant monitoring, administrative assistance, drafts, redrafts, etc. Transition this to a smart contract. Within the smart contract agreement (digital agreement) it could address that Member A can withdraw up to X amount of currency per day, Member B can withdraw up to Y amount of currency per day, Member A and Member B together can withdraw anything, and Member A (the band leader) can shut off Member B’s ability to withdraw at any point. It’s impossible for one circumstance to predate the preset scenario. In this basic, yet practical scenario, a number of things have been eliminated: subjective interpretation, attorneys, business managers and accounting records just to name a few.
Essentially smart contracts will impact all levels of music, starting with indie bands. Indie bands need to operate on a shoestring budget, but still face legal issues like operating agreements, publishing agreements, management implementation, etc. With smart contracts, band members who may have coding backgrounds could posses the ability to generate contacts themselves that to some degree will be more effective than physical contracts drafted by an attorney. Why? It eliminates the administrative element. Just as the blockchain example above states, bands can progress any scenario of circumstances. Think of curing the constant collection issue following a gig. Where is the promoter? Who is paying us, etc.? Implement a smart contract with the venue that eliminates general booking agreements. Play Venue X, Venue X pays Y amount. Once the performance occurs, the blockchain progresses to payment, in which Venue X pays the band’s bank directly via the coded formula that contains preloaded bank transfer instructions. Payout the agent, manager, etc. via a preloaded automatic system that takes care of everything. Management contract? Manager X will be paid 15% upon the completion of items A, B, C. If Manager X does not complete A, B, C, Manager X will be paid Y. The contracts can be linkable to accounts, and once the blockchain continues, so does the contract. Human error, interpretation, cost and complex legal language just got eliminated – which normally triggers the biggest problems. Major labels will likely reap an enormous benefit simply due to the contractual complexities and contract monitoring for each deal that takes place. Recording Agreements can be linked to payout benchmarks, cross referenced to Company bylaws (often cited in Long Form Agreements), sales figures triggering royalty boosts, etc.
Just like all transitions from one model to the next, natural selection will prove unfavorable to a certain population. Much like A&R departments downsized several years ago, legal, business affairs and accounting departments will take a hit. Their expertise become a “one time” usage as opposed to an ongoing team member. Example: you’ll need an attorney to advise on some of the complex legal components within a smart contract, negotiations, etc. but once the code is set, it’s rare the attorney will be used again. Business managers will set up the initial smart contract financial blockchain, but following, their skills will be needed on a limited basis and; labels will likely layoff people in herds within Business and Legal Affairs. In short, two things will happen (1) Artists will become highly efficient, and (2) the population getting laid off will need to develop non-traditional skills within their expertise to survive. Both of which will be interesting to watch.
Currently smart contracts are not being used, so why should Artist care? More so, what do Artists need to know in order to prepare for the future? Begin thinking in the form of smart contracts. Meaning – keep things really simply. The litmus test should be – can I eventually manage everything from my phone (accounting, legal management, royalties, etc.) within a single app?
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