Euterpe has become a hot program since it received a new round of funding from the HKICEx. I take a deeper look at the company to see what’s driving this surge of excitement.
The company presents itself a little more academically as far as I can tell. When I clicked a hyperlink within the company’s whitepaper, something from Buffalo Law Review popped up which made me think I went to the wrong place. But here it is: The whitepaper of Euterpe is a law review paper.
The author of the article is Jiarui Liu, who received his J.S.D from Stanford and is now an assistant professor of law (tenure-track) at the University of New Hampshire School of Law, specializing in intellectual property law. Regardless of whether or not you have any interest in music exchange itself, as long as your product or service is related to intellectual property, you might want to read the paper since the author includes a survey of the current copyright landscape in the music industry.
Why the Current Copyright System Sucks
There are several ways to address this issue.
From the creator’s perspective, no matter whether you are a singer, songwriter, or composer holding the copyright to a musical work, or an artist, sound engineer, or producer holding the rights to a sound recording, you are suffering from an unfair revenue sharing system. A system wherein you are underpaid, irregularly, and in an opaque manner with which some 20%-50% mysteriously vanishes. Since almost all the attention focuses on the top 1% of artists, only a few benefit from the current system. Accompanying the inability to support oneself financially, artists are often forced to sign contracts with complete control given to the labels when they are still nobody, a fact that might later harm these creators.
From the label’s perspective, they are also struggling. Signing an artist is similar to an angel investment, you have to jump in as early as possible. However, just as there might be only one company to successfully survive in a 100-company investment portfolio, labels are taking risks in investing in those musicians as well. The spending on promoting a new star is huge — you not only have to pay for them to produce music but also spend money on non-musical elements such as an artists’ appearance, wardrobe, social media management, etc.
From the revenue segmentation perspective, copyright is no longer the main contribution of total revue. Currently, performance generates the most revenue while copyright revenue is not even listed in the top three. Thus, for those independent artists who have no stable performance invitations, merchandising has yet to develop into a meaningful source of income.
From the efficiency perspective, no matter who holds the copyright, there are too many intermediate roles involved in the licensing process which wastes time and money, reduces cash flow, and makes it hard to figure out who is the rightful owner.
An Alternative: Blockchain Copyright Exchange (BCE)
Why BCE is a Better Option?
Based on the deficiencies introduced above, there might be a solution using a blockchain copyright exchange, which aims to enlarge the total amount of copyright loyalties by restoring the market value and minimizing transaction costs.
In Euterpe’s whitepaper, it wants to use the à-la-carte model, as iTunes does, basically selling music for a per-unit price, in contrast to the subscription model, which is used by most mainstream streaming services. Based on the author’s calculation, the subscription model would be devaluing creative works unintentionally. It is not that hard to understand. If the increase in subscriptions lags behind the increase in the total number of songs, the royalty income per stream would decrease over time.
In the blockchain, we always say “law is code“, the same applies here. The traditional law tries to manage all of those complicated copyright issues through intermediate players, and the BCE cuts off these roles to return the lost money to who truly deserves it, the creators. Currently, the illegal use of online content would not be punished unless it imposes injunctive relief and monetary damages. Unfortunately, creators could not receive any money from such illegal use. Smart contracts will enforce the legal and contractual obligations ex ante by technological means. The predetermined contractual terms, essentially immune from any external influence, will force money to go to the right place, immediately, without exception.
It sounds like the new BCE will only benefit creators, but the author says, no, the new system will benefit fans and labels as well. Fans, traditionally, have had no incentive to share or promote their favorite artists besides psychological satisfaction. The BCE hopes to change this situation. By design, fans may share in the commercial success by acquiring a portion of copyright ownership in a creative work and therefore receive a percentage of revenue flows. Additionally, fans may mine BCE tokens by hosting, promoting, and voting for creative works. As for labels, since fans have taken part in the investment of the artists, labels would be less stressed in regard to the financial costs and thereby might diversify investment risks via supporting more artists.
When artists no longer need a powerful company to help them promote and market their work, talented and independent artists will have more chances to stand out. In other words, the whole talent discovery process will be democratized.
How Does BCE Work?
BCE provides a blockchain-based crowdfunding procedure to benefit all parties. The procedure is as follows:
- A publisher such as an artist or label, who FIRST brings their work into the BCE community, may offer a percentage of copyright ownership in their work in the form of NFT or FT for crowdfunding purposes.
- All members of the BCE community are invited to bid for sponsorship of any works offered. The others do not have to return empty-handed. Instead, they may choose to use a portion (e.g., $1) out of their initial bids to purchase a presale copy enabling them to eventually mine BCE tokens at an accelerated rate.
- A publisher may propose a numerical threshold for crowdfunding. During and immediately after the bidding process, all the funding would be temporarily stored in an escrow account on the BCE blockchain:
- if the threshold is not reached, money will go back to the original bidders
- if the threshold is reached and the work has been released, BCE smart contracts will release the funding to the publisher and simultaneously transfer the shares of copyright royalties pro rata to the winning bidders
- if the threshold is not reached but the work has yet to be released, 35% goes to the publisher for the production fee while the remaining 65% would be released after the work is published. Finally, more than 50% of the shares of the winning bidders would approve the published work
- The winning bidders would then split the percentage of copyright royalties offered pro rata according to their respective ownership amounts.
- Those who acquire ownership through crowdfunding shares in any of the works would be free to transfer their shares to the secondary market.
The procedure is designed for copyright, but could also be applied to live performance.
As mentioned earlier, BCE aims to democratize the talent discovery process. The financial benefits could be worked out as below:
- Mining by Hosting: Marketing
- Once a user downloads a copy of a work, the person will serve as a “hosting miner” by setting up their copy as a “node” that supplies a feed to other users who stream or download the same work.
- All the hosting miners whose nodes facilitate a stream or download would jointly be entitled to an additional 10% of the BCE tokens allocated to its copyright
- Mining by Linking: Distributing
- A user who downloads a copy of a work may obtain from the BCE a widget that uniquely associates that particular user and embeds a hyperlink to a particular work.
- They may distribute the widget, e.g., as part of a commentary or playlist, within the BCE community and through social media. If another user downloads or streams a work through their widget, they would be entitled to an additional 20% of the BCE tokens allocated to the copyright owners.
- Mining by Voting: Voting
- This approach is designed to fully reflect the user’s willingness to pay (WTP) since the previous two approaches might contain price discrimination when each stream or download is priced universally.
- Specifically, BCE plans to release a series of weekly charts that rank the most valuable works (e.g., Top 100) in different genres. The so-called valuable will be calculated based on：
- 35%: downloads or streaming
- 35%: votes from users, a weighted average weighted by the BCE tokens that the voter has spent on their vote for or against any work about any weekly chart in which it may potentially appear.
- 30%: votes from qualified artists, simple average.
- The mining result will be based on the movement of the ranking. Whoever votes in the opposite direction will lose the tokens used in the voting. In detail,
- If a work has moved upwards in a chart, the BCE tokens from the negative voters would be divided between the relevant artists (35%), the positive voters (35%), and the positive critics (30%). Similar to the condition of moving downwards.
- If a work has stayed put, the tiebreaker would be the change in the total value of streams and downloads, then the change in the total weighted value of votes, and then the change in the total value of critic votes.
As introduced previously, the blockchain could be a powerful protection of copyright. The BCE provides a bunch of tools to reach that goal, including but not limited to streamlining approval mechanisms for people to incorporate other work, dispute resolution to deal with legal issues, and automated investigations to catch infringement.
However, the root here is to change the relationship between artists and fans from pure-business-and-consumers to flesh-and-blood. Fans now hold a strong motivation to support licensed work and report any infringement behavior; otherwise, they will incur a financial loss. This will be the revolutionary and key change.
Token System Design Overview
The BCE community operates on an ERC20 utility token that enables all users to access creative works and participate in community activities.
The BCE allocates each subscriber a predetermined quantity of FREE BCE coupons every week. The coupons are inalienable and may only be converted to BCE tokens through streaming, download, or other activities within the BCE community. The number of free coupons will be enough for users who spend around one hour per day on the platform.
If a subscriber streams or downloads a work, a portion of her BCE coupons will automatically be converted into BCE tokens and transferred to the relevant artists. The price of a download is initially set at $1, based on the pricing scheme that the iTunes store used back in 2003.
Additionally, for each stream or download, the BCE automatically generates an additional 10% of the value for mining by hosting and 20% of the value for mining by linking.
Naturally, the copyright market has two types of trades at the BCE, and to fit each type’s condition the best, the BCE plans to use two different blockchains to fulfill the needs:
Ledger I – Low-Frequency and High-Value
Example: crowdfunding, auctions, and other sales
Solution: Set up principally on Ethereum as its backend, since Ethereum’s PoW structure is slower, more expensive, but safer.
Ledger II – High-Frequency and Low-Value
Example: end-user licenses for consumption, mining activities
Solution: 1) employ an off-chain scaling solution 2) Use PoS chain
Euterpe will definitely revolutionize the music industry since it changes the relationship between different roles. I am not very sure about the role music labels will play in the industry once the BCE becomes more established. Currently, it looks like music labels are mostly used to discover talent, connect performance and marketing resources. However, in the BCE model, this part of the work will be shared by the fans themselves. What makes these music labels still relevant? The jury is out on that one…