Is The Future Of Music Decentralized?

How The Web3 Platform Audius Challenges The Traditional Music Industry

Prasad Pathak

Northeastern University

Introduction

This research paper will focus on the current state of the traditional music industry, the pitfalls, and how emerging blockchain technologies and Web3 innovations like Audius ($AUDIO) are challenging the status quo. This market research will aim to project a balanced view of the industry with supporting pros and cons of the current landscape against emerging technologies like Web3 and blockchain.

The music industry seems to be one of the most underreported among others. The struggles of an artist to put out their creations to the world are unknown to the masses. People generally only care to listen to the music put up on the popular streaming platforms such as Apple Music, Spotify, and Youtube. 

However, there are questions that remain about the behind the scenes work that it takes to get music in the public. For example, what does it take to become popular on those platforms? Who is incentivized the most to release music – the artist or the platform? Are these Web2 platforms open? What are the barriers to entry for a new emerging talented artist looking to get their breakthrough?

The purpose of this research is to holistically examine the music industry and understand how leveraging blockchain technologies can help facilitate a healthier ecosystem for both the artists as well the consumers.

What’s The Current Music & Entertainment Landscape Like 

In 1999, the global recorded music industry experienced a period of growth that lasted for almost a quarter of a century. Approximately one billion records were sold worldwide in 1974, but by the end of the century, the number of records sold was more than three times as high. At the end of the 90s, spirits among record label executives were high and few music industry executives at this time expected a team of teenage Internet hackers, led by Shawn Fanning, to change the way things were done. 

Shawn Fanning created and launched a file-sharing service called Napster that allowed users to download and share music without compensating the recognized rights holders. Napster was fairly quickly sued by the music industry establishment and was eventually forced to shut down the service. However, a string of other increasingly sophisticated services immediately followed suit.

During the 15 years that have passed since Napster was launched, the music industry has been completely transformed and the model that ruled the industry during most of the past century has been largely abandoned. 

This rapid transformation of the music industry is a classic example of how innovation is able to disrupt an entire industry and make existing industry competencies obsolete. The power and influence of the pre-Internet music industry were largely based on the ability to control physical distribution. The Internet makes physical music distribution increasingly irrelevant and the incumbent major music companies have been required to redefine themselves in order to survive.

In order to understand the dynamics of the music industry, it’s first of all necessary to recognize that the music industry is not one, but a number of different industries that are all closely related – but which at the same time are based on different logic and structures. 

The overall music industry is based on the creation and exploitation of music-based intellectual properties. Composers and songwriters create songs, lyrics, and arrangements that are performed live on stage; recorded and distributed to consumers; or licensed for some other kind of use, for instance, sheet music or as background music for other media (advertising, television, etc). This basic structure has given rise to three core music industries: 

1. Recorded music industry – focused on the recording and distribution of music to consumers
2. Music licensing industry – primarily licensing compositions and arrangements to businesses
3. Live music – focused on producing and promoting live entertainment such as concerts and tours

This research paper will focus primarily on the recording and distribution to consumers' side of things.

Streaming Is Driving Music’s Growth

The global music recording industry is back in growth territory again. According to the International Federation of the Phonographic Industry (IFPI), recorded music revenue returned to growth in 2015, after nearly two decades of piracy-driven declines. The global industry’s revenue bottomed out at $14 billion in 2014 but grew to $20 billion in 2019, back in line with 2004 levels.

The convenience and personalization of music streaming, combined with the accessibility afforded by smartphones and smart devices, has driven recorded music’s growth. IFPI notes that global streaming revenues grew at a 42% CAGR (compound annual growth rate) since 2015, compared to the entire recording industry’s 9% CAGR. The chart below from IFPI shows the evolution of the industry’s revenue composition and how streaming growth has more than offset declines in physical and downloaded formats over the past decade.

Despite its seeming ubiquity, streaming is still in the early innings of mass adoption. The following statistics highlight how the market still has room to expand:

1. According to IFPI, there were 341 million global paid streaming accounts by the end of 2019, which represents less than 11% of the 3.2 billion global smartphone users.
2. According to the Digital Media Association, the US market had 99 million paid streaming subscribers (or 30% of the US population) at the end of 2019. For comparison, in Sweden (the home of Spotify), global paid music streaming penetration is 52%.

Challenges

1. There is little to no transparency around the origins of artist payouts (e.g. number of plays, location, original gross payment before fees)
2. Incomplete rights ownership data often prevents content artists from getting paid; instead, earnings accumulate in digital service providers (DSPs) and rights societies
3. There are layers of middlemen and significant time the delay involved in payments to artists
4. Publishing rights are complicated and opaque, with no incentives for the industry to make rights data public and accurate
5. Remixes, covers, and other derivative content are largely censored due to rights management issues
6. Licensing issues prevent DSPs and content from being accessible worldwide

The Emergence Of Audius

Audius is a fully decentralized music streaming platform that enables listeners to support artists directly via its native cryptocurrency, AUDIO. As of December 2021, Audius has almost 6 million monthly unique users and hosts over 100,000 artists.

Co-founded in 2018 by Forrest Browning and Roneil Rumburg, Audius revolutionizes the traditional music industry model by removing intermediaries and record label barriers. Unlike other streaming platforms, artists' revenue is not determined by how many times a song is played.

Audius does not host actual music on the blockchain, but it uses the blockchain as a ledger and distributes the music in chunks to different nodes on the Audius network. A staking-based reward system ensures that $AUDIO holders are encouraged to host network nodes and stream the music to fans worldwide.

Audius is set to make the biggest splash in the online music distribution industry since Limewire. The unique content distribution system and the immutability of records on the blockchain ensure that small and medium content creators don’t get bullied by content trolls.

Key Beliefs

1. Users should be compensated in proportion to how much value they create for the network 
2. Artists should directly engage with and transact with their fans 
3. Governance power should be earned by creating value in Audius, and shared consistently between user groups contributing to the protocol 
4. Prices and earnings for participants should be consistent, predictable, and transparent 
5. Access should be democratized; anyone can contribute to Audius if they follow the protocol rules, and all information is publicly accessible 
6. Intermediaries should be removed when possible; when necessary, they should be algorithmic, transparent, and verifiably accurate

Architecture

The Audius protocol allows artists, fans, and node operators to collectively provide a high-quality end-user music streaming experience without centralized infrastructure. The protocol is comprised of majorly 5 components working in conjunction.

(Source: Audius Whitepaper)

Audius token, stablecoins, and artist tokens:

1 Audius Token

Audius platform tokens (ticker $AUDIO) have three prongs of functionality within the protocol unlocked by staking:

• Security
• Feature access
• Governance

Audius tokens are staked as collateral for value-added services. In exchange, stakers earn ongoing issuance, governance weight, and access to exclusive features. 

Node operators stake audius tokens to run the Audius protocol, and by artists and curators to unlock exclusive features and services. Any $AUDIO staked within the protocol is assigned governance weight, used to shape future iterations of the protocol. 

Audius tokens will serve as collateral for artist-based tooling as well. Early examples incubated by the community include artist's tokens, badges, and earnings multipliers. In the future, fans may delegate tokens to specific artists and curators to share in their growth on the platform and the issuance of future tokens.

2 Stablecoin Payments

In the future, the Audius community may choose to leverage 3rd-party stablecoins to unlock paid content. These tokens are price-stable, providing a stable unit of account to ensure that artists, fans, and node operators can participate in the Audius economy without concern for price volatility

3 Artist Tokens 

The project team also foresees Audius providing a direct mechanism for artists to better engage their community through the distribution of artist tokens. Artists could have the ability to distribute a unique token directly through Audius, giving fans who hold a specified amount of those tokens the ability to access exclusive content.

Content Nodes

Content nodes maintain the availability of content and metadata in Audius on AudSP, the Audius-native extension to IPFS. These nodes can be run by node operators alongside an active network stake, giving them the opportunity to earn part of the ongoing Audius token issuance and aggregated fee pools, or can be run by an artist themself to host their own content.

By default, an artist’s client elects a set of these nodes to maintain the availability of content automatically on the artist’s behalf—the vast majority of artists do not need to have any knowledge of this process.

If the artist chooses, though, they could select the self-hosted node(s) to host their content instead. Running their own content node(s) gives artists a higher degree of control over their content distribution by:

• Keeping control of content encryption keys on infrastructure they control and 
• Allowing for custom permissions extensions that are not native to the protocol

AudSP: A decentralized storage protocol

AudSP is built on top of IPFS (InterPlanetary File System). IPFS enables modular object-level encryption, global distribution capability, secure content addressing, and object immutability. In order to ensure high availability for files stored through the Audius protocol, AudSP provides a staking-based incentive structure for users to host network content.

Upload flow

To distribute a track on Audius, artists must agree to the Audius open license (this license will be published in a separate brief), making the content available on the broader Audius network. The artist's client will then 

1. Slice the track into fixed-length segments, 
2. Encrypt them locally (if the content is permissioned) with segment-specfic keys, and 
3. Upload these encrypted segments, the encryption
4. Keys, and required metadata to their content node(s). The content node(s) then publish the content and metadata to AudSP

Content permissioning

In addition to maintaining content availability, content nodes also take responsibility for permissioning access to content. The content permissioning system in Audius aims to be:

1. Transparent for all parties involved
2. Cost- and time- efficient for all transactions
3. Flexible, accounting for multiple streaming models and any monetization scheme the artist sees fit
4. Granular, with users paying each other directly and immediately for services rendered when possible

Content Ledger

The Audius content ledger is the amalgamation of smart contracts on Ethereum, POA network, and other future L1 or L2 blockchain networks that host pieces of the Audius ecosystem. Different parts of the Audius protocol will continue to run on different blockchain-based platforms, or utilize on-chain scalability solutions, where scalability trilemma tradeoffs can be made on a module and subprotocol-specific basis. The content ledger for Audius includes:

• A consistent audio content and metadata format specification to ensure accessibility 
• A decentralized process for artists to control:
• Track content
• Revenue splits
• Content ownership structure
• A registry of all nodes reachable in Audius 
• The social graph of all users interacting with Audius
• Implementations of the token and governance systems described in this paper

Discovery Nodes

In order for a fan to discover content on the network, Audius has a mechanism for indexing metadata that is efficiently queryable by users. Based on the philosophies of the Audius project, this index is:

• Decentralized
• Efficient and straightforward for user clients to consume (promoting accessibility)
• Provably correct and transparent, eliminating profit incentives to manipulate the results returned to users
• Extensible, so that the Audius community can explore different ranking and searching methodologies.

Discovery node operators earn revenue by registering a node with an active network stake, letting them earn part of the ongoing Audius token issuance and aggregated fee pools. Fan clients select discovery nodes to query from via the content ledger’s node registry

Discovery nodes are read-only. Clients can use them to fetch a fan’s feed, a playlist, and song and artist metadata, search the corpus of Audius entities and execute other queries about the network. Anyone can register a discovery node if they meet the requirements outlined in this section.

Governance

Integral to achieving this mission is a decentralized governance protocol, whereby artists, node operators, and fans are individually and collectively enfranchised in decision-making about protocol changes and upgrades.

In the spirit of creating a community-owned and operated streaming protocol, these key actors are implemented to shape, mend and modify underlying parameters of the Audius protocol including but not limited to:

• Feature Integrations
• Royalty Rates
• Token Distribution
• Fee Pool Allocation
• Staking Rewards

Everything in Audius is governable, and all Audius tokens staked in the protocol automatically receive governance weight on a 1 token, 1 vote basis.

For node operators, Audius governance acts as a key tool to empower decentralized content storage, providing a direct mechanism for rewards to be earned and amended in line with the costs, value, and consensus of other providers on the network.

Short-circuiting

There is a short-circuit process that allows both:

1. proposals to be passed without a broader vote if urgency requires, eg. during active exploitation of a vulnerability in the protocol, and 
2. proposals to be vetoed if they are not consistent with the philosophies outlined in this paper.

This short-circuit capability will be controlled by a community multisig with an initial set of signers. Additional signers can be voted into place via the open community governance process. The community, at any time, can vote to remove the ability to short-circuit governance if they choose, and the controllers of the short-circuit multisig has committed to not veto said proposal when the time comes to relinquish control.

The project team added this functionality to the governance process with the intention for it to be removed— it is up to the community to decide when it makes sense to take off the training wheels or whether it makes sense to have this functionality at all.

Analyzing Audius’s Data: Web3 Music Reality Check

All of this decentralization of music sounds promising in theory. In reality, it’s important that we look at facts. Whenever we research a protocol, we should look at its token distribution, active wallets, and circulating supply among other things. Let's take a look at a few of these metrics:

Circulating Supply

As seen in the image below, the token is majorly owned by the team and investors. The lack of community ownership is clearly highlighted and thus poses a risk of centralization.

(Source: Audius.org)

Holder Statistics

Top 100 wallets for $AUDIO hold over 96% of the circulating supply. This makes the protocol vulnerable to centralization risks like token selloff and governance takeover. To put things in perspective, $BTC top 100 wallets hold only 14% of the total circulating supply.

(Source: Coinmarketcap)

Plays/Active Users

Is the Hype over? The number of plays as well as unique active users have moreover stalled over the past year.

(Source: Audius.Analytics)

Genre Variety

Lack of variety of content: One reason for the stagnation of adoption could be the lack of variety of content on the platform. Audius has the majority of its music from the electronic and Hip-Hop genres.

(Source: Audius.Analytics)

Comparing Web2/Traditional Music vs Decentralized Music & Audius

Audius Royalties vs Spotify Royalties

Some of the early artists on the platform such as Alina Baraz, she earned over 10,000 $AUDIO tokens so far and has about 93,500 total plays on the platform. As on March 30, 2021, 10,000 $AUDIO = 17.789 ETH according to Uniswap.com and 1 ETH = $1,838.61 USD. So, $1,838.61 USD x 17.789 = $32,707.03

That’s about $0.35 per stream compared to $.00437 for Spotify. For comparison, using a Spotify streaming royalty calculator tool, 93,500 streams equals roughly $408.59. That would mean audius almost pays 80x more to their artists than Spotify

Best of both worlds?

Audius stands at the forefront of pioneering the vision for a community-owned streaming protocol. The community that has formed around this protocol has become formidable, growing far beyond the reach of the small project team that built the initial implementations of each respective component. Having said that, Audius seems to still have a long way to go as it is only a couple of years old. Audius currently has only 4M unique users vs. 500M+ paid streaming subscribers.

It is no hidden fact, that decentralization alone can solve all problems. For mass adoption, it is imminent to integrate web3 protocols into web2 ecosystems. Social media platforms like Facebook, Instagram, and TikTok can prove to be a catalyst to protocols like Audius with deep integration in their platforms