D.A. Wallach On Spotify, Bitcoin, And A More Moral Music Industry

By September 30, 2015Bitcoin Business
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In Part One of my interview with the musician, investor, and entrepreneur, D.A. Wallach, we discussed the “poorly architected systems” of the music industry, and how blockchain technology could potentially resolve some of these issues via its decentralized nature and smart contracts.

In addition to the above list of accomplishments, Mr. Wallach has had a long relationship with Spotify, and was for a time their artist in residence.

As anyone who has had the mis/good fortune of spending any time with me, or hearing me speak at conferences, knows, I have a troubled-at-best relationship with Spotify.

That said, I do feel strongly that the vast majority of people who work not just at Spotify, but in the music industry, generally are doing so because they value art, and genuinely do not want to intentionally harm artistic creators.

In short, I believe they mirror the sentiment that I came up with and try to repeat as often and loudly as I can: More Art Equals Less War.

Given this, and – importantly – given the fact that Mr. Wallach is an artist, I was eager to get his perspective on both Spotify, specifically, and the music business, generally.

While Mr. Wallach and I don’t necessarily see eye to eye on Spotify, one thing we resoundingly agree on is, as Mr. Wallach says: “If we want to fix the music industry, we have to get more money flowing into it.”

Our conversation below has been lightly edited for grammar and clarity, but otherwise is transcribed verbatim. If you prefer, you can listen to the entirety of our conversation here.

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D.A. Wallach. Photo Credit: Prakash Shroff
D.A. Wallach. Photo Credit: Prakash Shroff

George Howard: What is your role at Spotify? What type of work are you doing there?

D.A. Wallach: My role at Spotify is really limited now. I have put in three and a half years of really intense work there, and, my responsibility as “artist in residence” was really to do two things: One, to help educate the creative community about Spotify’s business model, and to sort of allay peoples’ terror that this was going to destroy everything, which I’ve never believed it would.

And, on the other hand, I have a more exciting important role I played: To be a vehicle for artists and the creative community into Spotify.

And, things that we have built at Spotify, that were sort of catalyzed by my efforts, were to sell merchandise to the fans of the product, with the ability to sell concert tickets, and increasingly the ability to derive analytics from the behavior of people who were listening to your music.

So, I was meant to be a sort of voice of artists within the company, and obviously this has been a really fraught topic, and I’ve spoken over the past few years literally to thousands of musicians and managers and, you know, my view remains that this is going to be a really, really fantastic development for artists and for the music industry and that’s what got me involved in the first place.

GH: They are lucky to have had you. I contend that they need a lot more people like you working there. But, certainly having you is awesome.

I am very candid about my frustrations, and also with the potential possibilities of Spotify. And, I have been really transparent about it. I do think that – if it is sort of viewed as a discovery tool, and with some of the things that you have done, whether it’s with merchandise or tickets – it potentially can provide value to artists. And that’s a sort of nice throughline that provides some value.

Otherwise, it is fairly easy to see as Spotify using the artist to get subscribers without compensating the artist fairly.

So, I am interested to hear how you see blockchain related to this, or not. But, how do you see Spotify grow and evolve into a place where it becomes a good business, both for them and for artists?

DW: Right. I think this relates to — in some way to what you were envisioning for the future of PROs — a sort of decentralized automated infrastructure. [NOTE: In Part One of our conversation, I lay out my theory for how blockchain technology could obviate the role of PROs by providing direct relationships between those who desire to use music (restaurants, radio stations, etc.) and music creators.]

GH: Yes.

DW: So, what Spotify is trying to create for consumers is a way of listening to music and paying for it, that [consumers] basically don’t have to think about it.

GH: Got it.

DW: Just automate everything about the consumer experience. So, the idea is that right now consumers for the most part get – the vast majority of people – listen to a lot of music, but they don’t pay anything for it.

I look at this really, really simply and my starting point is that if we want to fix the music industry, we have to get more money flowing into it.

So, a lot of the conversation about Spotify and live streaming and everything is about how money is shared within the industry, but the problem that I have always focused on is how do we get more money into the industry?

GH: Love it.

DW: So, for me almost axiomatically, the only way you can do that is to convince people who aren’t paying a lot for music to spend more on music than they are spending right now.

GH: Which is nothing.

DW: Which is nothing.

GH: If you are starting from a baseline of zero, as you say, getting more people to pay for music is axiomatically a good thing if the distribution of those funds in a sort of reasonable way, that both allows for artists, and the companies that are trying to build businesses around them, to survive.

DW: Absolutely. And look, there are going to be competing models for how to best accomplish this. All that we can say right now is that, after four years, nobody in the world has done a better job than Spotify of getting people to pay for subscriptions to music.

And, the marketplace is getting more competitive.

Apple is dealing with a different model without a free tier. Other people will come along and have different models, and, as an artist, I want a lot of competition, right?

GH: Yeah.

DW: And so to your point, what I want to see is a world in which entrepreneurs are really excited to build competitive businesses in and around music.

And, when I look at Spotify and Google and Apple getting into this; what I see is that, holy cow thank God: if you are an artist you’ve now got the biggest technology companies in the world fighting with each other to build the most exciting music products.

GH: Boy, I love that! I love your spirit. The cynical view… and it’s not my view. I want to be clear; I am much more in line with you.

DW: Yeah. Yeah.

GH: But, the cynical view would be:

But, that’s only because people like music, and if these companies can use music as a loss-leader to compel people to buy other products — and for Apple that’s iPhones, for Spotify, that’s maybe a video product down the road, or what have you — then, the music is just simply a loss-leader for that. The artists – they are a dime a dozen. They self replicate.

DW: The artist, the industry at large, and record labels can take a cynical view if they want. That’s alright. We create the music. We own it. If you sell it to a record label, they own it. This is everyone’s right. If we take a cynical attitude, what that will mean is that people don’t want to come and start businesses around music.

We as an industry either have to be welcoming or we have to be really formidable.

GH: But, wait. Who is the industry that has to be welcoming or formidable?

DW: I think it’s artists. I think it’s record labels. I think it’s publishers. I think it’s performing rights organizations.

So, when you look at the nineties, basically if you wanted to be general about the industry, the attitude was: pirating was bad. Consumers who are pirating are breaking the law. They are stealing our [the labels’] shit, which is basically true. Anyone who is building a company which helps them do that [e.g. Napster] is breaking the law, and we [labels] are going to sue them into oblivion, and we are going to make them disappear. Because ultimately, we [labels] create the music. We have the power. We can tell the consumer how they are going to listen to our stuff and how they are going to pay us and it’s on our terms.

And, it didn’t work.

GH: It didn’t work.

DW: It was a disaster, and as a result of that, all the consumers stopped paying.

And, so we ended up with an industry that was horribly mismanaged. Where none of the consumers paid any money for music, and as a result all the money disappeared and artists don’t have money. And, that’s a really bad problem to have as a media business.

And so, when I got involved in Spotify, I looked at Daniel Ek and the folks who started the company and I said, “Jesus, here are some really competent, smart, enthusiastic, determined people who want to try and fix this.”

And, of course, their motivation is not only fixing it as a moral solution for artists, it is because we actually can get people to pay for music again. And, if we can do that, we are going to make a ton of money too.

GH: Yeah. Which I am fine with, by the way.

At the very beginning of our conversation, we were talking about blockchain tech, and one of the motivations there is: there is an economic incentive to be a miner and do all those other things.

I think we are really in harmony here. So, I hope I am not coming across as disagreeing with you. You have an inside advantage that I just don’t have. All I can look at is the actions. But, I have no problem — in fact, I think it’s imperative — that these companies have a financial incentive.

I think the worst thing that we could do is to say that there is some sort of noblesse oblige; we should just do music for the public good or something like that. Then, we end up with museums and things. There has got to be an economic imperative. And that is why I go back to blockchain.

DW: Well, let me use this as a pivot into talking about why I think streaming actually sets the stage for a sort of decentralized infrastructure. And that’s what we are talking about. And, the reason for that is that – there are two:

The first is that companies like Spotify — and this is something that I have seen from the inside — they have to manage how complex the industry is and how fragmented the information is. It costs them a ton of money and takes up a lot of time. And, when we talk about an industry that welcomes entrepreneurships and innovations, I think that means we have to lower the barriers to entry, right? And, one of those barriers right now is that if you want to start up by a competitor and you are George in Boston….

GH: You have to negotiate with all the master rights holders.

DW: Oh my God! You have to deal with all this complex stuff. And then you have to find some computer genius…

GH: And deal with 7Digital or some of these master holders that are . . .well . . . I am not going to say what I really think, but that are challenging at best to deal with. But, go ahead.

DW: And, you have to build this insanely complicated database to deal with rights ownership and payment specs. Who do you hire to do that? These are all problems that should be non-problems. That’s one.

GH: I love this. So, let’s be clear — and this is what I do in my consulting business — if somebody comes in and says, “I want to start a music streaming service,” unfortunately, I have to tell them the Byzantine pathway to doing that which are mired in all the transaction costs and uncertainty, and uncertainty is the worst thing for investment.

DW: Right. But, let’s talk about what a solution could look like. Now, the other aspect of streaming music, in particular, is that — this is hotly contested but, for better or worse — the business model requires you to pay out a fraction of a cent every time people play something.

So, we are moving from an industry where a consumer buying a song for a dollar can play it forever. We say, “Look, every time you listen to something, you pay a very tiny amount and we are going to pay that out to the artist and let him keep a fraction of it.”

What this means practically, is that the music industry as a whole, is moving towards a micropayments based economy. Right now we don’t have the infrastructure to support that.

So, the way a company like Spotify approaches this, is you basically look every week, or every month, or every quarter, at how much stuff got played. And you say, each time it got played that was a half of a penny multiplied by the number of plays. That’s the check that we are going to write every month.

And, what would be much better is if companies like Spotify — every time someone listened to a song — could instantaneously issue a micropayment. They literally can’t do that today, because: how do you do it? You can’t send a friend half a cent.

GH: Exactly.

DW: So you need a financial infrastructure that allows for the flow of fractional payments in real time. And that would be a great service to artists. It would be a great service to services like Spotify and Google and Apple.

GH: I want to talk at this point about morality. To really know where you are going with that; how blockchain has a moral component to it? Because typically when you talk about financial tech, I think people are very skeptical about the immoral things you could do with it.

But, what you have suggested is completely in line with what I have proposed too: using a cryptocurrency to do the micropayments and obviate those transaction costs. Do them in real time. And, here’s what important: Do it transparently.

When you have a company like Kobalt that can enter a very convoluted and crowded space and gain market share just by saying, “Hey, yeah. We are not going to lie to you,” it shows you the type of demand for moral or at least transparent procedure.

The transparency obviates so much of these unethical foundations in the music businesses.

DW: Totally. And, one thing that I have taken away from my experience with Spotify, and dealing with the record labels is that look, the music industry has a terrible history of screwing artists and being full of evil atrocious con artists, right? But, my experience — at the highest levels of Universal Music Group, with Warner Bros., or any of these places — is that most of the people are really nice people.

GH: I totally agree.

DW: And, most of them are…it’s like if you are in the United States Congress today, it’s not your fault that you have to spend half of your time raising money.

GH: The system sucks. Right.

DW: The system sucks, and everybody who is involved with this, is basically complicit in this thing because nobody has stepped up and created a solution.

GH: There’s the moral problem and that’s because they’re afraid. They are afraid at the higher levels that if they step to the higher level of innovation, that you and I are talking about, they are going to get fired. And, so they don’t.

DW: Yeah. Hell yeah. And, also there is a more charitable view, which is that it’s really hard.

GH: Of course it’s hard. But that’s their job!

DW: There is a reason I wrote Bitcoin For Rock Stars, and didn’t start this company. I think this is a ten-year project. You need people who are really, really capable and maniacally obsessed with this problem.

The state of the art now as I look at it is poised to produce the sort of solution that you and I are talking about and grasping for, in general.

What I have yet to see necessarily, is the right entrepreneur, approaching it in exactly the right way, and there are a bunch of folks working on parts of the problem, who are talented and really, really interesting. But, what I want to see is folks coming together, and working exhaustively to make this happen.

GH: That’s what it is going to take. But, D.A., you’ve got the ball rolling. I can’t thank you enough for not only writing the article, but for the work that you have done on behalf of artists.

I know now having talked to you exactly where it stems from. So, we are all grateful to you for what you have done. I am grateful to you for taking the time—it was more time than you allocated. So, I appreciate it. But this has been wonderful to talk to you. So, thank you very much.

DW: Absolutely. It has been pleasure, George. Thanks.

In addition to the above list of accomplishments, Mr. Wallach has had a long relationship with Spotify, and was for a time their artist in residence.

As anyone who has had the mis/good […]

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